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Advanced Financial Accounting

and Reporting (AFAR) CPA Review DE LEON/DE LEON/ALENTON
AFAR.3601 PARTNERSHIP May 2024

LECTURE NOTES
FORMATION
The initial investments of the partners are recognized at For example:
FAIR VALUES and credited to the partners capital accounts In continuation of the same Illustrative Case
in the agreed INTEREST RATIO. Partnership goodwill is no Partner A invested additional capital on May 1, 2023 for
longer recognized under IFRS. Therefore, the total of the P30,000 cash; contributed merchandise with a fair value of
contributions of the partners is deemed be also the total P24,000 on September 1, 2023; and withdrew
agreed capital, to be allocated to individual partners’ permanently cash of P12,000 on December 1, 2023.
CAPITAL ACCOUNTS per their agreement. For example: Partner B had no additional investments nor permanent
withdrawals during 2023.
A and B formed a partnership on January 2, 2023 by
contributing the following net assets from their respective They agreed to divide profits and losses as follows:
proprietorships: a. Interest of 6% on average capital for each partner
A B b. Salaries of P4,000 each month to both partners
Cash P 30,000 P 20,000 c. Bonus to A of 10% of net income after interests
Non cash assets 620,000 730,000 and salaries; and
Liabilities (450,000) (530,000) d. The balance is agreed to be divided equally.
Net assets P200,000 P220,000 e. Both partners withdrew temporarily 60% of their
respective salaries.
The non-cash assets of A is overstated by P24,500 while
the liabilities of B is understated by P5,500 They agreed on The reported profit of P150,000 for 2023 will be divided as
a interest/capital ratio of 48:52 to A and B, respectively. follows:
A B TOTAL
The compound journal entry to record the formation of the Interests P 12,852 P 12,168 P 25,020
partnership is Salaries 48,000 48,000 96,000
Cash P 50,000 Bonus 2,898 2,898
Non-cash assets 1,325,500 Balance 13,041 13,041 26,082
Liabilities P 985,500 Total P 76,791 P 73,209 P150,000
A, capital 187,200
B, capital 202,800 The journal entry to transfer the net income for 2023 to
capital is
The above agreement resulted in a bonus of P11,700 from Income Summary 150,000
B to A, which is the excess of B’s contribution of P214,500 A, capital 76,791
against a smaller capital credit of P202,800, or the excess B, capital 73,209
of A’s capital credit of P187,200 over the amount
contributed of P175,500. This is referred to as BONUS Average capital for Partner A is computed as follows:
METHOD. If no bonus is to be recognized, the partners
should have used their contributions ratio, 45:55 as 1/01/23 187,200 x 12/12 P187,200
capital ratio to A and B, respectively. This is referred to as 5/01/23 30,000 x 8/12 20,000
NET INVETMENT method. 9/01/23 24,000 x 4/12 8,000
12/01/23 (12,000) x 1/12 (1,000)
OPERATIONS Average capital P214,200
During the operations of the partnership, loan by a partner Multiply by 6%
to the partnership (Loans Payable) or by the partnership to Interest P 12,852
a partner (Loans Receivable) may be recognized; Ave. capital of B : P202,800 x 6% P 12,168
temporary drawings in anticipation of profits may occur;
additional investments may also be made by the partners; The financial statements prepared for partnerships are
and the result of operations during the period is reported. similar to those prepared for corporations, except for the
following basic differences:
Partnership income or loss is allocated to partners in many a. In the balance sheet, ownership equity for a
ways. Generally, agreement items for income or loss partnership will be partners’ capital balances; in a
allocation conform with the following remunerations: corporation, capital stock, additional paid-in capital,
a. income allocations on the basis of capital balances to and retained earnings. In lieu of a statement of
reward partners in proportion to their respective retained earnings done for corporations, partnerships
investments through interests; present a statement of partners’ capital in support of
b. income allocations on the basis of service contributions its ownership equity on the balance sheet.
to reward partners for their respective service to the b. A statement of partners’ capital balances will show
partnership through salaries; initial or beginning balances, additional investments,
c. income allocations on the basis of effective withdrawal of capital, temporary drawings, share of
management of the partnership through bonuses; and net income or net loss, and partners’ compensation
d. Any numerical ratio, e.g. 3:2:5 will apply to the treated as operating expenses.
residual profit or loss after allocations made for (a)
(b), and (c) above. For example:

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Continuing with the same Illustrative Case, the acquired interest is P289,760 at 40%, resulting in
statement of Partners’ capital balances during 2023 P89,760 excess credit over the amount contributed.
follows:
The journal entry to be recorded upon C’s admission is

A B TOTAL Cash P200,000

BB P187,200 P 202,800 P390,000 A, capital (P89,760 x ½) 44,880
AI 54,000 54,000 B, capital 44,880
Wdrwl of C ( 12,000) (12,000) C, capital P289,760
Drawings ( 28,800) ( 28,800) (57,600)
SONI 76,791 73,209 150,000 The new profit and loss ratio would probably be
EB P277,191 P247,209 P524,400 Partner A (60% x ½) 30%
Partner B 30%
c. As illustrated, per GAAP, partners’ compensation items Partner C 40%
such as interests, salaries, and bonuses are simply
items selected by the partners to make the profit b. Admission by purchased interest is one in which
distribution fair. Nevertheless, in some cases, partners’ the new partner transfers assets directly to one or
1remuneration items are treated as operating more partners (NOT TO THE PARTNERSHIP) in
expenses and accordingly included in the income consideration for the purchased interest. Thus the
statement. This latter case requires additional net assets of the partnerships remain the same
accounting procedures and the profit agreement will even after the admission of the new partner.
then apply to the decreased net income as a For example:
consequence of the increased operating expenses. Continuing with the same Illustrative Case and
assuming the old partner sells 40% of their respective
For example: interests for a total consideration of P200,000, the
Continuing with the same Illustrative Case, journal entry to be recorded upon C’s admission is

The following journal entry will be recorded to validate A, capital P110,876

the compensation items as operating expenses: B, capital 98,884
C, capital P209,760
Interest expense 25,020
Salary expense 96,000 The total old capital remains at P524,400 after C’s
Bonus expenses 2,898 admission and the consideration of P200,000 is divided
A, capital 63,750 between Partner A and Partner B as follows
B, capital 60,168
To A (P277,191 x 40%) – (P9,760 x ½) P105,996
The reduced net income of P26,082 (P150,000 – B (P247,209 x 40%) - (P9,760 x ½) 94,004
P123,918) will be recorded as follows Total P200,000
Income Summary 26,082 The P9,760 is total loss to the old partners, (P209,760
A, capital 13,041 acquired interest less consideration paid of P200,000).
B, capital 13,041
WITHDRAWAL or RETIREMENT of a PARTNER
Although the revised schedule of capital balances will
have new details, ( 2 items instead of just one over If a partner withdraws from the partnership, the
the net income) , the ending capital balances will be partnership must liquidate the withdrawing partner’s
identical since the profit and loss agreement ownership equity, as follows:
remained effectively the same. a. Payment to withdrawing partner will not come from
partnership assets-
ADMISSION OF A NEW PARTNER The withdrawing partner may just sell his/her interest
Any major change in ownership, such as admission of a to the remaining partners or to an outsider with the
new partner, or withdrawal of a partner from an existing permission of the remaining partners. In this case the
partnership dissolves the entity. Dissolution of a entry required to be recorded in the books of the
partnership entity does not however imply liquidation, for partnership is simply the transfer of interest from the
oftentimes the business entity continues its operations withdrawing partner to the buying partner(s)
undisturbed. account(s).

There are two ways a new partner can get admitted into For example:
the partnerships: Continuing with the same Illustrative Case and assuming
a. Admission by investment is one in which the new partner A succumbed to head injuries from a car accident
partner transfers net assets into the partnerships. a day after C’s admission by investment, the journal entry
Thus, the net assets of the partnerships increase to be recorded by the partnership if the heirs of A sold the
by the amount contributed and also increase total partnership equity to D (with B and C’s permission) for
capital by the same amount. Capital credits to all P300,000 is
partners upon admission of a new partner will
depend upon the agreement. A, capital P232,311
For example: D, capital P232,311
Continuing with the problem, assume C was admitted
as a partner in the AB Partnership by investing The total capital of the partnership remains the same
P200,000 for a 40% interest in capital and in profits. at P724,400.

The total contributions by the partners will be b. Payment to the withdrawing partner will come from
P724,400 (P277,191 + P247,209 + P200,000). The partnership assets –

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Under this arrangement, one of three situations can 10/31/23 Paid partners cash of P370,000
occur:
i. Payment is equal to the interest withdrawn, which In November, 2023
is easily recorded by a debit to the capital account 11/2-30/23 Realized P312,000 from the sale of
of the withdrawing partner and a credit for the the remaining non-cash assets
payment made, since both amounts are equal. 11/15/23 Paid liquidation expenses of P6,000
ii. Payment is less than the interest withdrawn, which 11/25/23 Paid third-party creditors in full.
is recorded with bonus to the remaining partners 11/30/23 Paid partners cash of P306,000 in
divided in the remaining profit and loss ratio. final settlement.
iii. Payment is more than the interest withdrawn, the
excess is recorded as bonus to the retiring partner
and charged to the remaining partners in the Lump-Sum Liquidation:
remaining profit and loss ratio. Cash NCA A/P A B
BBL 185,000 645,000 96,000 366,000 368,000
For example: Sale 597,000 (645,000) (14,400) (19,200)
Continuing with the same Illustrative Case but this LQ Exp (10,000) ( 4,286) ( 5,714)
time payment to A’s heirs will be P240,109 from AP Pd. (96,000) (96,000)
partnership assets, the journal entry to record A’s Pd to P(676,000) (347,314)(343,086)
withdrawal by death is Balances 0 0 0 0 0

A, capital P232,311 b. Liquidations in which there are several distributions

B, capital 3,342 during the course of liquidation, oftentimes at points
C, capital 4,456 when there are unrealized non-cash assets and unpaid
Cash P240,109 third-party creditors. This is called installment
liquidation
The total capital after the withdrawal of Partner A will be
P484,291, i.e. Partner B, P198,987 and Partner C, By-Installment Liquidation:
P285,304. The bonus to Partner A of P7,798 is divided October Liquidation
between B and C in the remaining profit ratio of 3:4. Cash NCA A/P A B
BBL 185,000 645,000 96,000 366,000 368,000
LIQUIDATION OF A PARTNERSHIP NCA sale 285,000(300,000) (6,429) (8,571)
A liquidation winds up all operations of the partnerships, Exp pd (4,000) ( 1,714) (2,286)
converts all partnerships assets into cash and distributes to A/P pd (50,000) (50,000)
creditors of the partnerships, then to accounts with Pd to P (370,000) (210,000)(160,000)
partners. Bals. 46,000 345,000 46,000 147,857 197,143

Statement of Liquidation Computation for safe payments to partners

A statement of liquidation summarizes all liquidation A B TOTAL
activities, including payments to partners. There are two Balances, 10/31 357,857 357,143 P 715,000
types of distribution in partnerships liquidation, as follows: TPL(345,000) (147,857) (197,143) (345,000)
a. Liquidations in which all distributions are made in a Free interests 210,000 160,000 P370,000
single time following the sale of all non-cash assets.
This is called lump-sum, or total, liquidation. It is a November Liquidation
summary of the entire liquidation process upon its Cash NCA A/P A B
completion. It is one in which at the time cash is Bals,11/1 46,000 345,000 46,000 147,857 197,143
distributed to partners noncash assets had been NCA sale 312,000 (345,000) (14,143) (18,857)
already disposed and the full loss or gain on realization Expenses (6,000) ( 2,571 ) ( 3,429)
reflected in partners’ capital balances. A/P paid (46,000) (46,000)
Cash to P (306,000) (131,143)(174,857)
For example: Balances 0 0 0 0 0
AB Partnerships is to be liquidated on September
30, 2023. On this date, its balance sheet is as No need for safe payment computations because the
follows: partners’ capital and profit ratios have become identical by
Cash P 185,000 the end of October, 2023.
Non-cash assets 645,000
A, loan 20,000 Distribution of partnership cash in liquidation must be
Accounts payable (96,000) made to creditors first, and then to partners’ accounts
B, loan (12,000) which are always based on free-interest computations.
A, capital (386,000) Loan accounts are prioritized over capital balances only if
B, capital (356,000) they belong to the same partner and only after the amount
payable to that partner has been established by free
interest calculations.
AB divide profits and losses on a 3:4 ratio to A and
B, respectively. Safe-payment computations is required for every
distribution to partners when non- cash assets remain
The following are liquidation transactions: unsold ( and the profit and loss ratio and the interest ratio
In October, 2020. at that point are not identical). The purpose of this
calculation is to determine who among the partners have
10/1-31/23 Realized cash of P285,000 from a sale the free-interests to deserve the payment from the
of non-cash assets of P300,000 partnerships.
10/10/23 Paid liquidation expenses of P4,000
10/15/23 Paid third-party creditors P50,000

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Cash Distribution Program – Alternate Method To avoid October payment

preparing the calculation for safe-payment every time 10/31/23 Payment, P370,000
there is an installment distribution, a cash distribution A B TOTAL
program to partners is prepared. This statement is Priority 1 90,000 - 90,000
prepared just before the start of liquidation, i.e. before any Priority 2 120,000 160,000 280,000
realization of assets and replaces the safe-payment Totals 210,000 160,000 370,000
calculations by the use of just one schedule for the November payment of P306,000 will be paid in the original
numerous distributions to partners normally occurring in profit and loss ratio of 3:4 to A and B, respectively:
liquidation.
To A: P306,000 x 3/7 P 131,143
For example: B: P306,000 x 4/7 174,857
Continuing with the current illustrative case

INTERESTS PAYMENTS Please note that payment to partners (AFTER the first
A B A B TOTAL P90,000 payment to A) will henceforth be in the original
BBL 366,000 368,000 P&L ratio because the capital and profit ratios of the
/PLR 3/7 4/7 partners have become identical after the said priority
LAA 854,000 644,000 payment.
P#1 (210,000) 90,000 - 90,000
LAA 644,000 644,000 90,000 - 90,000
P#2 Payments to both partners in the original P&L ratio. - done –

DISCUSSION PROBLEMS
PARTNERSHIP FORMATION 5. Prepare the journal entry for the revised
Raul, Sito, and Troy formed a Partnership on June 1, 2024, assumption.
with the following assets and liabilities, measured at book
values in their respective records, contributed by each 6. Explain why Partner Sito was unaffected by the
partner: bonus feature in the ownership agreement among
the partners.
Raul Sito Troy
PARTNERSHIP OPERATIONS
Cash P128,000 P 96,000 P 96,000 On January 1, 2024, Nike and Hoka formed a partnership
Accounts by initially contributing cash of P 224,000 and P140,800,
receivable 22,544 24,640 44,096 respectively. The changes in their capital balances during
Inventory 86,400 76,320 42,880 2024 are summarized as follows:

Plant, Property, &

Equipment (PPE) 288,000 230,400 243,200
Accounts payable (25,600) (32,000) (38,400) NIKE HOKA
Long-term debt ( 64,000) (76,800) (83,200) Balances, January 1 P224,000 P 140,800
Net assets P435,344 P318,560 P304,576 Investment, April 1 20,480
Withdrawal July, 1 (32,000)
Investment, September 1 59,520
Withdrawal, October 1 (2,560)
Investment, December 31 5,120
Except for the plant assets and the long term debts, the Balances, December 31 P 241,920 P 173,440
partners have agreed that the proprietorship net assets
are fairly valued. The partnership reported a net income of P259,968 in
2024 and the profit and loss agreement are as follows:
The agreed fair valuation of net asset items where the a. Interest at 5% is allowed on average capital
book value is not the fair value follows: balances;
b. Salaries of P1,600 per month to each partner;
Raul Sito Troy c. Bonus to Nike of 10% of net income after interest,
PPE P323,200 P222,336 P208,080 salaries, and bonus; and
Long-term-debt 73,600 80,000 96,576 d. Balance to be divided in the ratio of 6:4 to Nike and
Hoka, respectively.
1. How much is the contribution of each partner?
Calculate their contribution ratio. Both partners withdrew one-fourth of their salary
allowances in 2024.
2. What is the capital balance for each partner at the
opening of business on June 1 as per above Required:
information? 1. Prepare a schedule for the division of net profit for
3. Prepare the journal entry in the partnership books 2024 with supporting computations when appropriate.
for the above assumption. 2. Prepare a statement of the partners’ capital balances
for 2024
4. What is the capital balance for each partner at
June 1, instead, if the interest ratio is agreed at
4:3:3 to Raul, Sito. and Troy, respectively?

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PARTNERSHIP DISSOLUTION
A. ADMISSION OF A NEW PARTNER The corporation’s ordinary shares is to have a par value of
James and Reid are partners sharing profits and losses in P312.50 each and the partners are to be issued corresponding
the ratio of 60% and 40%, respectively. The partnership shares equivalent to 70% of their adjusted capital balances.
balance sheet at April 30, 2024 follows: The partnership balance sheet at December 31, 2024
follows:
Cash P 32,000 Accounts Payable P 72,640 Cash P 112,500 Liabilities P 107,500
Accts rec 62,500 Acc. Dep 5,000
Inventory 48,000 James, Loan 3,520
Inventory 87,500 Mira, cap. 106,250
Land 51,200 James, capital 304,000
Equipment 50,000 Bell, cap. 93,750
Buildings 323,200 Reid, capital 83,840 Total P 312,500 Total P 312,500
Reid, Loan 9,600 1. Determine the total credit to APIC upon incorporation of
Total P 464,000 Total P464,000 the partnership
a. P 61,875 c. P 60,000
The partners agreed to admit Coco for a one-tenth interest b. P 144,375 d. P 140,000
for a P44,800 consideration. At the time of admission, the
fair market value of the land is appraised at P115,200 and 2. The number of ordinary shares issued to Partner Bell is
the market value of the inventory is P96,000. a. 210 c. 238
b. 245 d. 217
1. Assume Coco is admitted by purchase of each of the
original partners’ interest and paid the partners:
A. Prepare the journal entries on the revaluation of PARTNERSHIP LIQUIDATION.
assets and the admission of Coco 1. LUMP-SUM
B. Calculate the capital balances of the partners after Dave, Jill and Elsa plan to liquidate their partnership. They
the admission of Coco have always shared losses and gains in a 2:3:5 ratio, and on
C. Calculate the amounts received by James and by the day of the liquidation their balance sheet appeared as
Reid for their respective partnership interest follows:
transferred to Coco.
DAVE, JILL, and ELSA
D. Explain why no amount of bonus was recognized
Balance Sheet
despite the difference between Coco’s investment
December 31, 2024
and his acquired partnership interest. Assets Liabilities and Capital
Cash P55,000 Accounts payable P104,296
2. Now assume Coco is admitted by investing the
Elsa, loan 4,000
P44,800 to the partnership for a 10% interest
Other assets 361,000 Dave, Capital 61,000
A. Calculate the partners’ capital balances after the Jill, loan 40,000 Jill, capital 200,704
admission of Coco.. _______ Elsa, capital 86,000
B. Prepare the journal entry for the admission of Total assets P456,000 Total equities P456,000
Coco..
The other assets are sold for P170,000, and assume the
B. RETIREMENT OF A PARTNER following information on partners’ net assets, exclusive of
their respective partnership interests at that point.
The following balances as at October 31, 2024 for the DAVE JILL ELSA
Partnership of Brad, Luke, and Todd were as follows: Assets P550,000 P300,000 P 133,600
Liabilities 450,000 280,000 129,500
Cash P 52,800 Liabilities P 52,000
Luke, Loan 15,200 Brad, loan 16,400
Required: Prepare general journal entries to record the sale
Other Assets 400,000 Brad, capital 133,600
of the other assets and the distribution of the cash to the
Luke, capital 86,000 proper parties. Show supporting computations in good form.
Todd, capital 180,000
Totals P468,000 Totals P468,000 2. BY INSTALLMENT
On December 31, 2024, the balance sheet of CDO Partnership
Brad has decided to retire from the partnership on October is as follows:
31. Partners agreed to adjust the non-cash assets to their Assets Liabilities
fair market value of P486,000. The estimated profit to Cash P 15,360 Account Payable P51,200
October 31 is P96,000. Brad will be paid P202,000 for his Salry Pyble, Celia 10,240
partnership interest exclusive of his loan which is repaid in Noncash assets 271,360 Dave, Loan 20,480
full. Their profit and loss ratio is 4:2:4 to Brad, Luke. and Loan to Oleg 10,240 Celia, Capital 38,912
Todd, respectively. Dave, Capital 73,728
1. Prepare entries for the retirement of Brad from the _______ Oleg, Capital 102,400
partnership. P296,960 P 296,960

2. What will be the balance of Luke’s capital account after Profit and losses were shared as follows; Celia, 30%; Dave,
30%; Oleg, 40%. It was decided to liquidate the business.
the retirement of Brad?
The following is a summary of the realization and liquidation
activities.
Book
C. INCORPORATION Value Cash Expenses Liabilities Cash Paid
Partners Mira and Bell, who share profits and losses equally, of Asset Collected Paid Paid to Partners
have decided to incorporate the partnership at December 31, Realized
2024. The partnership net assets after the following 1st Period 133,120 81,920 4,100 40,000 41,980
adjustments will be contributed in exchange for shares of 2nd Period 76,800 51,200 4,800 11,200 40,000
3rd Period 61,440 35,840 3,600 - 38,640
stocks from the corporation.
Total 271,360 168,960 12,500 51,200 120,620
i. provision of allowance for doubtful accounts, P6,250
ii. adjustment of overstated equipment by 2,500
Required:
iii. adjustment of understated inventory by P20,000 and
1. Prepare a statement of liquidation for each period.
iv. recognition of additional depreciation of P5,000.
2. Prepare a program to show how cash is to be distributed

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MULTIPLE CHOICE QUESTIONS

the partnership agreement was changed to reflect the fact
FORMATION that Jullie could no
Andy and Bella have just formed a partnership. Andy
contributed cash of P441,600 and office equipment that
costs P202,560. The equipment had been used in his sole longer devote any time to the store’s operations. The new
proprietorship and had been 70% depreciated. The current agreement allows Carrie a salary of P8,640, and the
value of the equipment is P141,600. Andy also contributed remaining profits and losses are divided equally. In 2024
a note payable of P41,760 to be assumed by the an error was discovered such that the 2023 reported
partnership. The partners agreed on a profit and loss ratio income was understated by P1,920. The partnership
of 50% each. Andy is to have a 70% interest in the income of P12,000 for 2024 included this P1,920 related to
partnership. Bella contributed only the merchandise 2023.
inventory from her sole proprietorship carried at P264,000 1. In the reported net income of P12,000 for the year
on a first-in- first-out basis. The current fair value of the 2024, Carrie would have
merchandise is P252,000. a. P0
1. To consummate the formation of the partnership Amer b. P10,512
should make additional cash investment or c. P 8,208
(withdrawal) of: d. P 6,000
a. P 46,560
b. P(14,400) Eddie Floyd, and Gerry invest P19,200, P14,400 and
c. P107,520 P12,000 respectively, in a partnership on June 30, 2024.
d. P(38,400) They agree to divide net income or loss as follows:
a. Interest at 10% on beginning capital account
In 2024, Sally and Celia agreed to form a new partnership balances
under the following general agreements: b. Salaries of P4,800, P3,840 and P2,880, respectively
(1) Partners’ CONTRIBUTIONS will be on a 5:4 ratio; (2) to Eddie, Floyd, and Gerry, respectively.
PROFIT & LOSS, 5:5, and (3) CAPITAL CREDITS, 6:4 c. Remaining net income or loss is divided equally
ratio, respectively to Sally and Celia. Their respective d. A minimum of P8,640 of income is guaranteed to
contributions will come from old proprietorships they GAB regardless of the results of operation.
owned.
2. If the net income for the year ended June 30,2024
Sally contributed the following items and amounts: before interest and salary allowances to partners was
Cash P359,424 P21,120, the amount of the net income credited to Eddie
Equipment (at book value per her is:
proprietorship records) 245,760 a. P 6,960
b. P 9,600
Celia contributed the following items at their carrying c. P 8,800
amounts in the proprietorship records: d. P10,500
Accounts receivable 46,080
Inventory 129,024
Furniture and fixtures 246,989 Partners Jay and May share profits 3:1 after annual salary
Intangibles 105,984 allowances of P1,920 and P2,880 respectively; however, if
profits are not adequate to meet the salary allowances, the
All the non-cash contributions are not properly valued. The entire profit is to be divided in the salary ratio. Profits of
two partners have agreed that (a) P3,686 of the accounts P4,320 were reported for the year 2023. In 2024, it is
receivable are uncollectible; (b) the inventories are ascertained that in calculating net income for the year
overstated by P9,216; (c) the furniture and fixtures are ended December 31, 2023, depreciation was overstated by
understated by P5,530; and the intangibles include a P1,728 and the ending inventory was understated by P384.
patent with a carrying value of P6,451, which must now be 3. The amount of the net adjustments in the books of Jay
derecognized upon a court order. The rest of the intangible and May are:
items are fairly valued. Jay May
2. How much is the total depreciable fixed asset recorded a. P(1,775) P( 8,703)
by the partnership? b. P 1,104 P 1,668
a. P 509,184 c. P 193,536 c. P 3,930 P 4,110
b. P 535,911 d. P 499,910 d. P 1,416 P 696

3. What is the capital balance of Celia after the formation

of the partnership? ADMISSION OF A NEW PARTNER
a. P 430,762 c. P 462,828
b. P 478,304 d. P 442,307 Abby, Bert, Carl, and Dido have become partners in the
ABCD Partnership under the following circumstances:

OPERATIONS On August 1, 2024 Partners Abby and Bert had the

following ownership balances in the AB Partnership:
Carrie and Jullie created a partnership to own and operate ABBY BERT
a health-food store. The partnership agreement provided Capital P150,000 P120,000
that Carrie receives an annual salary of P4,800 and Jullie a Loan (18,000) 6,000
salary of P2,400 to recognize their relative time spent in Total P132,000 P126,000
operating the store. Remaining profits and losses were In the morning of this date, Carl was admitted as a partner
divided 60:40 to Carrie and Jullie, respectively. Income of with an investment of P90,000 for 20% interest in capital
P6,240 for 2023, the first year of operations, was allocated and in profits or losses.
P4,224 to Carrie and P2,016 to Jullie. On January 1, 2024,

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CC 180,000
In the afternoon of the same day, over snacks, Dido
learned about the nature and objectives of the ABC
Partnership and insisted that he became a partner and was The partners agreed on a capital ratio of 1:2:3 upon formation
willing to contribute P72,000 under acceptable terms and P&L ratio of 3:3:4, respectively. The partnership reported
determined by the old partners. a net loss of P12,000 for 2023. Also, at the end of 2023, CC
has decided to withdraw from the firm and was paid P150,000
from partnership cash.
The old partners, in a caucus, have agreed to allocate 15%
of existing total capital, as well as 15% of profits or losses
On April 1, 2024, DD was admitted as a partner with an
to Dido. Over dinner, Dido accepted the admission investment of P96,000. He is given a share in capital of
arrangement without any change. On the other hand, the 40%and in profits, 30% the old partners have agreed to retain
old partners will each transfer 15% of their respective their old ratio over the remaining profit and loss share of
interest to Dido. Under the old AB Partnership, profit or 70%. The partnership reported a net profit of P12,600 for
loss was 60% and 40% to Abby and Bert, respectively. 2024, one-third of which is deemed earned as of the end of
the year’s first quarter’s operation.
2. Determine the capital balances of AA and BB, respectively,
1. Determine the capital balance of Carl upon his admission as of December 31, 2023.
to the AB Partnership on August 1. a. P 56,400 & P116,400 c. P 116,400 & P 69,000
b. P 69,000 & P129,000 d. P 99,000 & P129,000
a. P 69,600 c. P 70,800
b.P 73,200 d. P 72,000 3. Determine the capital balances of AA, BB, and DD,
respectively on December 31, 2024.
2. Determine the capital balance of Bert under the ABCD a. P 59,100, P 45,432 & P 68,304
Partnership in the late evening of August 1, 2024. b. P 56,184, P 42,492 & P 65,784
a. P 16,680 c. P108,120 c. P 60,594 P 46,902 & P 72,084
d. P 62,400, P122,400 & P121,800
b.P 64,800 d. P 54,000
INCORPORATION
The following is the condensed balance sheet of G & N Lexy and ACE partnership’s balance sheet at December 31, 2023
partnership at August 30, 2024, at which date Edna is to reported the following balances.
be admitted with a 30% interest in capital and in profits Total assets P187,500
Total liabilities 37,500
for an investment of P26,400. Lexy, capital 75,000
Book Value Fair Value Ace, capital 75,000
Cash P 9,600 P 9,600
On January 2, 2024, LEXY and ACE dissolved their partnership and
Other assets 241,440 200,160
transferred all assets and liabilities to a newly formed corporation.
Current liabilities (25,920) (25,920) At the date of incorporation, the fair value of the net assets was
Non current liabilities (129,120) (132,000) P22,500 more than the carrying amount on the partnership’s
Gerry, capital ( 57,600) books. Of which P12,500 was assigned to tangible assets and
P10,000 was assigned to patent. LEXY and ACE were each issued
Nedy, capital ( 38,400) 5,000 shares of the corporation’s P12.50 par common stock.
Gerry and Nedy share profits and losses 60% and 40%,
respectively. 1. Immediately following incorporation, additional paid-in capital
in excess of par should be credited
3. What will be the capital balances of Gerry and Nedy a. P160,000 c. P 25,000
after Edna’s admission? b. P 47,500 d. P137,500
a. P23,472 and P31,507 c. P21,907 and P32,861
b. P32,861 and P21,907 d. P31,133 and P23,635 LIQUIDATION
Partners Edman, Sonny and Zarah decided to liquidate their
partnership on November 30, 2024. Their capital balances and
profit and loss ratio are as follows:
RETIREMENT OF A PARTNER Capitals P & L Ratio
Edman P 288,000 40%
The balance sheet at December 31, 2024, for the Bea, Day, Sonny 376,320 40%
and May partnership is summarized as follows: Zarah 115,200 20%

Assets P 480,000 Liabilities P120,000 The net income from January 1, 2024 to November 30, 2024 is
Loan to Day 60,000 Bea capital (50%) 180,000 P314,880. On November 30, 2024, the cash balance is P249,600,
Day capital (40%) 180,000 and that of liabilities is P556,800.
May capital (10% 60,000
Edman is to receive P339,149 in the settlement of his interest.
P 540,000 P540,000
1. Calculate: (1) The loss on realization, and (2) the amount to
Day is retiring from the partnership. The partners agree that be realized from the sale of non-cash assets?
partnership assets, excluding Day’s loan, should be adjusted a. (1) P372,000; (2) P2,316,000
to their fair value of P600,000 and that Day should receive b. (1) 148,800; (2) 3,060,000
P182,400 for her capital balance net of the P60,000 loan. c. (1) 187,008; (2) 1,214,592
1. How much are the capital balances of Bea and May d. (1) 331,200; (2) 2,316,000
immediately after Day’s retirement.
a. P185,000; P 61,000
b. P240,000; P 72,000 The accounts of the Partnership of RR, SS, and TT at the
c. P231,000 P 70,200 end of its fiscal year on November 30, 2024 are as follows:
d. P228,000 P 69,600 Cash ; P 63,744 Loan from SS P 12,288
Other non-cash RR, capital (30%) 163,584
assets 434,688
AA, BB, and CC formed a partnership on January 1, 2023 with Loan to RR 9,216 SS, Capital (50%) 83,712
the following contributions: Liabilities 161,280 TT, capital (20%) 86,784
AA P 60,000 2. If in the first cash distribution, SS received P30,720, which of
BB 120,000 the following statements is incorrect?

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a. Total amount distributed to partners is P206,592. a. P 33,600 c. P 29,040

b. Total amount paid to creditors is P161,280. b. P 18,600 d. P 35,400
c. RR received an amount equal to P115,200
d. Total amount realized from the non-cash assets is
P367,872. The accounts of the partnership of PBA at December 31, 2024 are
as follows:
Cash P 63,360 Liabilities P 48,000
The partnership ABC is currently liquidating and on February 15, Non-cash assets 559,680 Loan from Bal 15,360
2024, their balances in capital and their profit and loss (P&L) Loan to Pat 11,520 Pat, capital 158,400
ratios are shown below: Bal, capital 281,280
Art, capital 131,520
Andy, capital (P&L 40%) P10,560 Total 634,560 Total 634,560
Bing, capital (P&L 20%) 6,720
Clouie, capital (P&L 40%) ( 5,760)
Assume non-cash assets have been all disposed and Clouie has They divide profits and losses 3:5:2 to Pat, Bal, and Art
promised to pay her deficiency in a week’s time, respectively. They have decided to liquidate the partnership at this
date.
3. Calculate the amount to be received by one of the partners if
cash is paid immediately on February 15, 2024. 7. Determine the amount payable to Partner Art if cash is paid
a. Bing, P 4,800 c. Andy, P 13,200 just before the start of liquidation on December 31, 2024
b. Bing, P 7,200 d. Andy, 7,200

a. P 16,858 c. P 16,972
The balance sheet for Cezar, Jess and Jhun Partnership, who b. P 16,944 d. P 13,577
share profits and losses in the ratio of 50%, 25%, and 25%,
respectively, shows the following balances just before liquidation.
Cash P 11,520 A condensed balance sheet with profit sharing percentages for the
Other assets 57,120 E, F, and G partnership on January 1, 2024, shows the following:
Liabilities 19,200
Cezar, capital 21,120 Cash P 48,000 Liabilities P 38,400
Jess, capital 14,880 Other assets 240,000 Ella, capital (40%) 48,000
Jhun, capital 13,440 Flor, capital (40%) 120,000
On the first month of liquidation, certain assets are sold for Gene, capital (20%) 81,600
P30,720. Liquidation expenses of P960 are paid, and additional P288,000 P288,000
liquidation expenses are anticipated. Liabilities are paid amounting
to P5,184 and sufficient cash is retained to ensure the payment to On January 2, 2024, the partners decide to liquidate the business,
creditors before making payments to partners. On the first and during January they sell assets with a book value of P144,000
payment to partners, Cezar receives P6,000. for P81,600.
4. Determine the amount of cash withheld for anticipated 8. How much cash will the partners receive if all available cash,
liquidation expenses. except for a P4,800 contingency fund, is distributed
a. P 2,880 c. P 19,920 immediately after the sale.
b. P 17,520 d. P 21,120 a. All partners will receive P36,000
b. Partners Flor and Gene will both receive P43,200
c. Partner Flor will receive P58,000 and partner Gene
The following balance sheet for the partnership of A, B, and C was will receive P56,000
taken from the books on December 31, 2024. d. Partner Flor will receive P114,000
Assets Liabilities and Capital
Cash P 19,200 Liabilities P 48,000
Other Assets 172,800 Art, Capital (40%) 35,520 Claire, Peter, Mela, and Hilda are partners who share profits and
Bam, Capital (40%) 62,400 losses at 40%, 30%, 20%, and 10%, respectively. Since two of
Cox, Capital (20%) 46,080 them have given intention to withdraw, they have decided to
Total Assets P 192,000 Total Liab & Cap P 192,000 liquidate the partnership instead. At this point, the capital
balances of the partners are as follows:
5. If the firm is dissolved and liquidates by installment, the Claire P24,480
first sale of the other assets having book value of P86,400 Peter 10,368
realized P38,400 and all cash available are distributed, the Mela 16,512
amount to be received by Art, Bam, and Cox respectively Hilda 8,160
would be
Art Bam Cox 9. Which of the following statement is true?
a. P 0 P10,800 P24,000 a. The first available P1,152 will go to Claire.
b. P 0 P48,000 P12,000 b. Hilda will be the last to receive cash
c. P12,000 P 0 P 0 c. The first available P192 will go to Mela.
d. P 0 P 0 P 9,600 d. Peter will collect a portion of any available cash
before Hilda receives anything.
6. If the firm is dissolved and liquidates and Art receives a
total of P1,440 in full settlement of his interest, then Cox
would have received a total of

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