PARTNERSHIP FORMATION

Problem 1:
Hope admits Josh as a partner in business. Prior to the formation of the partnership, Hope’s books
showed the following balances:
Debit Credit
Cash P5,200
Accounts receivable 24,000
Merchandise inventory 36,000
Accounts payable 12,400
Hope, capital 52,800

It was agreed that, for purposes of establishing Hope’s investment in the partnership, the following
adjustments shall be made:
• Allowance for doubtful accounts equal to 2% of accounts receivable shall be set up.
• Merchandise inventory shall be valued at P40,400.
• Prepaid expenses of P700 and accrued expenses of P800 shall be recognized.

1. How much is the adjusted capital of Hope prior to the admission of Josh? Prepare the
journal entries to recognize these adjustments.
2. How much should Josh contribute to secure a one-third interest in the partnership?
Prepare the journal entry.
3. If Josh contributed an equipment with carrying value of P8,000 and fair value of P9,000,
how much cash was contributed for a one-fifth interest in the partnership? Prepare the
journal entry.

Problem 2:
Xerox, Yves, and Zeus formed the XYZ Partnership on January 1, 2024, with the following assets and
liabilities, measured at book values in their respective records, contributed by each partner:

Xerox Yves Zeus

Cash P160,000 P120,000 P120,000
Accounts receivable 28,180 30,800 55,120
Inventory 108,000 95,400 53,600
Property, plant, and equipment (PPE) 360,000 288,000 304,000
Accounts payable 32,000 40,000 48,000
Long-term liabilities 80,000 96,000 104,000

Except for PPE and long-term liabilities, the partners have agreed that the net assets are fairly valued.

The agreed fair valuation of net asset items where the book value is not the fair value follows:
Xerox Yves Zeus
Property, plant, and equipment P404,000 P277,920 P260,100
Long-term liabilities 92,000 100,000 120,720

1. Upon formation of the partnership, how much is the initial capital balance of each
partner? Prepare the journal entry in the partnership books.
Assuming the partners agreed to have a capital ratio of 4:3:3 for Xerox, Yves. and Zeus, respectively.
2. What are the capital balances of the partners upon formation? Prepare the journal entry
for the transfer of capital among the partners.

Assume that the partners agreed to have an interest ratio of 4:2:4 to Xerox, Yves, Zeus, respectively
and Yves and Zeus will invest or withdraw certain amounts to conform with the agreement.
3. What are the capital balances of the partners upon formation?
4. How much is the additional investment (or withdrawal) of Yves?
5. How much is the additional investment (or withdrawal) of Zeus?
6. Prepare the journal entry in the partnership books.

PARTNERSHIP OPERATIONS

On January 1, 2024, Chris and Nikki formed a partnership by initially contributing cash of P280,000 and
P176,000, respectively. The changes in their capital balances during 2024 are summarized as follows:

CHRIS NIKKI
Balances, January 1 P280,000 P176,000
Investment, April 1 25,600
Withdrawal, July 1 (40,000)
Investment, September 1 74,400
Withdrawal, October 1 (3,200)
Investment, December 31 6,400
Balances, December 31 P302,400 P216,800

The partnership reported a net income of P324,960 in 2024 and the profit and loss agreement are as
follows:
• Interest at 5% is allowed on average capital balances;
• Salaries of P2,000 per month to each partner;
• Bonus to Chris of 10% of net income after interest, salaries, and bonus; and
• Balance to be divided in the ratio of 6:4 to Chris and Nikki, respectively.

Both partners withdrew one-fourth of their salary allowances in 2024.

1. Compute the profit share of each partner for 2024.

2. Compute the capital balances of the partners as of December 31, 2024.
 PARTNERSHIP DISSOLUTION

Admission of a New Partner

Elmo and Lito are partners sharing profits and losses in the ratio of 60% and 40%, respectively. The
partnership balance sheet on April 30, 2024, follows:

Cash P 40,000 Accounts Payable P 90,800

Inventory 60,000 Elmo, Loan 4,400
Land 64,000 Elmo, capital 380,000
Buildings 404,000 Lito, capital 104,800
Lito, Loan 12,000

Total P 580,000 Total P580,000

The partners agreed to admit Romy for one-tenth interest for a P56,000 consideration. At the time of
admission, the fair market value of the land is appraised at P144,000 and the market value of the
inventory is P120,000.

Assume Romy is admitted by purchase of each of the original partners’ interest and paid the partners.
1. Calculate the capital balances of the partners after the admission of Romy. Prepare the
journal entries on the revaluation of assets and the admission of Romy.

Assume Romy is admitted by investing P56,000 to the partnership for a 10% interest.
2. Calculate the partners’ capital balances after the admission of Romy. Prepare the journal
entry for the admission of Romy.

Retirement of a Partner
The following balances as of October 31, 2024, for the partnership of Tony, Liza, and Cory are as
follows:
Cash P 66,000 Liabilities P 65,000
Liza, Loan 19,000 Tony, loan 20,500
Other Assets 500,000 Tony, capital 167,000
Liza, capital 107,500
Cory, capital 225,000

Totals P585,000 Totals P585,000

Tony has decided to retire from the partnership on October 31. Partners agreed to adjust the non-cash
assets to their fair market value of P620,000. The profit for the period January 1 to October 31 is
P120,000. Tony will be paid P273,000 for his total interest in the partnership including his loan to the
partnership. The profit and loss ratio is 4:2:4 to Tony, Liza, and Cory, respectively.

1. How much is the bonus recognized upon retirement of Tony?

2. What will be the capital balances of the remaining partners after the retirement of Tony?
Prepare entries for the retirement of Tony from the partnership.
Incorporation of a Partnership
X and Y, partners of XY Partnership (who share profit and loss in 80:20 ratio) organized XY Corporation
to take over the net assets of the partnership. The balance sheet of the partnership on September 30,
2024, the date of incorporation, contains the following accounts:

Cash P14,400
Accounts receivable (net) 33,000
Inventory 30,600
Equipment (net) 40,800
Accounts payable 42,000
X, capital 57,588
Y, capital 19,212

After an appraisal of the equipment and an audit of the partnership’s financial statements, the partners
agree that the following adjustments are required to restate the net assets of the partnership to current
fair value:
• Increase the allowance for doubtful accounts by P480.
• Increase the inventories to current replacement cost of P36,000.
• Increase the equipment to its current fair value of P47,400.
• Recognize accrued liabilities of P1,320.
• Recognize prepaid expenses of P12,000.

XY Corporation is authorized to issue 12,000 shares of P10 par common stock. It issues common
stocks valued at P11 a share to the partnership in exchange for the net assets of the partnership.

1. How many shares of common stocks were issued to X and Y, respectively, upon
incorporation?
2. Immediately after effecting the transfer of the net assets, and the issuance of common
stocks, XY Corporation’s additional paid-in capital account would be credited for what
amount?
 PARTNERSHIP LIQUIDATION

Lump-Sum Liquidation
DONNA, JANICE, and ELLERY plan to liquidate their partnership. They have always shared profits and
losses in a 2:3:5 ratio, and on the day of the liquidation their balance sheet appeared as follows:

DONNA, JANICE, and ELLERY Partnership

Statement of Financial Position
December 31, 2024

Assets Liabilities and Capital

Cash P68,750 Accounts payable P130,370
Other assets 451,250 ELLERY, loan 5,000
JANICE, loan 50,000 DONNA, Capital 76,250
JANICE, capital 250,880
_______ ELLERY, capital 107,500
Total assets P570,000 Total equities P570,000

The other assets are sold for P212,500, and assume the following information on partners’ personal
net assets, exclusive of their respective partnership interests at that point.

DONNA JANICE ELLERY

Personal assets P687,500 P375,000 P167,000
Personal liabilities 562,500 350,000 161,875

Determine the amount of cash paid to the partners at the end of the liquidation.

Installment Liquidation
On December 31, 2024, the balance sheet of CDO Partnership is as follows:

Assets Liabilities
Cash P 15,360 Account Payable P51,200
Noncash assets 271,360 Loan, Celia 10,240
Loan to Oleg 10,240 Dave, Loan 20,480
Celia, Capital 38,912
Dave, Capital 73,728
_______ Oleg, Capital
102,400
P296,960 P
296,960

Profit and losses were shared as follows; Celia, 30%; Dave, 30%; Oleg, 40%. They decided to liquidate
the partnership. The following is a summary of the realization and liquidation activities:
 Book value Cash Liquidation Outside Cash withheld for
of asset collected expenses liabilities anticipated expenses
realized paid paid and unrecorded
liabilities
1st Period 133,120 81,920 4,100 40,000 -
2nd Period 76,800 51,200 4,800 11,200 6,400
3rd Period 61,440 35,840 3,600 - -

Total 271,360 168,960 12,500 51,200 6,400

1. Determine the total amount of cash available for distribution to partners each period.
2. Determine the amount cash paid to each partner in each period by preparing schedules
of safe payments.
3. Prepare a cash priority program to show how cash is to be distributed to each partner.

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