DO NOT FORGET TO WRITE THE NAMES OF THE MEMBERS OF THE GROUP.

SCORE:_______________

PROBLEM 1:
On July 1, 2020, Adam and Eve decided to combine their resources and form a partnership. The trial balances as of June 30,
2020, are as follows:

DEBITS ADAM EVE

Cash 900,000 1,100,000
Account Receivable 10,000,000 8,000,000
Notes Receivable 3,000,000 -
Inventory 6,000,000 4,500,000
Prepaid Insurance - 325,000
Equipment 12,500,000 -
Furniture and Fixtures - 2,500,000
Cost of Goods Sold 12,000,000 15,200,000
Operating Expenses 5,000,000 4,000,000
Total P 49,400,000 P 35,625,000

CREDITS
Allowance for Doubtful Accounts 600,000 275,000
Accumulated Depreciation - Equipment 2,500,000 -
Accumulated Depreciation – F&F - 625,000
Accounts Payable 8,495,000 1,552,500
Unearned Rent Income 295,000 -
Notes Payable - 2,328,750
Capital 17,510,000 11,843,750
Sales 20,000,000 19,000,000
Total P 49,400,000 P35,625,000

The partnership is to take over the business’ assets and assume business liabilities. It was agreed that for purposes of
establishing the partner’s interest, the following adjustments shall be made:

 5% of the accounts receivable of Adam and Eve are estimated to be uncollectible.

 A 120-day, 12% note was received last June 1, 2020. No interest has been accrued yet.
 Interest at 10% on note was issued should be accrued. The note is dated April 1, 2020.
 The inventory of Eve should be valued at P 4,600,000, while 5% of Adam’s inventory are to be considered obsolete
and worthless.
 80% prepaid insurance has expired.
 The equipment should be 40% depreciated.
 The furniture and fixtures was under-depreciated by P 20,000.
 40% of the unearned rent income is earned.
 Accrued expenses of P 10,000 is to be recognized in the books of Eve.

It was agreed that Eve shall invest or withdraw cash to make her capital balance proportionate to her profit and loss ratio of
40%.

Page 1 of 4
Required: Compute for the following:
1. The post-closing capital balances of Adam and Eve.
2. What amount shall Eve invest or withdraw to her capital balance proportionate to her profit and loss ratio?
3. How much is the total capital of Adam and Eve upon formation?
4. How much is the total assets of the partnership upon formation?

Solution:
Requirement 1:
Adam Eve
Pre Closing Capital Balance 17,510,000 11,843,750
Sales 20,000,000 19,000,000
COGS (12,000,000) (15,200,000)
Operating Expenses (5,000,000) (4,000,000)
Post-Closing Capital Balance 20,510,000 11,643,750

Requirement 2: P 740,875 - additional investment

Adam Eve
Post-Closing Trial Balance 20,510,000 11,643,750
Allowance for Doubtful Accounts 100,000 (125,000)
Interest Receivable (3M X 12% X 1/12) 30,000
Interest Payable (2,328,750 X 10% X 3/12) (58,218.75)
Inventory (300,000) 100,000
Prepaid Insurance Adjustment (260,000)
Adjustments for depreciation (2,500,000) (20,000)
Adjustments for unearned rent income 118,000
Accrued Expenses (10,000)
Adjusted Capital before investment P 17,958,000 P 11,270,531.25

Contributed Capital Agreed Capital Differences

Adam (60%) 17,958,000.00 17,958,000 -
Eve (40%) 11,270,531.25 11,972,000 701,468.75
Total P 29,228,531.25 P 29,930,000 701,468.75

Analysis:
1. Investment-withdrawal method is to be used, hence, TAC is not equal to TCC
2. Eve is to invest or withdraw cash, hence, we will use Adam’s contributed capital as based. Meaning his contributed
capital will be the same as his agreed capital.
3. To get the Total Agreed Capital = 17,958,000 divided by 60% = P 29,930,000 (see table above).
4. To get Eve’s agreed capital = 29,980,000 x 40% = 11,992,000; or other way of computing it is (P29,930,000 less
17,958,000 = 11,972,000).

HENCE, based on the computation, Eve will invest an additional cash of P 701,468.75.

Requirement 3: P 17,958,000 for Adam and P 11,972,000 for Eve. (See Solution above)

Page 2 of 4
Requirement 4:
Do not forget the Basic Accounting Equation; Assets = Liabilities + Equity
ADAM EVE TOTAL
Total Partnership Capital P 29,930,000
Add: Liabilities
Accounts Payable 8,495,000 1,552,500 10,047,500
Unearned Rent Income 177,000 177,000
Notes Payable 2,328,750 2,328,750
Accrued Expenses 10,000 10,000
Interest Payable 58,218.75 58,218.75
TOTAL ASSETS P 42,551,468.75

OR
ADAM EVE
Assets per book 29,300,000 15,525,000
Assets Adjustments:
Allowance for doubtful Account 100,000 (125,000)
Interest receivable 30,000 -
Inventory (300,000) 100,000
Prepaid Insurance (260,000)
Accumulated Depreciation (2,500,000) (20,000)
Additional cash investment of Eve 740,875
Total P 26,63,000 P 15,960,875 P 42,620,875

PROBLEM 2:
Allan, Lydia, and Bruce formed a new partnership. Partner Allan invested P 50,000 in cash. Partner Lydia instead a property
which cost her P 100,000 and has a market value of P 75,000. Partner Bruce contributed cash amounting to P 80,000. The
partnership agreement provided, that Allan, Lydia, and Bruce share profits and losses in a ratio of 50:25:25, respectively.

Required:
Compute the capital of each partner upon formation of the partnership under the following assumptions:
1. Using Net Investment Method
2. Assuming the partners agreed to bring their respective capital in proportion to their respective profit and loss ratio.
The capital balances of each partner
a. Using Bonus Method
b. Using Positive Revaluation Method
c. Using Negative Revaluation Method
3. Using the capital of Lydia as a basis. How much will be the additional investment (withdrawal) of Allan and Bruce?

Requirement 1:
Allan: 50,000
Lydia: 75,000
Bruce: 80,000

Page 3 of 4
Requirement 2:
Bonus Method (TAC=TCC)
Contributed Capital Agreed Capital Differences
Allan (50%) 50,000 102,500 52,500
Lydia (25%) 75,000 51,250 (23,750)
Bruce (25%) 80,000 51,250 (28,750)
Total 205,000 205,000 -

- END -
Positive Revaluation (undervalued) - use Bruce as based.

Contributed Capital Agreed Capital Differences

Allan (50%) 50,000 160,000 110,000
Lydia (25%) 75,000 80,000 5,000
Bruce (25%) 80,000 80,000 -
Total 205,000 320,000 115,000

Negative Revaluation (Overvalued)

Contributed Capital Agreed Capital Differences

Allan (50%) 50,000 50,000 -
Lydia (25%) 75,000 25,000 (50,000)
Bruce (25%) 80,000 25,000 (55,000)
Total 205,000 100,000 (105,000)

Requirement 3:

Contributed Capital Agreed Capital Differences

Allan (50%) 50,000 150,000 100,000
Lydia (25%) 75,000 75,000 -
Bruce (25%) 80,000 75,000 (5,000)
Total 205,000 300,000 95,000

Page 4 of 4