Partnership

MULTIPLE CHOICE THEORIES

(1) Which of the following is a characteristic of a general partnership?
a. All partners must agree to legal agreement 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
partnership business.
d. Partnership income is separately taxed.

Answer: B

(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.

Answer: D

(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 partners salaries and interest.
c. partnership income after deducting partners salaries.
d. partnership income before deducting salaries and interest

Answer: D

(4) Which of the following is false regarding the measurement of a 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.

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d. Partnerships do not report income tax expense.

Answer: B

(5) A partnership’s income-sharing 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.

Answer: A

(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
b. Corporation and Partnership
c. Partnership and Proprietorships
d. Corporation, Partnerships, and Proprietorships

Answer: A

(7) Which of the following is not a similarity that exists between and
proprietorships 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.

Answer: D

(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

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c. The ease of ownership feasibility

d. All the above are areas where partnerships and corporations differ

Answer: D

(9) Which of the following is not a difference when comparing partnerships

and corporations?
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. Partners have unlimited liability while corporation shareholders generally
do not have unlimited liability
d. Corporations are required to pay income tax while partnerships are not
required to pay income taxes

Answer: B

(10) What theory of equity is applicable to partnerships?

a. Proprietary theory
b. Entity theory
c. A mix of proprietary and entity theory
d. Partnership theory

Answer: C

(11) Which of the following is not an example of the proprietary theory of equity?
a. Partners do not have claims to specific assets
b. Individual partners are liable for all debts of the partnership
c. A partner’s income tax includes the partner’s share of partnership net
income and the partnership does not pay income taxes
d. Salaries of partners are viewed as distributions of income, not
components of net income.

Answer: A

(12) Which of the following is not an example of the entity theory of equity?

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a. Continuity of the partnership when admission or withdrawal of partners

occurs
b. A partnership can enter into contracts
c. Assets contributed to the partnership retain the existing tax basis to the
partner contributing
d. Partnership creditors have priority claim to partnership assets and the
creditors of partners have priority claim to the partner’s assets in the
event of liquidation.

Answer: C

(13) Which of the following statements is correct with regard to the creation of
initial capital account balances on the partnership’s records?
a. The capital accounts can be created by 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 account must have a non-zero value assigned to
it
d. All the above statements are correct

Answer: A

(14) Which of the following statements is not true with regard to assigning the
carrying value of noncash assets contributed to those assets at the date of
a partnership’s formation?
a. Use of the noncash asset’s historical cost can result in the misstatement
of the partners’ capital account
b. Assigning the historical cost to noncash assets contributed to a
partnership may require the partnership agreement to address
profit/loss distribution that will occur when the contributed asset 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 partnership income
d. All of the above statements are correct

Answer: C

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(15) Which of the following statements is correct with regard to the contribution
of assets and associated liabilities to a partnership?
a. Liabilities associated with assets 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 a partnership become the
liability of both the contributing partner and the partnership
d. Assets may not be contributed to a partnership if there is a liability
associated with asset

Answer: B

(16) When can the bonus method be applied?

a. When a partnership is formed
b. When a 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

Answer: D

(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
partner’s capital account

Answer: C

(18) Which of the following statements is correct with regard 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

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b. Drawing accounts establish 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 a corporation
d. Drawing accounts appear on the balance sheet as a contra-equity
account

Answer: A

(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

Answer: C

(20) Which component of the partnership profit and loss allocation

compensates partners for routine time and effort expended in the business?
a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest

Answer: C

(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
b. Bonus
c. Salary
d. Residual interest

Answer: B

(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

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b. Residual profit and loss ratios can be changed by agreement

c. The residual profit and loss ratio must be applied
d. All of the above are true statements

Answer: B

(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.

Answer: A

(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
b. Termination
c. Dissolution and termination
d. None of the above occurs

Answer: A

(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 an existing partner
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
b. Recognition of goodwill

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c. Application of the bonus method

d. Any of the three or a combination may be applied

Answer: D

(27) Which 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. Either bonus method or goodwill/revaluation method
d. Existing partners’ capital accounts never change when a new partner is
admitted into a partnership.

Answer: C

(28) A partnership is formed with three equal partners. However, each partner
invests a different amount of net assets. Which of the following statements is
true?
a. Under the bonus method, all partners will have equal initial capital
balances.
b. Under the goodwill method, each partner will have a different initial
capital balance.
c. Because the investments are unequal, setting each partner’s capital
balances 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.

Answer: A

(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 interests approach, total partnership capital
increases
b. Using the transfer of capital interests approach, partnership capital of
existing partners does not change

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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.

Answer: D

(30) Which of the following statements is false concerning a comparison of the

bonus and goodwill methods of recording admission of a new partner by
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 exceeds that partner’s share of
the firm’s total capital, the existing partners will receive either a bonus or
goodwill depending on whether the bonus or goodwill method is used.
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 revaluation
when a new partner invests assets in the partnership, the goodwill method
does not.

Answer: D

(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 assets will be increased.
d. The new partner will be required to reduce his/her profit and loss sharing
ratio.

Answer: C

(32) Which of the following statements is false with regard to the goodwill
recognized for new partner entering a partnership?

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a. The new partner’s capital account balance will exceed the amount
invested
b. The existing partners’ capital accounts 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

Answer: D
(33) Which of the following statements presents a reason that goodwill may be
recorded with regard to a new partner at the date of that partner’s
admission to the partnership?
a. The existing partnership is worth more than the appraised value of the
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 identifiable net assets contributed
d. The new partner’s residual interest in profits and losses is greater than 30
percent

Answer: C

(34) What portion of the partnership assets must be revalued when a partner
withdraws from the partnership?
a. The withdrawing partner’s share must be revalued
b. All the partnership’s assets must be revalued
c. Any or all of the partnership’s assets may be revalued but none have to
be revalued
d. Partnership assets may not be revalued when a partner withdraws

Answer: C

(35) Who may acquire the ownership interest of a partner who is withdrawing
from a partnership?
a. Existing partners
b. New investors
c. The partnership

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d. All of the above

Answer: D

(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

Answer: A

(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

Answer: D

(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

Answer: A

(39) Which of the following statements is true with regard to o withdrawing

partner?
a. A bonus must be paid to the retiring partner
b. A bonus may be paid lo the retiring partner

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c. A bonus must be paid to the refining partner or to the remaining

partners
d. Recognizing a bonus is not appropriate when a partner retires
Answer: C

(40) What change occurs to continuing partners' capital accounts when a

withdrawing partner is assigned goodwill/revaluation of asset at the date
of withdrawals?
a. Continuing partners' capital accounts decease by their profit and loss
ratio proportion of the goodwill assigned to the withdrawing partner
b. Continuing partners' capital accounts increase
c. Continuing partners' capital accounts do not change
d. Goodwill cannot be recognized with regard to withdrawing partners
Answer: D

(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
Answer: A

(42) Which of the following is true regarding the admission or o new partner by
purchase of an existing partnership interest?
a. Using the transfer of capital interests approach, total partnership capital
increases
b. Using the transfer of capital interests 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.
Answer: D

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(43) D, E and F are partners who share income in a 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
b. Partial goodwill
c. Total goodwill
d. Transfer of assets
Answer: C

(44) M who has a 40 percent interest in a partnership, retires and receives a

settlement payment that is P10.000 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.
Answer: B

(45) 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.
Answer: A

(46) Which of the following statements supports the use of the partial goodwill
method (aside from the total goodwill) to record the retirement of a
partner?
a. A change in partnership interests requires a revaluation of all assets to
fair value.
b. Retirement is not an arm's length transaction.

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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
Answer: D

(47) Which statement is false regarding the method used 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 account?
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 the partnership, the total goodwill method should not
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.
Answer: C

(48) 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 always result in
recognition of goodwill
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.
Answer: B

(49) 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 a gain for the year.
d. Partnership assets are liquidated for more than book value.
Answer: C

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(50) 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.
b. foreclosure
c. rule of dual priorities.
d. right of offset
Answer: D

(51) When an individual partner uses performance assets to pay partnership

creditors, this payment is recorded as
a. an Investment of capital in the part
b. a liability to the partnership
c. a receivable owing to the partnership
d. a reduction in a partnership asset.
Answer: A

(52) 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 sate 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
Answer: A

(53) Which statement below is false concerning liquidation of a partnership

a. All assets can be sold at fair value in a single transaction 10 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

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c. Assets can be sold piecemeal over an extended period of time to

interested parties
d. Assets must be liquidated solely through sale transactions.
Answer: B

(54) 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 distributions do not jeopardize payments to
creditors
Answer: D

(55) To accomplish a partnership liquidation, the accountant should understand

a. The rights of the partners
b. The rights of the partnership's creditors
c. The rights of the partners' creditors
d. All of the above
Answer: C

(56) Which of the following is not correct with regard to creditor claims against
partnership 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
Answer: D

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(57) 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 it claim is not fully paid from partnership assets
Answer: B

(58) Which of the following is not a part of the partnership liquidation process?
a. Allocation of any remaining profit or loss to partners' capital accounts
b. Liquidation of noncash assets
c. Closing of the accounting records
d. Recognition of market value adjustments of assets and liabilities
Answer: B

(59) 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 with loans to/from the
partnership
Answer: B

(60) 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

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d. The combining of a partner's capital account with loans to/from the

partnership
Answer: C

(61) 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 accounts
d. Balance sheet and income statement accounts appear on the
statement
Answer: D

(62) 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
Answer: B

(63) Which of the following is an assumption an 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 contributions 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
Answer: B

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(64) Which of the following is true with regard to a partnership liquidation when
a deficit balance occurs in a partner's 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 based 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 partner's deficit
capital account balance
Answer: C

(65) Why might a particular partner have a deficit occur in his/her capital
account during 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 partner with the deficit may have the smallest profit and loss residual
ratio
d. Both a and b are correct
Answer: B

(66) Which of the following statements is correct with regard to a cash

distribution plan prepared for a partnership liquidation?
a. It guarantees to partners the amounts of distributions 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 distribution plans are not prepared for a partnership liquidation
Answer: B

(67) Which of the following is not part of the calculation to determine the loss
absorption power when preparing a cash distribution plan?

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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
Answer: D

(68) 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 loss absorption power
Answer: B

(69) When is it possible to use a schedule of safe payments during a 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
Answer: D

(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 investments into the
partnership
Answer: C

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MULTIPLE CHOICE PROBLEMS

Partnership Formation:

1. On December 1, 20x5, EE and FF formed a partnership, agreeing to share for

profits and losses in the ratio 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
(AICPA)

Answer: (d)

In the formation of a partnership, one or more of the partner will contribute

noncash assets to the business such as inventory, land or equipment, etc.
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 the 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 P300,000 P 700,000
Machinery and equipment 250,000 750,000
Building -- 2,250,000
Furniture and fixtures 100,000 --

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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. P3,700,000 c. P3,050,000
b. 3,140,000 d. 2,900,000
(AICPA)

Answer: (d)

JJ___

Cash ……………………………………………………………………..… P 700,000

Machinery and Equipment……………………………………..…..…. 750,000
Building …………………………………………………………………… 2,250,000
Total assets invested …………………………………………...…..….. P 3,700,000
Less: Mortgage loan ……………………………………...…………... 800,000
Capital balance off JJ on March 1, 20x5 …………...……………. P 2,900,000 (d)
Profits and loss ratios are ignored and does not have any bearing in the
problem, unless the noncash assets are invested and recorded in the
partnership and subsequent adjustments are required to reflect agreed value
or fair values.

3. The same information in Number 2, except that the mortgage loan is not
assumed by the partnership. On March 1 20x5 the balance in JJ's capital
account should be:

a. P3,700,000 c. P3,050,000
b. 3,140,000 d. 2,900,000
(AICPA)

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Answer: (a)

JJ
Cash ……………………………………………………………………… P 700,000
Machinery and Equipment ….………………………………………. 750,000
Building …………………..………………………………………………. 2,250,000

Total assets invested ………………………………………………….. P 3,700,000

Less: Mortgage loan …………………………………………………. 0
Capital balance off JJ on March 1, 20x5 …….…………………. 3,700,000 (a)

4. As of July 1, 20x5, FF and GG decided to form a partnership. Their balance

sheets on this date are:

______FF_____ ____GG____
Cash P 15,000 P 37, 500
Accounts Receivable 540,000 225,000
Merchandise Inventory -- 202,500
Machinery and
150,000 270,000
Equipment
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 P15,000 and that of GG by P45,000. Allowance for doubtful
accounts is to be set up amounting to P120,000 for FF and P45,000 for GG. The
partnership agreement provides for a profit and loss ratio and capital interest

23
 Partnership

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. P52,560 c. P142,560
b. 102,500 d. 172,500
(Adapted)

Answer: (d)

GG’s adjusted capital* ……………………………………………… P 700,000

Divided by: GG’s P&L percentage ….……………………………. 40%
Total agreed capital …………………………………………………. 1,012,500
Multiplied by: FF’s P&L percentage ….……………………………. 60%
FF’s agreed capital …………………………………..………………. 607,500
Less: FF’s adjusted contributed capital .………………………..… 435,000
Additional cash to be invested by FF ……..……………………… 172,500 (d)

Computation of adjusted contributed capital:

FF GG__
Unadjusted capital ………………………….…….. P570,000 P495,000
Add: (Deduct): adjustments:
Accumulated depreciation……………….…. ( 15,000) ( 45,000)
Allowance for doubtful accounts………. ( 120,000) ( 45,000)
Adjusted contributed capital ..…………….…. P 435,000 P 405,000

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 adjustments.
(Profit and loss are allocated equally.)

BB's inventory is to be increased by P4,000; an allowance for doubtful accounts

of P1,000 and P1,500 are to be set up in the books of AA and BB respectively;
and accounts payable of P4,000 is to be recognized in AA's books. The
individual trial balances on August 1, before adjustments, follow:

24
 Partnership

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 adjustments?

a. AA, P68,750; BB, P77,250

b. AA, P75,000; BB, P81,000
c. AA, P65,000: BB, P76,000
d. AA, P65,000: BB, P81,000
(Adapted)

Answer: (d)
AA BB______
Assets ………………………………….…….. P75,000 P113,000
Less: Liabilities ……………………….….…. 5,000 34,500
Unadjusted capital………….…….………. 70,000 78,500
Add: (deduct): adjustments:
Increase in inventory……..….…… 4,000
Allowance for doubtful accounts… ( 1,000) ( 1,500)
Accounts Payable ………….….……. ( 4,000)
Adjusted capital balance.……………… P 65,000 P 81,000 (d)

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 P 6,800
Accounts Receivable 14,200
Merchandise Inventory 20,000
Accounts Payable 8,000
CC, Capital 33,000

25
 Partnership

It is agreed that for purposes 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) P 35,347; (2) P 11,971

b. (1) 36,374; (2) 18,487
c. (1) 35,374; (2) 17,687
d. (1) 28,174; (2) 14,087
(Adapted)

Answer: (c)
Unadjusted capital of CC………………………………………… P495,000
Add: (Deduct): adjustments:
Allowance for doubtful accounts (3% x P14,200) ………. ( 426)
Increase in Merchandise inventory (P23,000 – P20,000) 3,000
Prepaid salary…………………………………………………. 600
Accrued rent expense …………….…………………………. ( 800)
Adjusted capital balance of CC ………………………………… P 35,374 (c)
Divided by: capital interest of CC ….………………………..…. 2/3
Total capital of the partnership ………………………………….. 53,061
Less: Adjusted capital balance of CC ………….……………… 35,374
Capital balance of DD …………………………………………….. 17,687 (c)

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

26
 Partnership

wishes to withdraw and it is 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 at P65,000. Brand new equipment may
cost P80,000. Compute for: (1) OO's acquisition on 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) P 15,000 each for MM and NN, (2) P150,000.

b. (1) P 5,000 each for MM, NN and OO, (2) P145,000.
c. (1) P 5,000 each for MM, NN and OO, (2) P195,000.
d. (1) P 7,500 each for MM and NN, (2) P145,000.
(Adapted)

Answer: (b)

(1) Reduction in capital:

Equipment of carrying value ….…………………….……. P 65,000
Equipment at second-hand value (fair value..………... 50,000
Decrease in equipment ……………………………………. 15,000
Multiply by: Profit and loss ratio of MM, NN, and OO ….… 1/3
Reduction in capital ………………………………………..…….. P 5,000(b)

(2) Notes payable to OO:

Unadjusted capital of OO ……………………………………… P200,000
Less: Share in the decrease of equipment ……………….. 5,000
Adjusted capital of OO …………………………………….….. 195,000
Less: Equipment received at second-hand value ………… 50,000
Value at notes payable ………………………………………… P 145,000 (b)

Incidentally the journal entry would be:

OO, Capital ………………………………………………….. 200,000
NN Capital ……………………………………………………. 5,000
MM, Capital …………………………………………………. 5,000
Equipment, carrying value ………………………………………. 65,000
Notes Payable ……………………………………………………… 145,000

27
 Partnership

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 purposes?

Jones Smith
A. P 350,000 P 270,000
B. P 260,000 P 180,000
C. P 360,000 P 260,000
D. P 500,000 P 300,000

a. Option A c. Option C
b. Option B d. Option D

Answer: (c)

Jones Smith

Assets of fair value

Jones: P80,000 + P400,000 ………….… P480,000
Smith: P40,000 + P280,000 …………….. P320,000

28
 Partnership

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 P 22,354
Accounts receivable 234,536 567,890
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 P 1,020,916 P 1,317,002
Accounts Payable P 178,940 P 243,650
Notes Payable 200,000 345,000
LL, Capital 641,976 --
MM, Capital -- 738,352
P 1,020,916 P 1,317,002

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 ore worthless in LL's and MM's respective
books.
c. Other assets of P2,000 and P3,600 in IL's and MM's respective books are
to be written off.

The capital account of the partners after the adjustments will be:

29
 Partnership

a. LL, P 615, 942; MM, P 717, 894

b. LL, P 640, 876; MM, P 712, 345
c. LL, P 640, 876: MM P 683, 050
d. LL, P 614, 476; MM, P 683, 052
(PhilCPA)

Answer: (c)
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 other assets…………………………… (2 000) (3 600)
Adjusted capital balance……………………………….. P614,476 P683,052

10. The same information in Number 9, how much total assets does the partnership
have after formation?

a. P 2,337,918
b. 2,237,918
c. 2,265,118
d. 2,365,218
(PhilCPA)

Answer: (c)

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

30
 Partnership

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
Accounts receivable 18,500 13,500
Inventories 30,000 19,500
Furniture and fixtures
30,000 9,000
(net)
Office equipment (net) 11,500 2,750
Prepaid expenses 6,375 3,000
Total P 105,375 P 51,500
Accounts Payable P 450,750 P 18,000
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 ………………………………….. P 29,500

For QQ ………………………………… 21, 000

31
 Partnership

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

PP QQ
a. P 2,870 P 2,820
b. P (2,870) P (2,820)
c. P (870) P 180
d. P 870 P (180)

Answer: (c)

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: (P29,500 – P30,000) (500)
QQ: (P21,000 – P19,500) 1,500
Net adjustments P(870) P180

12. The same information in Number 11, compute the total liabilities after
formation:

a. P 61,950 c. P 65,550
b. P 63,750 d. P 63,950

Answer: (c)
Unadjusted total liabilities (P45,750 + P18,000)……………………… P63,750
Add (deduct): adjustments:
Accrued rent expense…………………………………………. 1,000
Accrued salary expense…………………………….…………. 800

32
 Partnership

Adjusted total liabilities after formation …………………………… P65,550

13. The same information in Number 11, compute the total assets after formation:

a. P 157,985
b. P 156,875
c. P 160,765
d. P 152,985

Answer: (a)
Unadjusted total assets (P105,375 + P 51,500)……………………… P156,875
Add (deduct): adjustments:
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 …………………………………. P157,985

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 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. LL contributed equipment with a P45,000
carrying amount, 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

33
 Partnership

(AICPA)

Answer: (c)

XX__ __YY__ ___ZZ__

Cash…………………………………………………….... P75,000
Property………………………………………………….. P120,000
Equipment………………………………………………. P82,500
Less: Mortgage assumed…………………………….. 52,500
Capital balances……………………………………… P75,000 P67,500 P82,500

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 P 240,000 on the building. Capital

accounts are set equal to net assets invested.

15. The increase in capital of Kendall:

a. None c. by P 160,000
b. by P 100,000 d. by P 220,000

Answer: (b)

Cash 100,000
Merchandise 25,000
Building 150,000
Equipment 85,000
Mortgage Payable 40,000
Capital, Jackson 100,000

34
 Partnership

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 capital of Jackson:
a. None c. by P 160,000
b. by P 100,000 d. by P 220,000

Answer: (c)
Cash P 100, 000
Merchandise 25, 000
Building 150, 000
Equipment 85, 000
Mortgage Payable P 40, 000
Capital, Jackson 160, 000
Capital, Kendall 160, 000

17. The partners have 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

Answer: (d)
Cash 100,000
Merchandise Inventory 25,000
Building 150,000

Equipment 85,000
Goodwill 120,000
Mortgage Payable 40,000

Capital, Jackson 220,000

Capital, Kendall 220,000

35
 Partnership

Partnership Operations:
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 capitol balances. In 20x5, 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 20x5,
what was the total partnership income?
a. P192, 000 c. P282,000
b. 345,000 d. 387,000

(Adapted)
Answer: (c)

JJ KK Total
Salary P 60, 000 P30, 000 P 90, 000
Interest 30, 000 12,000 42, 000
Balance or Residual Profit 60,0001 150,0002
P282, 000
1 Given

2 P60,000 ÷ 40% profit and loss ratio = P 150, 000

19. The Partnership has the following accounting amounts:

(1) Sales = P70, 000
(2) Cost of Goods Sold = P40, 000
(3) Operating Expenses = P10, 000
(4) Salary allocations to partners = P13, 000
(5) Interest paid to banks = P2, 000
(6) Partners' withdrawals = P8, 000
The partnership net income (loss) is:

a. P20, 000 c. P 5,000

b. 18,000 d. (3,000)

(Adapted)

36
 Partnership

Answer: (b)
Sales P 70, 000
Less: Cost of Goods Sold 40,000
Gross Profit P 30, 000
Less: Operating Expenses 10, 000
Operating Income P 20, 000
Less: Other Expenses: Interest Expense 2, 000
Net Income P 18, 000

20. Lancelot is trying to decide whether to accept a salary of P40, 000 or a salary
of P25, 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 P100, 000. What amount of income would be
necessary so that Lancelot would consider the choices to be equal?

a. P165, 000 c. P265,000

b. 290,000 d. 305,000
(Adapted)

Answer: (b)
Bonus = 10% (NI – Salaries – Bonus)
P15, 000 = .10 (NI – (P100, 000 + P25, 000) – P15, 000
P15, 000 = .10 (NI – P140, 000)
P15, 000 = .10NI – P14, 000
P29, 000 = .10NI
P29,000
= NI
.10
NI = P290, 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
own vacant land with a market value of P300,000 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?

37
 Partnership

a. P157, 500 c. P227, 500

b. P197, 500 d. P287, 500

Answer: (b)
= P300, 000 – P100, 000 (.65) + P450, 000 – P300, 000 (.45)
= P200, 000 (.65) + P150, 000 (.45)
= P130, 000 + P67, 500
= P197, 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 choose to
revalue assets with market value different from book value. One asset
revalued is land with a book value of P50, 000 and a market value of P120,
000. Two years after the profit and loss ratio is changed the land is sold for
P200,000. What is the amount of change to Robert's capital account at the
date the land is sold?
a. P32, 000 c. P60, 000

b. P44, 000 d. P82, 500

Answer: (b)
= P200, 000 – P120, 000 (.55)
= P80, 000 (.55)
= P44, 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 P200, 000 after deducting the bonus. If
operating income for the year is P250, 000, what is Shawn's bonus (rounded to
the nearest peso)?
a. P 3,703 c. P20,000

b. P40, 000 d. P40,000

Answer: (a)
Bonus = .08 (P250, 000 + P200, 000) – B)
= .08 (P50, 000 – B)

38
 Partnership

= 4 - 0 .08 B
1 + .08 B =4
1.08 B =4
B = 4/1.08
B = 3, 703

24. James has a bonus as part of his partner profit allocation. The bonus is based
on the partnerships net income. James receives a bonus equal to 5 percent
that the net income exceeds P150,000. If the net income in the current year is
P180,000, how much bonus does James receive?
a. P30,000 c. P 7,500

b. P 9,000 d. P 1,500
Answer: (d)
Bonus =.05 (P180, 000-P150, 000)

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 P500,000 to
P540,000 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
Answer: (c)
Bonus = {[(p540,000 – 500,000)/P500,000]-.05) P 120,000}

26. Nick, Joe, and Mike are partners. The company has P150,000 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 P200, 000 P350,000 P180,000

39
 Partnership

Salary 25,000 15,000 30,000

Bonus .1 (NI - P100 000)

Residual profit/loss ratios .25 .45 .30

Return on invested capital 9%

Nick Joe Mike

a. P43,000 P46,500 P60,500
b. P45,325 P50,685 P53,990
c. P50,000 P50, 000 P50,000
d. P44,075 P48.435 P57,490
Answer: (d)
Nick Joe Mike Total
Interest on Capital
P200, 000 × .09 P18, 000
P350, 000 ×.09 P31, 000
P180, 000×.09 P16, 000 P65, 700
Salary P25, 000 15,000 35,000 75,000
Bonus .1(P150, 000-P100, 000) 5,000 5,000
Residual
P4, 300 × .25 1,075
P4, 300 ×.45 1,935
P4, 500 × .30 1,290 4,300

Totals P44, 075 P48,435 P57,490 P150,000

27. Cab and Jo are considering forming a partnership whereby profits will be
allocated through the use of salaries and bonuses. Bonuses will be 10% of net
income after total salaries and bonuses. Cab will receive a salary of P30, 000
and a bonus. Jo has the option of receiving a salary of P40, 000 and a 10%
bonus or simply receiving a salary of P52, 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. P240, 000 c. P 94,000

b. 300,000 d. 334,000

40
 Partnership

Answer: (d)
To equate P52,000 to P40,000 plus bonus , the bonus should amount to
P12,000 (P52,000-P40,000) to be indifferent under the two profit sharing
options . Since Cab would receive the same bonus, the total bonus would
have to be P24,000 (P12,000 × 2). Based on foregoing, the following equation
should be developed:

Bonus = 10% (Net income – Salaries – Bonus)

P24,000 =.10 [NI – (30,000 + P40,000) - 24,000]
P24,000 =.10[NI -94,000]
P24,000 =.10NI-9,400
P33,400 =.10NI
P33,400/,10 =NI
NI = 334,000 (d)

Or Alternatively:

Bonus = P52,000-40,000 =P12,000 × 2 =P24,000

P24,000 =.10 (NI – Salaries – Bonus)
P24,000 =.10 (NI- 70,000-P24,000)
P24,000 =.10 (9,400
P 33,400 =.10 Nl
NI = P334,000

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 P200,000 and 20% over
P200,000.
 Second, YY and ZZ each are to receive 5% of the remaining income over
P300,000.
 The balance of income is to be allocated equally among the three
partners.
The partnership's 20x5 net income was P500,000 before any allocations to
partners. What amount should be allocated to XX?
a. P202,000 c. P206,000

b. 216,000 d. 220,000
(AICPA)

41
 Partnership

Answer: (b)

XX YY ZZ Total
XX First P200,000 × 10%.................P20,000 P 20,000
Over P200,000: (500,000-
P200,000) × 20% ……….…60,000 60,000
YY and ZZ: 5% of remaining income
Over P300,000: (P500,000 – 20,000-
P60,000 - P300,000) × 5% P6,000 P6,000 12,000
Balance : Allocate Equally…..…….136,000 136,000 136,000 408,000

P216,000 142,000 P142,000 P500,000(b)

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 ......................................................... P420,000
Additional investment, July 1 ………………………….… 120,000

Withdrawal, August 1 ……………………………………. (45,000)

Balance, December 31 ...................................................... 495,000

What amount of interest should be credited to SS's capital account for 20x5?
a. P 45,750 c. P 46,125
b. 49,500 d. 51,750

(AICPA)
Answer: (c)
The weighted-average capital is computed as follows:

January 1- July 1 : P420,000 × 6 months………………………P2,520,000

July 1 – August 1 : P 540,000 × 1 month ……………………….. 540,000
August 1 –December 31 : P 495,000 × 5 months……………. 2,475,000

Divided by: ………………………….…………………………………………. 12 months

42
 Partnership

Weighted Average capital………………………………………………….. P 461,250

Multiply by : Interest rate per year…………………………………………… 10%

Amount of Interest per year…………………………………………………….P 46,125 (c)

30. AA,BB, and CC are partners with average capital balances during 20x5 of
P360,000, P180,000, and P120,000. Respectively, Partners receive 10% interest
on their average capital balances. After deducting salaries of P90,000 to AA
and P60,000 to CC the residual profit or loss is divided equally. In 20x5 the
partnership sustained a P99,000 loss before interest and salaries to partners. By
what amount should AA's capital account change?
a. P 21,000 increase c. P105,000 decrease
b. 33,000 decrease d.126,000 increase
(AICPA)

Answer: (d)
AA BB CC Total

Interest on Average Capital

AA: P360,000 × 10%...................P36,000
BB:P180,000× 10%...................... P18,000
CC:P120,000 ×10%.................... P12,000 P66,000
Salaries…………………………………... 90,000 60,000 150,000
Balance or Residual : Equally…… .(105,000) (105,000 (105,000) (315,000)

Increase (decrease)………………P21,000 P(87,000) P(3,000) P99,000(a)

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 P10,000 and
DD a salary of P5,000 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 P13,000 was
allocated P8,800 to AA and P4,200 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

43
 Partnership

new agreement allows AA a salary of P18,000, and the remaining profits and
losses are divided equally. In 20x6 an error was discovered such that the 20x5
reported income was understated by P4,000. The partnership income of
P25,000 for 20x6 included the P4,000 related to year 20x5.

In the reported net income of P25,000 for the year 20x6. AA and DD would
have:
AA DD AA DD

a. P 21,900 P 3,100 c. P 0 P 0
b. 17,100 17,100 d. 12,500 12,500
(Adapted)

Answer: (a)
АА DD Total
Salary ................................................. P18,000 P18,000
Balance: Equally……………………... 1,500 1,500 3,000
Income for year 20x6 only ................ P19,500 P1,500 P21,000
Income for year 20x5 (60:40) ............ 2,400 1,600 4,000
Reported income for year 20x6......... P21,900 P3,100 P25,000

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 P120,000. The capital
accounts of the partnership show the following transactions.
DD, Capital EE, Capital
Dr. Cr. Dr. Cr.
January 1 ………………… – P40, 000 – P25,000
April 1 ……………………… P5, 000 – – –
June 1 ……………………… – – – 10,000
August 1 …………………… – 10,000 – –
September 1 ……………… – – P3, 000 –

44
 Partnership

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 of profits
should be:

a. DD, P60,000; EE, P59,400 c. DD, P67,200; EE, P52,800

b. DD, P61,200; EE, P58,800 d. DD, P68,800; EE, P51,200
(PhilCPA)

Answer: (b)
DD EE Total
Interest on Average Capital:
DD. 20% x P 42,000". ……………... P 8,400
EE: 20% x 30,000…………………… P 6,000 P 14,400
Balance: equally .................................... 52,800 52,800 105,600
P61,200 P 58,800 P 120,000 (b)
Average Capitals:
1 DD:
1/1 - 4/1 : P40,000 x 3.............. P120,000
4/1 - 8/1: P35,000 x 4................. 140,000
8/1 - 10/1: P45000 x 2 ................ 90,000
10/1 - 12/1: P50,000 x 2 ............ 100,000
12/1 - 12/31 : P54,000 x 1............. 54,000
Divided by: ............................... 12 months
Weighted - average capital... P 42, 000
2 EE

1/1 - 6/1: P25,000 x 5 ............... P125,000

6/1 - 9/1: P35,000 x 3............. 105,000
9/1 - 10/1: P32,000 x 1……… 32,000
10/1 - 12/1: P31,000 x 2……… 62,000
12/1 - 12/31 : P36,000 x 1……… 36,000
P360,000

45
 Partnership

Divided by:……………… ……12 months

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 of
P10,000 and equipment with an agreed upon valuation of P20,000. On July
20x5, BB invested an additional P10,000 in the partnership, DD made a capital
withdrawal of P4,000 on May 2, 20x5 but reinvested the P4,000 on October 1,
20x5. During 20x5, DD withdrew P800 per month and BB, the managing
partner, withdrew P1,000 per month. These drawings were charged to salary
expense. A pre-closing trial balance taken at December 31, 20x5 is as follows:
Debit Credit .
Cash ...………………………………… P 9,000

Receivable – net ..…………………… 15,000

Equipment – net ...…………………… 50,000
Other assets ................................................. 19,000

Liabilities .…………………………….. P 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 ………………………………………. P137,000 P137,000

Compute for the share of DD and BB in the partnership net income assuming
monthly salary allowances P800 and P1,000 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

46
 Partnership

(Adapted)

Answer: (d)

DD BB Total
Salary Allowances P8,000 P10,000 P18,000
Interest on 2,800 3,600 6,400
Average Capital
Balance (Equally) (200) (200) (400)
P10,600 P13,400 P24,000 (d)
Net Income of P24,000 would be computed as follows:
Service Revenue…………………………………………… P50,000
Less: Expenses:
Supplies……………………………………………… P17,000
Utilities……………………………………………….. 4,000
Other Miscellaneous expenses………………… 5,000 26,000
Net Income………………………………………………… P24,000

*DD: P800 x 10 = P8,000

*BB: P1,000 x 10 = P10,000

***Interest on Average Capital:

DD: P30,000 x 2 = P60,000
P26,000 x 5 = P130,000
P30,000 x 3 = P90,000
P280,000
10-month average capital: P280,000/10 = P28,000 x 12% x 10/12 = P2,800
Annual average capital: P280,000/12 = P23,333x 12% = P2,800

BB: P30,000 x 4 = P120,000

P40,000 x 6 = P240,000

47
 Partnership

P360,000
10-month average capital: P360,000/10 = P36,000 x 12% x 10/12 = P3,600
Annual average capital: P36,000/12 = P30,000x 12% = P3,600

34. AA and BB formed a partnership in 20x5 and made the following investments
and capital withdrawals during the year:
АА BB
Investments Draws Investments Draws
March 1 ………………………………… P30, 000 P20, 000

June 1 ……………………………..…….. P10, 000 P10,000

August 1 ………………………………… 20,000 2,000

December 1 …………………………… 5,000

The partnership's profit and loss agreement provides for a salary of which
P30,000 was paid to each partner for 20x5. AA is to receive o 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 P60,000 before salaries and bonus, 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
(Adapted: Fischer & Taylor)
Answer: (d)

AA BB Total
Salaries P30,000 P30,000 P60,000
Bonus* - - -
Interest on 2,167 800 2,967
Average Capital
**
Balance (Equally) (1,483) (1,484) (2,967)

48
 Partnership

P30,684 P29,316 P60,000 (d)

*No Bonus, since the basis of such computation would be zero.
**Interest on Average Capital:
AA: P30,000 x 3 = P90,000
P20,000 x 2 = 40,000
P40,000 x 4 = 160,000
P35,000 x 1 = 35,000
P325,000
10-month Average Capital: P325,000/10 = P32,500 x 8% x 10/12 = P2,167
Annual Average Capital: P32,500/12 = P27,083 x 8% = P2,167
BB: P20,000 x 3 = P60,000
P10,000 x 2 = 20,000
P8,000 x 5 = 40,000
P120,000

35. Partner A first contributed P50, 000 of capital into an existing partnership on
March 1, 20x5. On June 1, 20x5, the partner contributed another P20, 000. On
September 1, 20x5, the partner withdrew P15, 000 from the partnership.
Withdrawals in excess of P10, 000 are charged to the partner's capital
account. The annual weighted average capital balance is

a. P62, 000 c. P60, 000

b. 51, 667 d. 48, 333
(Adapted - Fischer & Taylor)

Answer: (b)

The Annual Weighted Average Capital would be:

March 1: P50,000 x 3 = P150,000
June 1: P70,000 x 3 = P210,000
September 1: P65,000 x 4 = P260,000
P620,000
Divided by: Months per annum 12 months

49
 Partnership

P 51,667

36. WW and RR share profits and losses equally, WW and RR receive salary
allowances of P20, 000 and P30, 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 P120, 000.
WW RR
January 1 capital balances.......................... P100,000 P120,000

Yearly drawings (P1,500 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. P110,667 and P119,583 c. P100, 000 and P120, 000
b. P105.333 and P126,667 d. P126,667 and P105,333

(Adapted-Patterson/Shoulders)

Answer: (a)

The weighted average capital would be:

WW:
January P100,000 x 6………………….. P600,000
July P88,000 x 1 ………………….. 88,000
August P128,000 x 5 …………………. 640,000
P1,328,000
Divided by: Months per annum 12 months

50
 Partnership

P 110,667
It should be noted that the number of months in the computation includes
the current month before the date of investment or date of withdrawal)
since the counting should start of the beginning of the month (let's say June
3, therefore the month of June should be included in the counting to
compute the average capital for the P100,000)

RR:
January P120,000 x 5 (Jan. – May) …………………… P 600,000
June P105,000 X5 (June - Oct.) …………………… 525,000

November P155,000 x 2 (Nov. - Dec.) ……………………. 310,000

P1,435,000
Divided by: Months per annum …………………………….. 12 months

P 119,583 (a)

Drawings are ignored as stated in the problem.

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: MM contributed additional capital of
P20,000 on August l and made a drawing of P10,000 on October 1: and, AA
made a drawing of P30,000 on November 1

The partners' capital balances on December 31, 20x5 are:

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 Partnership

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

(PhilCPA)
Answer: (d)

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 50,000

Capital, December 31. P223,180 P272,060 P280.760 P776,000

20x5
HH ММ 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 60,060 P 60,760 P176,000

52
 Partnership

*Average Capitals:
HH:

1/1 - 7/1: P150,000 x6 ………………………………………………….. P 900,000

7/1 - 10/1: P180,000 x 3 ……………………………………………….. 540,000

10/1 - 12/31 : P170,000 x 3 ……………………………………………. 510,000

P 1,950,000
Divided by: Months per annum …………………………………….. 12 months

Weighted-average capital ………………………………………….P 162,500

MM:

1/1 - 8/1: P200,000 x 7 ………………………………………………… P 1,400,000

8/1 - 10/1: P220,000 x 2……………………………………………….. 440,000

10/1 - 12/31 : P210,000 x 3 …………………………………………… 630,000

P 2,470,000
Divided by: Months per annum ……………………………………. 12 months

Weighted average capital …………………………………………. P 205,833

AA
1/1 - 11/1: P250,00 x 10 ……………………………………………… P 2,500,000
11/1 - 12/31 : P220,000 x 2 ………………………………………….. 440,000

P 2,940,000
Divided by: Months per annum ……………………………………………. 12 months

Weighted average capital …………………………………………………. P 245, 000

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 Partnership

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. 7,000,000

b. 4,666,667 d. 11,000,000
(AICPA)

Answer: (a)

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% ……………………… P 3,000,000 (a)

39. On January 2, 20x5, BB and PP formed a partnership BB contributed capital of

P175, 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 of 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 goods sold ......................................................... 700,000

Gross profit....................................................................... P175,000

Expenses (including the salary, interest and the bonus) 143,000

54
 Partnership

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

(PhilCPA)

Answer: (c)

Bonus = .15 (NI before salaries, interest and bonus)

B = .15 (NI after salaries, interest and bonus + salaries + interest + bonus)

B = .15 [P32,000 + (5,000 x 12) + (5% x P200,000) + B]

B = .15 (P32,000 +P60,000 + P10,000 + B)

B = .15 (P102,000 + B)
B = P 15,300 + .15B
B = .15 B = P 15,300

.85 B = P 15,300
B = P 15,300/.85

B = P 18,000 (c)

40. On January 1, 20x5, A, B, C and D formed Bakya Trading Co. a partnership

with capital contributions as follows: A. P50,000: 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 ofP6,000 per
annum, which is inclusive of amounts representing interest and share of
remaining profits. The balance of the profits shall be distributed to A, B, C, and
D in a 3:3:2:2 ratio.

55
 Partnership

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. P 30,667

b. 30,000 d. 32,333
(PhilCPA)
Answer: (d)

A B C D Total
5% interest on capital* P 2,500 P 1,250 P 1,250 P1,000 P6,000
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 P9,250 P4,583 P6,000 P32,333 (d)

*A: P50,000 x 5% = P2,500

B: P25,000 x 5% = 1,250

C: P25,000 x 5% = 1,250
D: P20,000 x 5% = 1,000

First, determine who among the partners will receive a fixed amount, then,
compute for the residual amount, i.e. for AA P12,500 – P2,500 – P5,000 resulting to
a share in the residual profits of P5,000. The P5,000 share in residual profits of AA
represents 30%, therefore capitalize P5,000 by 30% to arrive at P16,666 which will
be allocated to all partners based on their profits and loss ratio.

Second, determine who among the partners will receive a minimum

amount. Any partner who receives an amount lower than the minimum amount
is required to have an additional profit, i.e. for partner DD, which in DD’s case
P1,667 is needed to satisfy the minimum amount provided therein. Any partner

56
 Partnership

who receive an amount equal, or more than the minimum amount obviously does
not need an additional profit.

41. AA, BB and CC are partners with average capital balances during 20x5 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 20x5, 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 СС AA CC
a. P30,267 P(40,448) c. P(40,844) P31,235
b. 29,476 17,536 d. 28,358 32,458

(PhilCPA)
Answer: (a)

AA BB CC Total
10% interest on average capital* P47,250 P23,865 P16,235 P87,350
Salaries 122,325 - 82,625 204,950
Balance: Equally (139,308) (139,308) (139,308) (417,924)
Increase (Decrease) P30,267 P(115,443) P(40,448) P(125,624) (a)

* AA: 10% x P472,500 = P47,250

BB: 10% x P238,650 = P23,865

CC: 10% x P162,350 = P16,235

57
 Partnership

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. 23,865 d. (18,010)

Answer: (d)

AA BB CC Total
10% interest on average capital P47,250 P23,865 P16,235 P87,350
Salaries 122,325 - 82,625 204, 950
Balance: Equally (41,875)* (41,875)* (41,874)* (125,624)
P85,200 P(18,010) P56,985 P166,676 (d)

*Not rounded due to discrepancy of P1.

43. XX. YY and ZZ formed a partnership on January 1, 20x5. Each contributed

P120,000. Salaries were to be allocated as follows:
XX YY ZZ
P30, 000 P30, 000 P45, 000
Drawings 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 XX: 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, P155,100: YY, P155,100: ZZ, P169,800
b. XX, P126,000: YY, P126,0000: ZZ, P124,500

58
 Partnership

c. XX, P125,100: YYP125,100, ZZ, P124,800

d. XX, P125,500: YY, P125,500: ZZ, P124,000

(Adapted)
Answer: (c)

XX YY ZZ Total
Capital, January 1, 20x5 P120,000 P120,000 P120,000 P360,000
Add: Net Income
Salaries P30,000 P30,000 P45,000 P105,000
Bonus* 1,500 1,500 - 3,000
Balance: 30%: 30%: 40% 3,600 3,600 4,800 12,000
Share in Net Income P35,100 P35,100 P49,800 P120,000
Less: Drawings – Personal 30,000 30,000 45,000 105,000
P5,100 P5,100 P4,800 P15,000
Capital, December 31, 20x5 P125,100 P125,100 P124,800 P375,000 (c)

*Bonus = 25% (NI – Salaries – Bonus)

B = .25 (P120,000 – P105,000 – B)

B = P3,750 - .25 B
1.25 B = P3,750

B = P3,000; P1,500 for XX and YY.

44. CC, PP, and AA, accountants, agree to form a partnership and to share profits
in the ratio of 5:3:2. They also agreed 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, P38,000

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 Partnership

c. CC, P24,000. PP, P22,000. AA, P38,000

d. CC, P25,000, PP, P21,000, AA, P39,000

(Adapted)

Answer: (b)

CC PP AA Total
Salary……………………….. P28,000
P28,000
Balance (P84,000 – P28,000), 5:3:2 …… P28,000 P16,800 11,200 56,000
Additional profit to PP (P21,000 – (3,000) 4,200 (1,200) -
P16,800)
P25,000 P21,000 P38,000 P84,000* (b)

*Net Income would be:

Fees……………………………………………………………………….. P180,000
Less: Expenses ………………………………………………………….... 96,000

P 84,000
It should be noted that the additional profit given to PP actually came from
CC and AA based on their respective revised P&L ratio (5:2). The P4,200,
additional profit should not be added to total net income because by doing so,
it would be tantamount to distorting the net income of P84,000.
On the hand, assuming the P4,200 would be added to the net income of
P84,000, the total net income will now be P88,200, but an adjustment of P4,200
should be reflected to make it P84,000, and such adjustments will be shared
accordingly by CC and AA (5:2). Mathematically, the final results remain the
same.

45. Hunt, Rob, Turman, and Kelly own a publishing company that they operate as
a partnership. The partnership agreement includes the following:

60
 Partnership

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 ......... P50,000
Rob........... 45,000

Turman .... 20,000

Kelly .......... 47,000
Any remaining profits and loss are lo be divided equally among the partners.
Determine how a profit of P105,000 would be allocated among the partners.
a. Hunt, P41,450: Rob, P29,950: Turman, P15,450: Kelly, P18,150

b. Hunt, P28,000: Rob, P16,500: Turman, P 2,000: Kelly, P 4,700

c. Hunt, P39,700: Rob, P29,200: Turman, P16,700: Kelly, P19,400
d. Cannot be determined.

(Adapted)
Answer: (a)

HUNT ROB TURMAN KELLY TOTAL

Salaries P20,000 P10,000 - - P30,000
Bonus* 3,000 2,000 - - 5,000
10% Interest on Average
Capital 5,000 4,500 2,000 4,700 16,200
Balance
(equally) 13,450 13,450 13,450 13,450 53,800
P41,450 P29,950 P15,450 P18,150 P105,000
*Bonus = (3% + 2%) (Net Income-Bonus)
Bonus = 5% (P105,000 – B)

Bonus = P5,250 – 0.5B

1.05B = P5,250
B = P5,250/ 0.5

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 Partnership

B = P5,000, therefore HUNT should receive P3,000 (5,000 X3/5), while ROB will
receive P2,000 (5,000 X 2/5)

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, P6,750): PP. P( 6,750)

(Adapted)
Answer: (d)

Correcting the allocated net income:

RR PP TOTAL
Correct allocation of net income, equally P3,000 P3,000 P6,000
Allocation of net income per books 9,750 9,750 19,500
Adjustments increased (decreased) P(6,750) P(6,750) 13,500
*The adjusted or corrected net income for 20x5 would be:
Unadjusted net income (per books) P(19,500)
Add (deduct): Adjustments
Understatement of depreciation (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

62
 Partnership

of JJ and KK after adjusting the profits for the following items omitted from the
books:

Omissions of 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 accounts, 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
20% per annum is:

a. P67,765 c. P69,000
b. 72,105 d. 71,000

(PhilCPA)
Answer: (d)

20x5 20x6
Unadjusted net income P14,400 P13,600
Add (deduct): adjustments
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

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 Partnership

Divided by (capitalized at) 20%

Aggregate 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. An 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 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 in the
20x6 net income:
a. (1) 30% (2) P2,214 c. (1) 27% (2) P2,286

b. (1) 27% (2) P2,214 d. 11) 30% (2) P2,286

(PhilCPA)

Answer: (b)
(1) Profit and Loss Ratio:
OLD NEW
MM 50% X 90% 45%
NN 30% X 27%
OO 20% X 10% 18%
PP - 10%
100% 100% 100%

(2) Reported Net Income P12,500

Add (deduct): adjustments
a.Prepaid Expenses (20X5) (800)
b. Accrued Expense (20x6) (600)
c. Unearned Income (20x5) 700
d. Accrued Income (20x6) 500

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 Partnership

Adjusted Net Income P12,300

Multiply by P%L Ratio of OO 18%
Share of OO in Net Income P2,214

49. A, B, and care partners in an accounting firm. Their capital account balances
at year-end were A P90,000: B P110,000 and CP50,000. 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 partners A &C respectively
Assuming a net income of P44,000 for the year, the total profit share of

Partner C was:
a. P 7,800 c. P19,400
b. 16,800 d. 19,800

(PhilCPA)
Answer: (c)

A B C TOTAL
Bonus* P4,000 P4,000
Interest: 10% (110,000-
P100,000) P1,000 P1,000
Salaries P10,000 12,000 22,000
Balance: 4:4:2 3,400 17,000
19,400 P44,000
*Bonus = 10% (NI-Bonus)

Bonus = 0.10 (P44,000-B)

Bonus = P4,400-0.10 B
1.10B =P4,400

B = P4,000

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 Partnership

50. X, Y and Z, a partnership formed on January 1, 20x5 had the following initial
investments:

X - P100, 000
Y - 150,000

Z - 225,000
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 partners: P60, 000 for X, P48,000 for Y and 36,000 for Z
-Average partner's capital balances during the year shall be allowed 10%
Additional information:

-On June 30, 20x5 X invested an 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 31,2005 was:
a. P405,000 c. P480,000

b. 671,500 d. 672,750
(PhilCPA)

Answer: (d)

TOTAL
Capital, January 1, 20x5 P475,000
Add: investment 60,000
Net Income 207,750
Total 742,750
Less: Withdrawals 70,000
Capital, December 31,
20x5 672,750
*Net Income
X Y Z TOTAL
Salaries P60,000 P48,000 P36,000 P144,000
Interest on Ave. Capital:
X: 10% x P130,000 13,000
Y: 10% x P150,000 15,000
Z: 10% x P207,750 20,750 48,750

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 Partnership

Balance 5,000 5,000 5,000 15,000

P207,750
Average Capital:
X: P100,000 x 6= P600,000 Z: P225,000 x 9= P2,025,000
P160,000 x 6 = P960,000 P155,000 x 3= P465,000

P1, 560,000/12= P130,000 P2,490,000/12= P207,500

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 …………………………………………. P200,000

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 20xS 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)
Answer: (a)

X Y Z TOTAL
First 6 months
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

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 Partnership

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 6 months to 31
30 June 20x5 December 20x5
Salary……………….. S P15,000 P25,000
Share of balance in profit S 60% 40%
T 40% 40%
U 20%

The partnership profit for the year ended 31 December 20x5 was P350,000
accruing evenly over the year. What are the partners' total profit shares for the
year ended 31 December 20x5?
S T U
a. P196,000 P124,000 P30,000
b. 217,000 108,000 25,000
c. 155,000 130,000 65,000
d. 175,000 145,000 35,000
(ACCA)
Answer: (a)

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 60,000 60,000 30,000 150,000
(40%:40%:20%)
________ _______ _______ 175,000
30,000
196,000 124,000 375,000

53. AA and BB entered into a partnership as of March 1, 20x5 by investing

P125,000 and P75,000, respectively. They agreed that AA, as the managing
partner, was to receive a salary of P30,000 per year and a bonus computed

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 Partnership

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 balance.

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 rate was 20% per year.
The partners' capital balances on December 31, 20x5, after closing the net
profit and drawing accounts, were:
AA BB AA BB
a. P135,940 P47,960 c. P139,680 P48,680
b. P139,540 P49,860 d. P142,350 P47,670
(PhilCPA)

Answer: (b)

AA BB Total
Capital, March 1, 20x5 P 125,000 P 75,000 P 200,000
Add: Net Income 34,540 4,860 39,400
Total P 159,000 P 79,860 P 239,400
Less: Drawings 20,000 30,000 50,000
Capital, December 31, 20x5 P 139,540 P 49,860 P 189,400

Allocation of Net Income

AA BB Total
Salary (10 months) P 25,000 P - P 25,000
Bonus 1,440 - 1,440
Balance: 125:75 8,100 4,860 12,960
34,540 4,860 39,400

Sales P 233,000
Less: Sales returns 5,000
Net Sales P 228,000

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 Partnership

Less: Cost of goods sold:

Inventory, March 1 P -0-
Add: Purchases 196,000
Cost of goods available for sale P 196,000
Less: Inventory, December 31 73,000 123,000
Gross profit P 105,000
Less: Operating Expenses [P 60,000- P2,500 – P
950 65,000
+ P 1,550 + (20% x P 45,000 x 10/12)]
Net Income P 39,400

Bonus = 10% [NI - Salaries]

B = .10 [P39,000 – (P30,000 x 10/12)]
B = .10 (P14,400)
B = P 1,440

54. There and 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 the change, land has a market value of P250,000 and a book
value of P120,000. How much will Craig's capital account be adjusted at the
date of the change in the profit and loss ratios?
a. P52,000 increase c. P52,000 decrease
b. P13,000 increase d. P13,000 decrease
Answer: (b) – (P 250,000 – P 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 P370,000 and a market value of P520,000. One
year after the profit and loss ratio is changed the building is sold for P650,000.
What is the amount of change to Bruce's capital account at the date the
building is revalued?

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 Partnership

a. P105,000 c. P45,000
b. P 91,000 d. P39,000

Answer: (c) – (P 650,000 – P 370,000) (.30)

56. Using the same information in No. 55, what is the amount of change to Bruce's
capital account at the date the building is sold?

a, P91,000 c. P39,000
b. P78,000 d. P52,000
Answer: (d) – (P 650,00 – P 520,000) (.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 choose to prepare an itemized list of assets with market
values different from 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

Answer: (b) – (P 60,000 – P 50,000) (.60) + (P 80,000 – P 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
Answer: (b) – (P 60,000 – P 50,000) (.40) + (P 80,000 – P 60,000) (.30)

71
 Partnership

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

Answer: (b) – (P 300,000 – P 200,000) (.75) + (P 380,000 – P 300,000) (.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 ratios?
a. P25,000 increase c. P25,000 decrease

b. P50,000 increase d. P50,000 decrease

Answer: (c) – (P 600,000 – P 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%) …………………………….. P140,000
Iggy, capital (30%) ……………………………... 160,000
Grabby, capital (20%) ………………………….. 100,000

Total………………………………………........... P400,000

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 Partnership

Betty needs money and agrees to assign half of her interest in the partnership
to Yessir for P90,000 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. P310,000 c. P490,000
b. 200,000 d. 400,000

(Adapted)

Answer: (d)

A partnership is not dissolved when a partner assigns his or her interest in the
partnership to a third party because such an assignment does not in itself
change the relations among partners. Such assignment only entities the
assignee to receive the assigning interest partner’s interest in future
partnership profits and in partnership assets in the event of liquidation. The
assignee does not become a partner, however, and does not obtain the
right to share in management of the partnership. If the assignee does not
become a partner, the only change required on the partnership books is
for transfer of the capital interest of the assignor partner to the assignee.
The assignment by Betty to Yessir of his 50% interest in the BIG Entertainment
Company is recorded are follows;
Betty, capital (P 140,000 x 50%) 70,000

Yessir, capital 70,000

The amount of the capital have based is equal to the recorded amount of
Betty’s capital at the time of the assignment, and it is independent of the
consideration received by Betty for her 50% interest. If the recorded amount
of Betty’s is P 70,000, then the amount of the transfer entry is P 70,000,
regardless of whether Yessir pays Betty P 70,000 or some other amount.
Therefore, the capital of the partnership after the assignment of interest
remains the same at P 400,000.

62. Jenna is about to purchase some of Cynthia's partnership interest. Cynthia

currently has partnership equity of P84,500. If Jenna pays Cynthia P30,000 for

73
 Partnership

30 percent of her capital, what amount will be recorded in the partnership

accounting records?

Jenna Cynthia
a. P30,000 credit P25,350 debit
b. P25,350 credit P25,350 debit
c. P30,000 credit P30,000 debit
d. P25,350 debit P25,350 credit

Answer: (b) – P84,500 x 30%. If the 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 …….. 145,000 KK, capital ……... 252,000
LL, capital ……… 126,000
MM, capital ……. 42,000

Total ……………. P 500,000 Total ……………. P 500,000

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; P33,000.

b. P201,600; P100,800; P33,600.

c. P216,000; P108,000; P36,000.
d. P255,600; P127,800; P42,600.

(AICPA)
Answer: (b)

No goodwill is to be recognized in cases of admission of new partner,

therefore, book value method is used.

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 Partnership

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 (b)

64. Using the same information in No. 58, assuming that implied goodwill (or
revaluation of assets) is to be recorded prior to 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

Answer: (c)

Amount paid ...................................................................................... P 90,000

Less: Book value of interest acquired:
(P 250,000 + P 126,000 + P 42,000) x 20%........................... 84,000
Excess ................................................................................................. P 6,000
Divided by: ....................................................................................... 20%
Goodwill ............................................................................................. P 30,000

KK: [P 252,000 + (P 30,000 x 60%)] X 80% = ................................... P 216,000

LL: [P 126,000 + (P 30,000 x 30%)] x 80% = .................................... P 108,000
MM: [P 42,000 + (30,000 x 10%)] x 80% = ........................................ P 36,000 (c)

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
P140,000.00. They agree that goodwill or revaluation of assets of P60,000 is to

75
 Partnership

be recorded prior to admission of AA. The condensed balance sheet of the

XYZ partnership is as follows:

Cash …………….. P 60,000 Liabilities ………. P 100,000

Non-cash assets .. 540,000 XX, capital ……... 250,000
YY, capital ...…… 150,000
ZZ, capital ...……. 100,000

Total ……………. P 600,000 Total ……………. P 600,000

The capital of XX, YY and ZZ respectively after the payment and admission of
AA are:
a. P187,500; P112,500; and P75,000 c. P280,000; P168,000; and P112,000

b. P210,000; P126,000; and P84,000 d. P250,000; P150,000; and P100,000

Answer: (b)

The goodwill or revaluation of asset of P 60,000 can be proven by the

following computation:
Amount paid ....................................................................................... P 140,000
Less: Book value of interest acquired:
(P 250,000 + 150,000 + P 100,000) x 25%............................. 125,000
Excess .................................................................................................... P 15,000
Divided by: ............................................................................................ 25%
Goodwill / asset adjustments ........................................................... P 60,000

XX: [P 250,000 + (P 600,000 x 50%)] X 75% = ................................. P 210,000

YY: [P 150,000 + (P 60,000 x 30%)] x 75% = .................................... P 126,000
ZZ: [P 100,000 + (60,000 x 20%)] x 75% = ........................................ P 84,000 (b)

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 Partnership

66. On June 30, 20x5, the balance sheet of Western Marketing, a partnership is
summarized as follows:

Sundry assets …………………………………..... P150,000

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 P25,000. What is the amount of Cuba's capital to be taken up in
the partnership books if book value method is used?
a. P12,500 c. P25,000
b. 18,750 d. 31,250
(Adapted)
Answer: (b)

Amount paid ....................................................................................... P 25,000

Less: Book value of interest acquired:
1
P 150,000 x ............................................................................. 18,750 (b)
8

Gain of West and Tern ....................................................................... P 6,500

67. PP contributed P24,000 and CC contributed P48,000 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 P16,290; PP withdrew
P5, 050 and CC P8, 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 P30, 000 to PP and CC, whose capital accounts
were to be reduced by transfers to GG's capital account of amounts sufficient
to bring them back to their original capital ratio.
How should the P30,000 paid by GG be divided between PP and CC?
a. PP, P9,825; CC, P 20,175
b. PP, PI5,000; CC, P15, 000

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 Partnership

c. PP, P10,000; CC, P20,000

d. PP, P 9,300; CC, P20,700

(Adapted)

Answer: (d)
PP CC Total
Capital balances before net income ............... P 24,000 P 48,000 P72,000
1 2
Net income (24:48) 0r ( 3 : 3) .............................. 5,430 10,860 16,290

Drawings ............................................................... ( 5,050) ( 8,000) (13,050)

Capital balance before admission ................... P 24,830 P 50,860 P75,240

Amount paid ........................... ................................................. P 30,000

1
Less: Book value of interest acquired: ( 75,240 x 4)......... 18,810

Gain of PP and CC....... ............................................................ P 11,910

Therefore, the P 30,000 cash should be allocated as follows:

PP CC Total
Capital balances before admission ............... P 24,380 P 50,860 P75,240
Required capital balances
1 2
[P & L ratio - ( 3 : 3) of

P56,430 (P 75,240 - P18,810)]................. 18,810 37,620 56,430

Transfer of capital to needed to
bring back to original capital ratio .................. P 5,570 P 13,240 P18,810
1 2
Add: Personal gain (refer above) - 3 : ............ 3,730 7,460 11,190
3

Personal cash distribution .................................. P 9,300 P 20,700 ₱ 30,000 (d)

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 Partnership

68. The capital accounts of the partnership of NN, VV and JJ on June 1, 20x5 are
presented below with their respective profit and loss ratios:

NN ............................................................P139, 200 1/2

VV………………………………………….. 208, 800 1/3
JJ……………………………………………... P96, 000 1/6

On June 1, 20x5, LL is admitted to the partnership when LL purchased, for

P132,000, 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 assets and profits of the firm. What is the combined gain realized by
NN and JJ upon the sale of a portion of their interest in the partnership to LL?

a. P0
b. P 43,200
c. P62,400
d. P82, 000

(AICPA)
Answer: (b)

Amount paid ........................... ............................................................ P 132,000

Less: Book value of interest acquired:
1
(P 139,200 + P 208,800 + ₱ 96,000) x 5
.............................. 88,800

Gain ...................................................................................................... P 43,200 (b)

The problem is simpler than it appears at first glance because it states that
LL acquired a one fifth interest in the firm directly from NN and W and no
goodwill to be recorded. In other words, this was a transaction between
partners.

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 Partnership

69. Sam and Ray are partners with capital accounts of P150,000 and P225,000,
respectively. They are 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 partnership's assets and allocate any differences based on their
40/60 profit sharing agreement. Assume that the net market versus book value
differences is P100,000. What amount would Richard pay for the 30 percent
interest?

a. P67, 500
b. P76, 500
c. P97, 500
d. The amount cannot be determined from the information
provided
(AICPA)
Answer: (d)
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 account 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 partnership's income sharing ratio was Lon, 50%; Mac, 20%, and Nan, 30%.
On January 31, 20x5, Ole was admitted to the partnership for a 20% interest in
total capital of the partnership in exchange for an investment of P40,000 cash.
Prior to Ole's admission, the existing partners agreed to increase the carrying
amount of the partnership's inventories to current fair value, a P60,000
increase. The capital account to be credited to Ole:
a. P60,000 c. P52,000
b. P40,000 d. P46,000
(Adapted)
Answer: (c)

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 Partnership

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

*Total contributed capital: (P 120,000 + P 40,000 cash investment + P 30,000

adjustment to fair value) = P 260,000.

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 a 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, P60,000
b. MM, P45,000; OO, P45,000; PP, P60,000
c. MM, P36,000; OO, P36,000; PP, P48,000
d. MM, P26,000; OO, P46000; PP, P 48,000
Answer: (a)

Amount paid P60,000

Less: Book Value of interest acquired:
(P50,000 + P70,000) x 40% P48,000
Excess P12,000
Divided by: 40%
Goodwill P30,000

MM: [P50,000 + (P30,000 x 50%)] – (1/2 x P60,000) = P35,000

OO: [P70,000 + (P30,000 x 50%)] – (1/2 x P60,000) = P55,000

PP: Amount paid = P60,000

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 Partnership

MM OO PP Total

Capital Balances before admission P50,000 P70,000 - P120,000

(equally)
Goodwill (equally) 15,000 15,000 - 30,000

P65,000 P85,000 P- P150,000

Admission by purchase (transfer ½ of 30,000 30,000 60,000 -

P60,000)
Capital balances after admission P35,000 P55,000 P60,000 P150,000
(a)
Or alternatively: (a)

MM OO PP Total

Capital Balances after admission P35,000 P55,000 P60,000 P150,000

(equally)
Cash settlement 10,000 (10,000) - -

Capital balance after cash settlement P45,000 P45,000 P60,000 P150,000

(b)
Profit and loss ratio 30% 30% 40% 100%

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, P60,000
b. MM, P45,000; OO, P45,000; PP, P60,000
c. MM, P36,000; OO, P36,000; PP, P48,000
d. MM, P26,000; OO, P46000; PP, P 48,000
(Adapted)

Answer: (b)

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 Partnership

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 90,000
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
P 940,000

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. P140,000 c. P175,000

b. P142,000 d. P177,500

(AICPA)

Answer: (c)
Total agreed capital of the new partnership P875,000
(P310,000 + P200,000 + P190,000/80%)
Less: Contribution of old partners (LL, PP, and QQ) 700,000
Cash Investment of FF P175,000 (c)

Or, alternatively:
Total agreed capital of the new partnership P875,000
Multiplied by: capital interest of FF 20%
P175,000 (c)

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 Partnership

Take note that the loans to or from partners are ignored in the admission
of a new partner because the focus will be more on capital interest than total
interest.

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
P 65,000
On that date they agreed to admit EE as a partner with a one-third interest in
the capital and profits and losses, and upon his investment of P25,000. 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; P30,000; P30,000; c. P31,667; P28,333; P30,000;

b. P31,500; P28,500; P30,000; d. P35,000; P30,000; P25,000;

(AICPA)

Answer: (b)

Total agreed capital of the new partnership P90,000

Less: Contributed capital (P35,000 + P30,000 + P25,000) 90,000
P 0

Following the admission of EE, the partnership began with a total capital of
P90,000, and EE received a 1/3 interest; therefore, his capital must be credited for
P30,000 (P90,000 x 1/3). But EE contributes only P25,000 so the P5,000 difference
represents bonus (P30,000 – P25,000) must be debited and allocated to the old
partners in the ratio of 7:3:

CC [P35,000 – (70% x P5,000)] P31,500

DD [P30,000 – (30% x P5,000)] 28,500

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EE (P90,000 x 1/3) 30,000

P90,000 (b)

75. The capital accounts for the partnership of LL and MM at October 31, 20x5 are
as follows:

LL, capital…………………………………………..... P 80,000

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

(AICPA)

Answer: (d)
Since bonus method is recognized, the total agreed capital of the partnership
should be equal to the total contributed capital. Therefore, the bonus would be
computed as:
Total agreed capital (P120,000 + P30,000) P150,000
Multiplied by: NN’s capital interest 1/3
Agreed capital to be credited to NN P50,000
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:

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 Partnership

LL: [P80,000 – (P20,000 x 3/5)] P68,000

MM: [P40,000 – (P20,000 x 2/5)] 32,000
NN 50,000
Total agreed capital P150,000
(d)

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

(AICPA)

Answer: (d)
Since bonus method is recognized, the total agreed capital of the partnership
should equal the total contributed capital.

Total agreed capital (P60,000 + P20,000 + P15,000) P95,000

Multiplied by: GG’s capital interest 20%
Agreed capital to be credited to GG P19,000
(d)

The investment made by GG is in the form of non-cash assets; therefore,

they should be recorded based on agreed value (or fair value).

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 Partnership

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 January1,
20x5 are as follows:
Book Value Fair Value
Cash……………………………………….. P 20,000 P 20,000
Accounts receivable –net……………… 100,000 100,000
Inventories………………………………… 50,000 200,000
Plant assets-net…………………………..... 100,000 120,000
P 270,000 P 440,000

Accounts payable....................................... P 50, 000 P 50,000

Manssa, capital (50%)…………………... 120,000
Olga, capital (50%)……………………… 100,000
P 270,000

Marissa and Olga agree to admit Trent into the partnership for a one-third
interest. Trent invests 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 P120,000. Compute
the capital balance of Olga after the admission, assuming that the assets are
revalued and goodwill is recognized.
a. P175,000 c. P195,000

b. P155,000 d. P205,000

(Adapted)

Answer: (d)
Total agreed capital [(P95,000 + P120,000) / 1/3] P645,000
Less: Total contributed capital 605,000
Goodwill to old partners P40,000

Marissa: P120,000 + (P440,000, FV – P270,000, BV) x ½ P205,000

Olga: P100,000 + (P170,000 x ½) 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

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 Partnership

Therefore, the capital of Olga after the admission of Trent would be:

Olga: P185,000 + (P40,000 x ½) = P205,000 (d)

78. AA and BB entered into a partnership on May 31,20x5, contributing cash of

P48,000 and P32,000, respectively and agreeing to divide earnings in the ratio
of their initial investments after allowing annual salary allowance of P12,000
each. On December 31, 20x5, the income summary account had a credit
balance of P34,000, while the drawing accounts showed debit balances 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 a new 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
(Adapted)

Answer: (b)

Determining whether there’s goodwill or bonus:

Total Agreed Capital (P60,000/ 0.33 or 1/3%) P180,000

Less: Total Contributed Capital
Initial Investments (P48,000+P32,000) P80,000
Net Income 34,000
Drawings (P14,000+ P10,000) (24,000)
Contributed Capital of AA and BB P90,000
Investment of CC 60,000 (150,000)

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 Partnership

Goodwill to old partners (AA and BB) P30,000

Total agreed capital differs from total contributed capital, therefore goodwill
exists.

Private cash settlement:

AA BB CC TOTAL
Initial investments, 5/31/x4 P48,000 P32,000 P- P80,000
Net Income* 19,000 15,000 - 34,000
Drawings (14,000) (10,000) - (24,000)
Capital Balance, 12/31/x4 P53,000 P37,000 - P90,000
Additional investment 60,000 60,000
Goodwill(78) 18,000 12,000 - 30,000
P180,00
Total Agreed Capital P71,000 P49,000 P60,000 0
Required capital balance (P%L
Ratio 4:2:3) 80,000 40,000 60,000 180,000
Private cash settlement P9,000 P(9,000) - -

Allocation of Net Income: AA BB TOTAL

Salary Allowances (7 mos. Only) P7,000 P7,000 P14,000
Balance (48:32) 12,000 8,000 20,000
P19,000 P15,000 P34,000
Entry for private cash settlement in the books of the partnership:
BB, Capital 98,000
AA, Capital 98,000

79. AA, BB, and CC are partners sharing profits in a 5:32 ratio, and with capital
balances of P95,000, P80,000, and P60,000 respectively, on December 31, 20x3.
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 be:

a. P72,600 c. P79,100

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 Partnership

b. P74,600 d. P81,100

(Adapted)

Answer: (c)

AA BB CC DD TOTAL
Capital Balances before
the admission of DD P95,000 P80,000 P60,000 P - P235,000
Admission by purchase:
book value
15% x P80,000 (12,000) 12,000
Admission by investment P80,000 P80,000
Total Contributed Capital P95,000 P68,000 P60,000 P92,000 P315,000
Bonus to Old Partners
(5:3:2) 11,000 6,600 4,400 (22,000)** -
Goodwill to Old (5:3:2) 7,500 4,500 3,000 - 15,000***
Total Agreed Capital P113,500 P79,100 P67,400 P70,000* P330,000
*Given per problem

**Transfer of capital, therefore bonus

***Total agreed capital differs from total contributed capital, therefore goodwill

80. Jesse, Joseph, and Leslie are partners with capital accounts of P70,000,
P120,000, and P90,000, respectively. The partnership share 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 Hans' admission. Neither bonus nor goodwill are
required. If the asset's market value exceeds book value P150,000, how much
will Hans invest to acquire a 20% equity interest in the partnership?

a. P107,500 c. P86,000

b. P100,000 d. P70,000

Answer: (a)
{(P70,000 + P120,000 + P90,000 + P150,000)/ 0.80) (0.20)} = P107,500

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 Partnership

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

Answer: (b)
P250,000 + P87,500 = P337,500

82. The following are capital account balances and profit and loss ratios of the
partners in Precious Company.
P&L
Capital Ratio
LL……………………………… P2,250,000 2
OO……………………………... 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 5:32, 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 IT?
a. P800,000 c. P400,000
b. P600,000 d. P240,000
(PhilCPA)

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 Partnership

Answer: (a)

Admission of RR: Total agreed capital = Total contributed capital, therefore no

goodwill arises

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-

Admission of TT: Goodwill is computed

Total Agreed Capital (P1,200,000 / 20%) P6,000,000

Less: Total Contributed Capital (P4,000,000 +
P1,200,000) (5,200,000)
Goodwill P800,000

83. RR and XX formed a partnership and agreed to divide initial capital equal
even though RR contributed P 25, 000 and XX contributed P 21, 000 in
identifiable assets. Under the bonus approach to adjust the capital accounts.
XX's unidentifiable assets should be debited for
a. P 11, 500
b. 4, 000
c. 2, 000
d. 0

(AICPA)
Answer: (d)
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 P 140, 000 and Daniel's is P 40, 000 and
they share income in a 3:1 ratio respectively. They decide to admit David to

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 Partnership

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 P 40, 000 for a
one-fifth interest. What is the amount of inventory written down?

a. P 4, 000
b. P15, 000
c. P10, 000
d. P20, 000
Answer: (d)
Total Agreed Capital after the admission of
David:
(P40,000 x 5) P200,000
Less: Contribution/Investment of David 40,000
Capital Balances of AD before the admission
of David P160,000
Capital Contribution (P140,000 + P40,000) P180,000
Reduction of Inventory P20,000

85. Using the same information in No. 84, David directly purchases a one-fifth
interest by paying Allen P 34, 000 and Daniel P 10, 000. The land account is
increased before David is admitted. By what amount is the land account
increased?
a. P40,000
b. P20,000
c. P36,000
d. P10,000

Answer: (a)
Amount paid: ( P34,000 + P 10,000 ) ………………………………. P 44,000
Less: Book value of interest acquired:
(P 140,000 + P40,000) x 1/5…………………………………… P 36,000
Excess ………………………………………………………………….. P 8,000
Divided by / capitalized at ……………………………………………… 1/5
Amount of land to be increased…………………………………….. P 40,000

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 Partnership

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

b. (1) P7,120: (2) NN will gain P1,260
c. (1) 28,520 (2) NN will lose P1,260
d. (1) P8,520: (2) NN will gain P140
(Adapted)

Answer: (d)
(1) Goodwill method: Using the capital balance of new partner as a basis of
computing total agreed capital.
Total agreed capital (P5,000 ÷ 25%)………………………………. P20,000
Less: Total contributed capital (P6,000 + P4,800 + P5,000)…….. 15,800
…………………………….. P 4,200
Therefore, the capital balances after the admission of OO:
MM: [P6,000 + (P4,200 x 3/5)]……………………………. P 8,520 (a)
NN: [P4,800 + (P4,200 x 2/5)]…………………………… 6,480
OO ……………………………………………………………… 5,000
Total agreed capital ………………………………………… P 20,000
(2) If bonus method is used, the capital balances would be:
Total agreed capital (P6,000 + P4,800 + P5,000)……….. P15,800
Multiply by: OO’s capital interest…………………………. 25%
Agreed capital to be credited to OO……………………. P 3,950
Contributed/Invested capital of OO……………………… 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 x 3/5)]………………………………. P 6,630

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 Partnership

NN: [P4,800 + (P1,050 x 3/50)]……………………………… 5,220

OO ………………………………………………………………. 3,950
Total agreed capital………………………………………… P 15,800
For the purpose of comparing the bonus and goodwill, there are two
alternatives presented:
Alternative 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 P5,22 P3,950
Add: Goodwill (allocate equally)……………… 1,4000 1,400 1,400
P8,030 P6,620 P5, 350
(Gain) Loss -Bonus method ……………………... P490 P(140) P350 (d)

Alternative 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; written-off of goodwill
(allocate equally)…………………………… 1,4000 1,400 1,400
P7,120 P5,08 P3,600
Bonus method is used 6,630 5,220 3,950
(Gain) Loss -Bonus method ……………………... P490 P(140) P350

The bonus method adheres to the historical cost concept and it is often used in
accounting practice. It is objective that it establishes total capital of the new
partnership of an amount based on actual consideration received from the new
partner. The bonus method indirectly acknowledges the existence of goodwill by
giving bonus to either old or new partner.
The goodwill method result in the recognition of an asset implied by a transaction
rather than recognizing an asset actually purchased. Historically, goodwill has
been recognized only when purchased so that a more objective measure of its
value is established. Therefore, opponents of the goodwill method contend that

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 Partnership

goodwill is not determined objectively and other factors may have influence the
amount of investment required from the new partners.

Although either method can be used in achieving the required interest for the
new partners, the two methods offer the same ultimate results only:
1. When the incoming partner’s percentage share of profit and loss and
percentage interest in assets upon admission are equal, and
2. When the former partners continue to share profits and losses
between themselves in the original ratio.
If these conditions are not fully met, however, results will be different.

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

(Adapted)
Answer: (a)
Goodwill Method: using the capital of the new partner as a basis of computing
total agreed capital:
Total agreed capital (P500,000 ÷ 25%)………………………….. P2,000,000
Less: Total contributed capital (P600,000 + P480,000
+ P500,000)………………………………………………………… 1,580,000
Goodwill to old partners…………………………………………….. P420,000

Therefore, the capital balances after the admission of CC:

AA: [P600,000 + (P420,000 x 3/5)]…………………………………… P852,000
BB: [P480,000 + (P420,000 x 2/5)]…………………………………….. 648,000

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 Partnership

CC…………………………………………………………………………. 500,000
Total agreed capital………………………………………………….. P2,000,000

Bonus Method:
Total agreed capital (P600,000 + P480,000 + P500,000)……….. P1,580,000
Multiplied by: CC’s capital interest………………………………… 25%
Agreed capital to be credited to CC……………………………. P395,000
Contributed or invested capital of CC…………………………… 500,000
Bonus to AA and BB (old partners)………………………………… P105,000

The bonus would be added to AA and BB:

AA: [P600,000 + (P105,000 x 3/5)]…………… ………………... P663,000

BB: [P480,000 + (P105,000 x 2/5)]……………………………….. 522,000
CC…………………………………………………………………….. 395,000
Total agreed capital………………………………………………. P1,580,000

Retirement or Withdrawal of a Partner

88. On June 30, 2013, statement of financial position for the partnership of CC,
MM, and PP, together with their respective profit and loss ratios were as
follows:
Assets at cost…………………………………………………………P 180, 000

CC, loan………………………………………………………………. 9, 000

CC, capital (20%)…………………………………………………… 42, 000
MM, capital (20%)………………………………………………….. 39, 000

PP. capital (60%)……………………………………………………. 90, 000

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 Partnership

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 would pay CC P61, 200 cash for CC's 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. P 36, 450
b. 39, 000
c. 45, 450
d. 46, 200

(AICPA)
Answer: (c)

Amount paid…………………………………………………… P61,200

Less: Book value of interest of CC (20%)………………….. 58,200
Bonus to retiring partner……………………………………… P3,000

*Total interest of CC
Loans ………………………………………………………. P9,000
Capital …………………………………………………….. P42,000
Add: Share in the adjustment of asset
(P216,000-P180,000) x 20%.................................... 7,200 49,200
Total interests…………………………………………….... P58,200

Therefore the capital balance of MM would be:

MM: [P39,000 + (P216,000 – P180,000) x 20%-

(P3,000 x 2/8)]…………………………………………….… P45,450

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 Partnership

**New profit and loss ratio:

MM: 2/8
PP: 6/8

89. The December 31, 20x5, statement of financial position of the BB, CC, and DD
partnership is summarized as follows:
Cash .............................. P100, 000 CC, loan ................ P100, 000

Other assets at cost..... 500, 000 BB, capital ............. 100, 000
CC, capital……….. 200, 000

___________ DD, capital……….. 200, 000

P 600, 000 P 600, 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. 20x5.
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, the capital balances of
BB and DD, respectively, will be:
a. P 116, 000 and P 240, 000
b. P 101, 714 and P 254, 286
c. P 100, 000 and P 200, 000
d. P 73, 143 and P 182, 857

(Adapted)
Answer: (a)
BB: P100,000 + (P600,000-P500,000) x 20%= P120,000 –(P14,000 x 2/7)= P116,000
CC:P200,000 + (P600,000-P500,000) x 30%= P230,000
DD:P200,000 + (P600,000-P500,000) x 50%= P250,000- (P14,000 x 5/7)= P240,000

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 Partnership

Amount paid…………………………………………………… P240,000

Less: BV of interest of
CC………………………………………………………………… 230,000
Bonus ti retiring partner………………………………………. P14,000

90. On June 30, 20X5, the condensed balance sheet for the partnership of DD FF
and GG, together with their respective profit and loss sharing percentages
was as follows:
Assets, net of liabilities…………………………………………….. P 320, 000

DD, capital (50%)………………………………………………….. P 160, 000

FF, capital (30%)…………………………………………………… 96, 000

GG, capital (20%)..................................................................... 64, 000

P 320, 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 assets implicit in the agreement is to be recorded. After DD's
retirement, what are the capital balances of the other partners?

FF GG
a. P 84, 000 P 56, 000

b. 102, 000 68, 000

c. 108, 000 72, 000
d. 120, 000 80, 000

(AICPA)
Answer: (c)
Amount paid……………………………………………………………… P180,000
Less: BV interest of DD(50%)…………………………………………….. 160,000
Excess / Partial goodwill………………………………………………… P20,000
Divide by:,………………………………………………………………… __50%
Total goodwill…………………………………………………………….. P40,000

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 Partnership

Therefore, the capital of the remaining partners:

FF: [P96,000 + (P40,000 x 30%)…………………………… P108,000

GG:[P64,000 + (P40,000 x 20%)…………………………. 72,000

The interest and profit/loss ratio are assumed to be the same.

When a partner withdraws, the partnership agreement should be consulted
to determine if any guidelines have been established that would influence the
procedure. The withdrawal of partner requires a determination of the fair
market value of the partnership entity and a measurement of partnership
income to the date of withdrawal. Also, in many cases, the equity of retiring
partner may not be equal to the partner’s capital balance as a result of (1)
the existence of accounting errors, (2) differences between fair market value
and the recorded book value of assets. , and (3) unrecorded assets such as
goodwill.
If accounting errors are discovered, they should be treated as prior period
adjustments and corrected by adjusting the capital balances of the partners.
Theoretically, an error should be allocated to partners’ capital balances
according to profit / loss ratio that existed when error is committed. Therefore,
it is necessary to identify the period in which it is traceable. This practice can
become complicated, and a well-designed partnership agreement should
include procedures for dealing with the correction of errors.

91. PP, RR and SS were partners with capital balances as of January 1, 20x5, of P
20, 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 the 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. P 3, 000

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 Partnership

b. 5, 000
c. 10, 000
d. 8, 500
(Adapted)

Answer: (a)

Amount paid……………………………………………….. P39,000

Less: Book value of interest of PP 36,000
(50%)………………….
Partial goodwill (to PP)…………………………………….. P3,000
Total interest of PP:
Capital ………………………………………………… P20,000
Add: Share in adjustment of asset 2,000
Share in net income (P28,000) x 50%......... 14,000
P36,000

Partial goodwill is preferred over total goodwill because it represents goodwill

that is actually paid for. On the other hand, total goodwill is also allowed, since
the standard allows both partial and goodwill method.

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
follows:
Net assets....................................................................................... P 480, 000
EE, capital (50%)………………………………..……………………. P 240, 000

FF, capital (30%)………………………………………… …………. 144, 000

GG, capital (20%)…………………………………………… …….. 96, 000

P 480, 000
As of said date, EE retired from the partnership. By mutual agreement, he was
paid P270, 000 for his interest in the partnership. Partial goodwill of adjustment
in assets was to be recorded. After EE’s retirement, the total net assets of the
partnership was:
a. P 300, 000

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 Partnership

b. 210, 000
c. 240, 000
d. 270, 000
(Adapted)

Answer: (c)
Amount paid……………………………………………………………… P270,000
Less: Book value of interest of EE (50%)…………………………….. 240,000

Partial goodwill………………………………………………………….. P 30,000

The entry to record the retirement would be:
EE, Capital……………………………………………............ 240,000

Goodwill…………………………………………………….. 30,000
Cash…………………………………………………. 270,000

Therefore, the net assets of the partnership after EE’s retirement would be:
Net assets, before retirement………………………………………. P480,000
Partial goodwill…………………………………….…………………. 30,000

Cash paid……………………………………………………………... (270,000)

P240,000 (c)

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 retirements?

a. P 300, 000
b. 210, 000
c. 240, 000
d. 270, 000
(Adapted)
Answer: (d)

Amount paid………………………………………………………………… P270,000

Less: Book value of interest of EE (50%)…………………………….….. 240,000

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 Partnership

Excess / Partial goodwill..………………………………………………... P 30,000

Divided by (capitalized at)…………………………..………………… 50%

Total goodwill…………………………..………………………………... P 60,000

The entry to record the retirement would be:

EE, Capital……………………………………………............ 240,000

Goodwill…………………………………………………….. 60,000
Cash…………………………………………………. 270,000

FF, capital (P60,000 × 30%)…………………... . 18,000

GG, capital (P60,000 × 20%)………………….. 12,000

Therefore, the net assets of the partnership after EE’s retirement would be:

Net assets, before retirement………………………………………. P480,000

Partial goodwill……………………………………….………………. 60,000
Cash paid……………………………………………………………... (270,000)

P270,000 (d)

94. A. Smith, a partner in an accounting firm, decided to withdraw from the

partnership. 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 partners' capital accounts before recognition of
partnership goodwill prior to Smith's withdrawal was P252, 000. After his
withdrawal the remaining partners' capital accounts excluding their share of
goodwill, totaled P192,000. The total goodwill of the firm was:
a. P 144, 000
b. 168, 000
c. 192, 000
d. 300, 000

(AICPA)
Answer: (a)

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 Partnership

Amount paid………………………………………………………………….... P88,800

Less: Book Value of interest of Smith (20%)

Total partner’s capital before withdrawal….………….… P252,000

Less: Total partner’s capital after withdrawal………. 192,000 60,000

Excess / Partial good will………………………………………………………. P28,800

Divided by (capital at)…………………………………………………………. 20%
Total goodwill……………………………………………………….……………. P144,000 (a)

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 partners' 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
Answer: (c) -- P150,000 + P22, 5000

96. 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 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

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 Partnership

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
b. P238,500
c. P186,750
d. P180,000
Answer: (b) – P135,000 + (P150,000 + 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
b. P446,000
c. P424,000
d. P376,000
Answer: (c) – 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 profits
and losses 45 percent, 30 percent, and 25 percent, respectively. The
partnership agreement states that the 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. P 87,500
b. P237,500
c. P350,000

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 Partnership

d. The amount cannot be determined because the amount Mary

paid for Sally's equity is not known

Answer: (b) – P200,000 + (P150,000 × .25)

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
Answer: (a)
Erica’s capital balance is reduced by (35%/70%) × P45,000 bonus to Fredric, or
P22,500.
Therefore, the capital of Erica amounted to PO 125,500 = 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. P 45,000 c. P100,000

b. P 55,000 d. P150,000
Answer: (a) – 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
Answer: (b)

P45,000/30% = P150,000 total goodwill/implied

Gustav’s share of goodwill = 35% x P150,000 = P52,500
P200,000 + P52,500 = P252,500

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 Partnership

102. Using the partial goodwill approach, Erica's capital balance, after Fredric's
departure, will be:

a. P127,500 c. P150,000
b. P134,250 d. P165,750

Answer: (c)

103. CC, DD and EE shared profit 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
date 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.…………………………………………………………..P2,000,000
Due to DD……………………………………………………… … 750,000
CC, capital......………………………………………………….. 1,750,000

DD, capital……………………………………………………….. 1,500,000

EE, capital ...............…………………………………………….. 1,000,000

Total liabilities and capital.……………………………………………. P7,000,000

Using the partial adjustment of goodwill method, the new capital balances 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

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 Partnership

(Adapted)
Answer: (d)

Amount paid ............................................................................................P600,000

Less: Book value of interest of EE (20%) (P1,000,000 – P250,000) .........750,000

Deficit- to be deducted to existing goodwill ........................................(P150,000)

A partner who is anxious to withdraw may be willing to accept less than the
balance reported on his or her capital. Willingness to accept such a reduced
amount may arise from the realization that a forced sale of the firm’s asset may
result in loss and decrease in interest as great or greater than which can be
affected through agreement. When a withdrawing partner agreed to accept
less than the amount reported in his or her capital account, such difference
may be viewed.

1) As a bonus accruing to continuing partners

2) Where goodwill has been previously recorded as an offset against the
goodwill balance

EE, Capital ..............................................................1,000,000

Cash...................................................................................600,000

Due from EE.......................................................................250,000

Goodwill..............................................................................150,000
The capital balance of the remaining partners will still be the same
CC ............................................................................................1,750,000
DD ...........................................................................................1,500,000

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

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 Partnership

d. CC. P1,750,000 and DD, P1,500,000

(Adapted)

Answer: Answer: (b)

Amount paid ..........................................................................P 600,000

Less: Book value of interest of EE (20%) ................................ 750,000
Deficit ......................................................................................(P150,000)

Divided by: ............................................................................ 20%

Negative goodwill to be deducted to existing goodwill....(P 750,000)
The entry to record the retirement would be:

CC, Capital .................................................................... P 375,000

DD, Capital .................................................................... . 225,000

EE, Capital ......................................................................1,000,000

Cash................................................................................................. 500,000
Due from EE .................................................................................... 250,000

Goodwill...........................................................................................750,000
Or, alternatively:

CC, Capital (P750,000 x 50%).....................................................375,000

DD, Capital (P750,000 x 30%) ..................................................225,000
EE, Capital (P750,000 x 20%) ...................................................150,000

Goodwill..............................................................................................750,000
EE, Capital (P1,000,000 – P150,000)................................... 850,000

Cash..............................................................................................600,000
Due from EE ................................................................................ 250,000
The capital balance of the remaining partner would be:

CC: (P 1,750,000 – P375,000) .................................................................P 1,375,000

DD: (P1,500,00 – P225,000) ....................................................................P 1,275,000

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 Partnership

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 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 Bonnie's capital account at the date of
Sally's withdrawal?
a. P376,000 c. P464,000
b. P424,000 d. P494,000
Answer: (d)
P 350,000 + (P200,000 + 40,000) (.60)

106. The partners' 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
Quạn (40%) …………………………………………………………………… 40,000

Total partners' capital (20%).......…………………………………………..P250,000

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

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 Partnership

b. 27,000 d. 25,000
(Adapted)

Answer: (a)

Total capital before retirement.........................................................................

P250,000
Less: Retirement of Park ................................................................................... P70,000

Add: Bonus to remaining partners due to retirement of Park.................... P 20,000

Capital balance before the admission of Reed ........................................ P 200,000
Add. Cash investment of Reed ...................................................................... P 20,000

Total agreed, capital of the partnership

(equal to the contributed capital)......................................................P 220,000

Multiplied by: interest acquired .....................................................................__ 10%__

Capital account to be credited to Reed ................................................... P 22,0000

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.

(1) 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 ВB?
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
(Adapted)

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 Partnership

Answer: (a)

(1) Amount paid ............................................................................................. P 30,000

Less: Book value of interest of CC(1/6) ......................................................... 20,000

Partial Goodwill .............................................................................................. P 10,000

Divided by (capitalized at) ............................................................................ ___1/6_
Total Goodwill .................................................................................................P 60,000

Therefore , the capital balance of BB after the retirement of CC:

BB: P30,000 + (2/6 x P60,000).........................................................................P 50,0000

(2)

Bonus method
Amount paid ................................................................................................ P 30,000
Less: Book value of interest of CC ............................................................. 20,000

Bonus retiring partner .................................................................................. P 10,000

Therefore, the capital balance of the remaining partners using bonus method:

AA: P 50,000 – (3/5 x P10,000).......................................................................P 44,000

BB: P 30,000 – ( 2/5 x P10,000).......................................................................P 26,000
Capital of the remaining partners will be still be the same since the goodwill is
applicable only to retiring partner.
AA...................................................................................................P 50,000

BB ...................................................................................................P 30,000
Total goodwill
AA: P50,000 + (3/6 x P60,000)........................................................P 80,000

BB: P30,000 + (2/6 x P60,000) ........................................................P 50,000

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 Partnership

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
P 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 of X and Y possesses goodwill of P10,000.

The combined businesses 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 recognized in the partnership
books:
a. Zero c. P40,000
b. P30,000 d. 68,000

(Adapted: Advanced Accounting by Pahler)

Answer: (c)

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 Partnership

Goodwill of A, B and C Partnership........................................................ P30, 000

Goodwill of X and Y Partnership............................................................. P10, 000
Total goodwill........................................................................................... P40, 000 (c)

109. Using the same information in No. 108, compute the capital balances 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

Answer: ( a )
A X
Unadjusted Capital Balances.................................... P50, 000 P60, 000
Undervalued Tangible Assets:

A: 20,000 x 40% ........................................................... P8, 000

X: 10,000 x 50% ........................................................... P4, 000

Goodwill:
A: 30,000 x 40% ......................................................... P12, 000
B: 10,000 x 50% .......................................................... P5, 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. 68,000

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 Partnership

Answer: ( a ) - 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 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, P58,800

Answer: ( d )
A: 50,000 + (2,400 x 40%)......................................................................... P50, 960

X: 60,000 + (2,400 x 50%)......................................................................... P58, 800

*The P2, 400 bonus to A, B, C and D were calculated as follows:

Bonuses to A, B, C and D: This is the portion of A, B, C and D’s undervaluation

that X and Y might share in if realized or allocated as bonus.
Undervalued tangible assets of P20,000 x 30% (X and Y’s new
profit and loss sharing percentage)................................................. P6, 000
Goodwill of P30,000 x 30% (X and Y’s new profit and loss
sharing percentage)............................................................................ 9, 000

Total Bonus to A, B, C and D .......................................................... P15, 000

Bonuses to X and Y: This is X and Y’s undervaluation that A, B, C and D might

share in if realized or allocated as bonus.

Undervalued tangible assets of P8,000 x 70% (A, B, C and D’s new

profit and loss sharing percentage)............................................... P5, 600
Goodwill of P10,000 x 70% (A, B, C and D’s new profit and loss
sharing percentage)........................................................................ 7,000

Total Bonus to X and Y.............................................................................. P12, 000

Net Bonus to A, B, C and D........................................................................ P2, 400

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 Partnership

Proof of Net Bonus to A, B, C and D to Achieve Equity

(1) Assume full realization of items not recognized on the books:

A, B, C and D:
Undervalued Assets............................................................................ P20, 000

Goodwill.............................................................................................. P30, 000

Total...............................................................................................P50, 000
X and Y:

Undervalued Assets............................................................................. P8, 000

Goodwill............................................................................................... P10, 000
Total...............................................................................................P18, 000

Total............................................................................................................. P68, 000

(2) Allocation of P68, 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 recognizer on the books.............. P50, 000 P18, 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:

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 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

P369,000 P369,000
It was agreed that adjustments be made to the following assets to be
transferred to the corporation:
Accounts Receivable .........………………………………............... P 40,000

Inventory………………………………………………………………… 68,000
Fixed Assets ......................………………………………………… 180,800
The R&G Corporation was authorized to issue P100 par preference shares and
P10 par 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 Shore

a. 2,540 shares 1,500 shares c. 2,642 shares 1,440 shares

b. 2,592 shares 1,440 shares d. 2,642 shares 1,550 shares

(PhilCPA)
Answer: ( b )
Total Roy Gil
Capital, Before Adjustment............... P309, 000 P94, 800 P214, 200
Less: Net Adjustment*........................... 35, 400 11, 800 23, 600

Capital, After Adjustment.................... P273, 600 P83, 000 P190, 600

Less: Portion covered by ordinary share

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par P10 (720 share to each partner).. P14, 400 P7, 200 P7, 200
Portion to be covered by preference
share par P100..................................... P259, 200 P75,800 P183, 400

Shares to be issued:
Preference Share................................. P2, 592 P758 P1, 834
Ordinary Share.................................... P1, 440 P720 720

FV, P40, 000 + P68, 000 + P180, 600 – BV, P60, 000 + P90, 000 + P174, 000

113. Partners Art and Tony, who share equally in profits and losses, have the
following balance sheet as of December 31, 20x5:
Cash ........................... P120,000 A/payable ............ P172,000
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 adjustments: provision of
allowance for bad debts of P10,000; restatement of the inventory at its current
fair value of P160,000and; 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. 267,000 d. 280,000

(PhilCPA)
Answer: ( b )
Unadjusted Capital Balances (P140,000 + P120,000).................. P260, 000
Add (deduct) : adjustments :
Allowance for doubtful accounts.............................................. (10, 000)
Revaluation of inventory (P160,000 - P140,000)......................... 20, 000

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Additional Depreciation............................................................. ( 3, 000)

Adjusted capital balances equivalent to
the total shares issued................................................................ P 267,000 (b)

114. JJ & KK partnership's balance sheet at December 31, 20x5, reported the
following:

Total assets ..…………………………………......... P100,000

Total liabilities………………………………………. 20,000
JJ, capital…………………………………………….. 40,000

KK, capital…………………………………………… 40,000

On January 2, 20x6, JJ and K dissolved their 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 P12,000 more than the
carrying amount on the partnership's books, of which P7,000 was assigned to
tangible assets and P5,000 was assigned to goodwill. JJ and KK were each
issued 5,000 shares of the Corporation's P1 par value ordinary share.
Immediately following incorporation, share premium/additional paid-in-
capital in excess of par should be credited for:
a. P68,000 c. P77,000

b. 70,000 d. 82,000
(AICPA)

Answer: ( d )
Carrying value of net assets (P100,000 – P20,000)................................ P80, 000
Add: Adjustments to reflect fair value................................................... P12, 000

Fair value of net assets............................................................................. P92, 000

Less: Common stock, P1 par (5,000 x 2 x P1)........................................ P10, 000
Additional Paid-in Capital / Share Premium................................... P82, 000 (d)

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