1.1.

1 PARTNERSHIP FORMATION (M-7 S-24) =31

1. AMI , MELI and LEAH formed a partnership on April 30, with the following assets, measured at their
fair market values, contributed by each partner:
AMI MELI LEAH
Cash P 50,000 P 60,000 P 150,000
Automobile 42,500
Delivery trucks 140,000
Computer and printer 25,500
Office furniture 17,500 12,500
Land and building 750,000
P 842,500 P 243,000 P 162,500

Although LEAH has contributed the most cash to the partnership, she did not have the full amount of
P 150,000 available and was forced to borrow P 100,000. The land and building contributed by AMI
has a mortgage of P 450,000 and the partnership is to assume responsibility of the loan. If the profit
and loss sharing agreement is 40 percent, 40 percent, and 20 percent, respectively, for AMI, MELI
and LEAH, what is the total capital investment of all the partners at the opening of business on April
30?

a. P 798,000 b. P 1,248,000 c. P 698,000 d. P 832,000

Total assets contributed:

AMi P 842,500
Meli 243,000
Leah 162,500 P1,248,000
Less: Liability assumed (Mortgage) 450,000
Total capital investment of all partners P 798,000 A (Application)

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2. C Cola and R. Crown formed a partnership and agree to divide initial partnership capital equally, even
though C. Cola contributed P50,000 in identifiable assets and R. Crown contributed P42,000. Such an
agreement implies that R. Crown is contributing an unidentifiable assets such as individual talent,
established clientele, or banking connections to the partnership.
The unidentifiable asset is not recorded on the partnership books, the journal entry necessary to
establish equal capital interest is:

a. Cash P92,000 c. C. Cola, capital P4,000

C. Cola, capital P50,000 R. Crown, capital P4,000
R. Crown, capital 42,000
b. Cash P92,000 d. R. Crown, capitalP4,000
C. Cola, capital P46,000 C. Cola, capital P4,000
R. Crown, capital 46,000

C Cola R Crown Total

Equal interest P46,000 P46,000 P92,000
Contribution 50,000 42,000 92,000
Bonus to be recognized (P4,000) P 4,000 -
Journal entry:
C. Cola, Capital 4,000
R. Crown, Capital 4,000 C (Application)

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3. The balance sheet as of July 31, 2016, for the business owned by Sunshine, shows the following
assets and liabilities:

Cash 50,000 Furniture and Fixtures P164,000

Accounts receivable 134,000 Accounts payable 28,800
Merchandise inventory 220,000

It is estimated that 5% of the receivables will prove uncollectible. The cash balance includes a 1,000
shares marketable equity securities recorded at its cost, P4,000. The stock last sold on the market at
P17.50 per share. Merchandise inventory includes obsolete items costing P18,000 that will probably
realized only P4,000. Depreciation has never been recorded; however, the furniture and fixtures are
two years old, have an estimated total life of 10 years, and would cost P240,000 if purchased new.
Prepaid items amount to P5,000. Paulo is to be admitted as a partner upon investing P200,000 cash
and P100,000 merchandise.

How much capital is to be credited to Sunshine upon formation of partnership?

a. P539,200 b. P613,000 c. P565,000 d. P606,200

Assets contributed by Sunshine:

Cash P 50,000
Accounts receivable 134,000
Merchandise inventory 220,000
Furniture and fixtures 164,000 P568,000
Less: Accounts payable ( 28,800)
Unadjusted capital contributed P539,200
Adjustments:
Allowance for bad debts (5% x 134,000) ( 6,700)
Marketable securities (17,500 – 4,000) 13,500
Merchandise inventory (18,000 – 4,000) ( 14,000)
Furniture and fixtures (240,000 x 80% - 164,000) 28,000
Prepaid items 5,000
Adjusted capital of Sunshine P565,000 C

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4. Paul admits Timothy as a partner in business. Accounts in the ledger for Paul on November 30, 2015,
just before the admission of Timothy, show the following balances:

Cash P 26,000 Accounts payable P 62,000

Accounts receivable 120,000 Paul, capital 264,000
Merchandise inventory 180,000

It is agreed that for purposes of establishing Paul’s interest the following adjustments should be
made:
1. An allowance for doubtful accounts of 2% of accounts receivable is to be established.
2. The merchandise inventory is to be valued at P202,000.
3. Prepaid expenses of P6,500 and accrued liabilities of P4,000 are to be established.

Timothy is to invest sufficient funds in order to receive a 1/3 interest in the partnership. How much
must Timothy contribute?

a. P132,000 b. P143,050 c. P95,360 d. P88,000

Unadjusted capital of Paul P264,000

Adjustment:
Allowance for doubtful accounts (2% x 120,000) ( 2,400)
Merchandise inventory (202,000 – 180,000) 22,000
Prepaid expenses recognized 6,500
Accrued liabilities recognized ( 4,000)
Adjusted capital of Paul P286,100 = 2/3
x ½
Cash contribution by Timothy P143,050 = 1/3 B (application)

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5. Effective August 1, 2016, Alex and Bob agreed to form a partnership from their two respective
proprietorships. The balance sheets presented below reflect the financial position of both
proprietorships as of July 31, 2016:
ALEX BOB
Cash P 12,000 P 30,000
Accounts Receivable 72,000 42,000
Merchandise Inventory 198,000 252,000
Prepaid Rent 24,000
Store Equipment 240,000 180,000
Accumulated Depreciation (90,000) (108,000)
Building 750,000
Accumulated Depreciation (150,000)
Land 360,000 _
Totals P1,392,000 P420,000

Accounts Payable P 45,000 P 18,000

Mortgage Payable 360,000
Alex, Capital 987,000
Bob, Capital _ 402,000
Totals P1,392,000 P420,000

As of August 1, 2016, the fair value of Alex’s assets were: merchandise inventory, P162,000; store
equipment, P90,000; building, P1,500,000; and land, P600,000. For Bob, the fair value of the assets
on the same date were: merchandise inventory, P270,000; store equipment, P39,000; prepaid rent, P
0. All other items on the two balance sheets were stated at their fair values. How much capital must
be credited to Alex upon formation of partnership?
a. P2,031,000 b. P1,791,000 c. P363,000 d. P2,394,000

Alex Bob
987,000 402,000
MI (36,000) 18,000
SE (60,000) (33,000)
Building 900,000
Land 240,000
PR (24,000)
2,031,000 363,000

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6. Roy admits Al as a partner in the business. Balance sheet accounts of Roy on September 30, just
before admission of Al show:
Cash P 15,600
Accounts receivable 72,000
Merchandise inventory 108,000
Accounts payable P 37,200
Roy, capital 158,400

It is agreed that for purposes of establishing Roy’s interest, the following adjustments shall be made:
a. An allowance for doubtful accounts of 2% is to be established.
b. Merchandise inventory is to be valued at P121,200
c. Prepaid expenses of P2,100 and accrued expenses of P2,400 are to be recognized.
Al is to invest sufficient cash to obtain a 1/3 interest in the partnership. How much is Al’s investment
to the partnership?
a. P84,930 b. P105,600 c. P85,830 d. P47,520

A
Roy’s capital 158,400
a. (1,440)
b. 13,200
c. 2,100
(2,400)
Roy’s capital 169,860
Cap ratio of Roy ÷ 2/3
Total capital 254,790
X 1/3
84,930

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7. Francis, Chris, and Ivan are to form a partnership. Francis is to contribute cash of P350,000; Chris,
P35,000; and Ivan, P350,000. Francis and Ivan are not to actively participate in the business, but
will refer customers, while Chris will manage the firm. Chris has to give up his present job, which
gives him an annual income of P420,000. The partners decided that profits & losses should be
shared equally.

Upon formation, partners’ capital balances would respectively be:

a. P245,000; P245,000; and P245,000
b. P350,000; P35,000; and P350,000
c. P350,000; P455,000; and P350,000
d. P385,000; P385,000; and P385,000

Francis Chris Ivan Total

350,000 35,000 350,000

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A. P, I and A are new CPA’s and are to form an accounting partnership. P is to contribute cash of
P75,000 and his computer originally bought at P80,000 but has a second hand value of P50,000. I is
to contribute cash of P100,000, and tables and chairs worth P20,000 but acquired by I for only
P18,000. A, whose family is selling computers, is to contribute cash of P40,000 and a brand new
computer plus printer with regular price at P80,000 but which cost their family’s computer dealership
P70,000. Partners agree to share profits 3:2:3.

1. The capital balance of partner P upon formation is:

a. P 125,000 b. P155,000 c. P 143,625 d. P136,875

2. The capital balance of partner I upon formation is:

a. P120,000 b. P118,000 c. P 95,750 d. P91,250

3. The capital balance of partner A upon formation is:

a. P120.000 b. P 110.000 c. P 143,625 d. P136,875

4. Assuming that except for the partners’ capital contribution and their agreed profit and loss
sharing, all other factors in relation to service and compensation of partners are equal, if the
partnership will make a profit, the agreement is:

a. Inherently advantageous to partner A.

b. Equally fair for all the partners
c. Inherently advantageous to partner P
d. Inherently advantageous to partner I

P I A
Cash contributed P 75,000 P100,000 P 40,000
Fair value of:
Computer 50,000
Tables & Chairs 20,000
Computer & Printer 80,000
Total capital credit P125,000 P120,000 P120,000

B. A, M, and I are forming a new partnership each contributing cash of P500,000 and their respective
office equipment and supplies valued at P200,000, P400,000, and P500,000, respectively. A’s
noncash contribution is his own developed audit software valued at cost which he could sell for a
mark-up twice the cost. Partners agree to admit his software at market value and they will share
profits equally.

1. The capital balance of partner A upon formation is:

a. P 1,100,000 b. P 900,000 c. P1,000,000 d. P1,300,000

2. The capital balance of partners M and I, respectively are:

a. P900,000 and P1,000,000

b. P1,000,000 and P1,000,000
c. P900,000 and P900,000
d. P1,000,000 and P900,000

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 3. Assuming that except for the partners’ capital contribution and their agreed profit and loss
sharing, all other factors in relation to service and compensation of partners are equal, if the
partnership will make a profit, the agreement is:

a. Inherently advantageous to partner M.

b. Equally fair for all the partners
c. Inherently advantageous to partner A
d. Inherently advantageous to partner I

4. After the formation of the partnership, which of the following statement is incorrect:

a. The partners will be liable for the personal liabilities of the other partner
b. The partnership may be dissolved at any time by action of the partners or operation of law.
c. The partnership has a legal personality separate and distinct from that of each of the
partners
d. Any partner may act as an agent for the partnership in conducting its affairs.

A M I
Cash contributed P500,000 P500,000 P500,000
Office equipment & supplies 600,000 400,000 500,000
Capital balances P1,100,000 P900,000 P1,000,000 (Application)

C. Andy and Don are joining their separate businesses to form a partnership. Property and cash are to
be contributed for a total capital of P400,000. The property to be contributed and liabilities to be
assumed are:
Andy Don
Book value Fair value Book value Fair value
Accounts receivable 30,000 P 30,000
Inventories 30,000 45,000 P80,000 P 90,000
Equipment 50,000 40,000 90,000 95,000
Total Assets P 110,000 P 115,000 P 170,000 P 185,000
Accounts payable 15,000 15,000 10,000 10,000
Net Assets P 95,000 P 100,000 P 160,000 P 175,000

The partners’ capital accounts are to be equal after all contributions and assumptions of liabilities.
Profit and loss ratio is 45% Andy and 55% Don.

1. The amount of cash Andy must contribute:

a. P100,000 c. P5,000
b. P80,000 d. P25,000,
2. The amount of cash Don must contribute:\

a. P25,000 c. P70,000
b. P45,000; d. P40,000

3. Assuming that except for the partners’ capital contribution and their agreed profit and loss
sharing, all other factors in relation to service and compensation of partners are equal, if the
partnership will make a profit, the agreement is:

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 a. Inherently advantageous to partner Don.
b. Equally fair for both partners
c. Inherently advantageous to partner Andy
d. Inherently disadvantageous to partner Don

4. The partners may have entered into the partnership because of the following reasons except:

a. The partnership as a separate entity will protect the personal assets of the partner against
the creditors of the partnership.
b. The combined personal credit of the partners offers better opportunity for obtaining
additional capital than does a sole proprietorship,
c. The participation in the business by more than one person makes possible for a closer
supervision of its activities;
d. It is easier and inexpensive to organize compared with a corporation

Andy Don Total

Equal capital P200,000 P200,000 P400,000
Total fair value of net assets contributed
Assets – Liabilities 100,000 175,000 275,000
Cash contribution P100,000 P 25,000 P125,000

D. Kong, Pat, and Soy are new CPAs and are to form an auditing firm. Kong is to contribute cash of
P30,000 and his computer originally bought at P60,000 but has a second hand value of P50,000. Pat
is to contribute cash of P80,000 and tables and chairs worth P20,000 but acquired by Pat for only
P5,000. Soy, whose family is selling computers, is to contribute cash of P40,000 and a brand new
computer plus printer with regular price at P80,000 but which cost their family’s computer dealership
P70,000. Partners agree to share profits 4:5:6.

1. The capital balance of partner Kong upon formation is:

b. P 80,000 b. P155,000 c. P 143,625 d. P136,875

2. The capital balance of partner Pat upon formation is:

b. P100,000 b. P118,000 c. P 95,750 d. P91,250

3. Assuming that all other factors in relation to service and compensation of partners are equal, the
agreement is:

a. Equally fair for all the partners

b. Inherently advantageous to partner Pat
c. Inherently advantageous to partner Kong
d. Inherently advantageous to partner Soy

4. The partners may have entered into the partnership because of the following reasons except:

a. It is easier and inexpensive to organize compared with a corporation.

b. The direct gain to the partners is an incentive to give close attention to the business.
c. The combined personal credit of the partners offers better opportunity for obtaining
additional capital than does a sole proprietorship,
d. The participation in the business by more than one person makes possible for a closer
supervision of its activities;

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 Kong Pat Soy
30,000 80,000 40,000
50,000 20,000 80,000
80,000 100,000 120,000

E. X and Y are partners sharing profits 60:40. A balance sheet prepared for the partnership on April 1,
2016 shows the following:

Cash P 48,000 Accounts payable P 89,000

Accounts receivable 92,000 X, capital 133,000
Inventory 165,000 Y, capital 108,000
Equipment 70,000
Accumulated depreciation ( 45,000) -
P 330,000 P330,000

On this date, the partners agree to admit Z as a partner. The terms of the agreement is that assets
and liabilities are to be restated as follows:

b. An allowance for possible uncollectibles of P 4,500 is to be established.

c. Inventories are to be restated at their present replacement values of P 170,000.
d. Equipment are to be restated at a value of P 35,000.
e. Accrued expenses of P 4,000 are to be recognized.

X, Y, and Z will divide profits in the ratio of 5:3:2. Capital balances for the new partners are to be in
this ratio with X and Y making cash settlement outside of the partnership for the required capital
adjustment between themselves and Z investing cash in the partnership for his interest.

1. How much cash Z should contribute?

a. P 61,875 b. P 49,496 c. P 60,250 d. P 50,625

Unadjusted capital of X & Y (133,000 + 108,000) P 241,000

Adjustments:
a. Allowance for uncollectibles ( 4,500)
b. Inventories (170,000 – 165,000) 5,000
c. Equipment (35,000 – 25,000) 10,000
d. Accrued expenses recognized ( 4,000)
Adjusted capital of X & Y P 247,500 = 8
x ¼
Cash contribution of Z P 61,875 = 2 A

2. What capital adjustments should be made between X and Y?

a. X must pay Y, P17,785. c. X must invest cash of P17,785.

b. Y must pay X, P17,785. d. Y must invest cash of P17,785.
X Y Total
Unadjusted capital P 133,000 P 108,000 P 241,000
Adjustment:
6,500 x 60% 3,900
6,500 x 40% 2,600 6,500
Adjusted capital P 136,900 P 110,600 P 247,500

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Agreed capital
247,500 x 5/8 154,687.50
247,500 x 3/8 92,812.50 247,500
Settlement (P 17,787.50) P 17,787.50 -
Answer: X must pay Y, P 17,785 A

3. Upon admission of Partner Z to the partnership, the following statements are true except;

a. Each of the partners will be liable for the personal liabilities of any of the partners

b. Partner Z becomes a co-owner of all of the assets of the partnership together with partners
X and Y

c. Partner Z becomes a co- obligor of all of the liabilities of the partnership together with
partners X and Y

d. The partnership may be dissolved upon the withdrawal of any of the partners X, Y or Z.

4. Assuming that all other factors in relation to service and compensation of partners are equal, the
agreement is:

e. Equally fair for all the partners

f. Inherently advantageous to partner x
g. Inherently advantageous to partner Y
h. Inherently advantageous to partner Z

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