PRACTICAL ACCOUNTING 2

THEORY & PRACTICE

ADVANCE ACCOUNTING
PARTNERSHIP – FORMATION & ADMISSION
QUIZZER
 Partnership Formation & Admission of a Partner

Partnership

I. Introduction
A partnership is defined as an association of two or more persons who contributes money,
property or industry to a common fund with the intention of dividing the profits among
themselves. Accounting for partnerships should comply with the legal requirements as set forth
by the Partnership Law as Well as complying with the partnership agreement itself.

//. Partnership Formation and Capital Accounts

All assets contributed to the partnership are recorded by the partnership at their agreed values
(or fair market values, in the absence of agreed values). All liabilities that the partnership
assumes are recorded at their net present values. Thus, if a partner contributes a noncash
asset to the partnership (e.g., land or equipment) subject to mortgage, the contributing partner's
capital account is credited for the agreed value (or fair values) of the noncash asset less the
mortgage assumed by the partnership.
The capital account is an equity account similar to the shareholders' equity accounts in a
corporation. It is used to account for permanent withdrawals and additional contributions. Other
important accounts include a drawing account and loans to or from partners. The drawing
account is used to account for net income or loss and personal or normal withdrawals, i.e.,
share against net income. It is closed at the end of the period into the capital account. Loan
accounts are set up for amounts intended as loans, rather than as additional capital
investments. In liquidation proceedings, a loan to or from a partner is in essence treated as an
increase or decrease in a partner's capital account.

///.Division of Profits and Losses

As a rule profits and losses are allocated based on agreement.
Methods
Various methods
Exist for the division of partnership profits and losses including the following:
1. Equally,
2. Arbitrary ratio,
3. Capital contribution ratio:
a. Original Capital or initial investment
b. Beginning Capital of each year
c. Average Capital
d. Ending Capital of each year
4. Interest on capital balance and/or loan balances and the balance on agreed ratio,
5. Salaries to partners and the balance on agreed ratio,
6. Bonus to partners and the balance on agreed ratio,

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a. Bonus as an "expense" in computing the bonus amount. Here, bonus is computed

based on net income after bonus.
b. Bonus as a distribution of profit. Here, the bonus is computed based on net income
before deducting the bonus.
7. Interest on capitals and/or loan balances, salaries to partners, and bonus to partner and
the balance on agreed ratio.
The method of division to be used in any given situation is generally the method specified in
the partnership agreement. This agreement must always be consulted first, since it is legally
binding on the partners. If no profit and loss sharing arrangement is specified in the partnership
agreement, the partnership requires that profits and losses be shared according to capital
contribution. Capital contribution should be interpreted to be original capital/beginning capital
of each year in the absence of original capital; similarly, if the agreement specifies how profits
are to be shared but is silent as to losses, losses are to be shared in the same manner as
profits. Notice that the profit and loss sharing ratio is totally independent of the partners'
ownership interests. Thus, two partners may have ownership interests of 70% and 30% but
share profits and losses equally.

IV. Dissolution
A. Admission of a New Partner
A new partner may be admitted to the partnership by purchasing the interest of one or more of
the existing partners or by contributing cash or other assets (i.e., investment of additional
capital). These two situations are discussed below.
1. Purchase of Interest - When a new partner enters the partnership by purchasing the
interest of an existing partner, the price paid for that interest is irrelevant to the
partnership accounting records because it is a private or personal transaction between
the buyer and seller. The assets and liabilities of the partnership are not affected. The
capital account of the new partner is recorded by merely reclassifying the capital account
of the old partner.
2. Admission by Investment of Additional Assets - A new partner may be granted an
interest in the partnership in exchange for contributed assets and/or goodwill (e.g.,
business expertise, an established clientele, etc.). The admission of the new partner and
contribution of assets may be recorded on the basis of the bonus method.
Bonus method
This method is based upon the historical cost principle. Admittance of a new partner involves
debiting cash or other assets for the FMV of the assets contributed and crediting the new
partner's capital for the agreed (i.e., purchased) percentage of total capital. Total capital equals
the book value of the net assets prior to admittance of the new partner, plus the FMV of the
assets contributed by the new partner. A difference between the FMV of the assets contributed

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and the interest granted to the new partner results in the recognition of a bonus.
a. No bonus recognized - When an incoming partner's capital account (ownership interest)
is to be equal to his purchase price, the partnership books merely debit cash or other
assets and credit capital.
b. Bonus granted to the old partners - When the FMV of the assets contributed by an
incoming partner exceeds the amount of ownership interest to be credited to his capital
account, the old partners recognize a bonus equal to this excess. This bonus is allocated
on the basis of the same ratio used for income allocation (unless otherwise specified in
the partnership agreement). Recording involves crediting the old partners' capital
accounts by the allocated amounts.
c. Bonus granted to new partner - An incoming partner may contribute assets having a
FMV smaller than the partnership interest granted to that new partner. Similarly, the new
partner may not contribute any assets at all. The incoming partner is therefore presumed
to contribute an intangible asset, such as managerial expertise or personal business
reputation. In this case, a bonus is granted to the new partner, and the capital accounts
of the old partners are reduced on the basis of their profit and loss ratio.
Goodwill method.
In PFRS No. 3, goodwill represents the excess of the cost of the business combination over
the fair value of the identifiable net assets obtained. Therefore, the standard provides that
goodwill attaches only to a business as a whole and is recognized only when a business is
acquired. This provision of PFRS No. 3 outlawed the use of the goodwill method in partnership
accounting particularly admission and retirement of a partner because there is no business
involved. The term "business" is defined in the Appendix A of PFRS No. 3 as:
An integrated set of activities and assets conducted and managed for the purpose of providing:
{a) a return to investor; or
[b) Lower costs or other economic benefits directly and proportionately to policyholders or
participants.
A business generally consists of inputs, processes applied to those inputs, and resulting
outputs that are, or will be, used to generate revenues. If goodwill is present in a transferred
set of activities and assets, the transferred set shall be presumed to be a business.
Refer to Appendix of this chapter for further discussion and illustration.
Note to the Examinees:
According to PFRS No. 3, goodwill represents the excess of the cost of the business
combination over the fair value of the identifiable net assets obtained. Therefore, the standard
provides that goodwill attaches only to a business as a whole and is recognized only when a
business is acquired. This provision of PFRS No. 3 outlawed the use of the goodwill method in
partnership particularly admission and retirement of a partner because there is no business
involved.

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MCQ - Theory
1. Which of the following is not a characteristic of most partnership?
a. Limited liability c. Mutual agency
b. Limited life d. Ease of formation Punzalan 2014

2. Which of the following is not a characteristic of the proprietary theory that influences
accounting for partnerships?
a. Partners' salaries are viewed as a distribution of income rather than a component of net
income.
b. A partnership is not viewed as separate entity, distinct, taxable entity.
c. A partnership is characterized by limited liability,
d. Changes in the ownership structure of a partnership result in the dissolution of the
partnership. Punzalan 2014

3. Which of the following statements is correct with respect to a limited partnership?

a. A limited partner may not be an unsecured creditor of the limited partnership.
b. A general partner may not also be limited partner at the same time.
c. A general partner may be a secured creditor of the limited partnership.
d. A limited partnership can be formed with limited liability for all partners. Punzalan 2014

4. An advantage of the partnership as a form of business organization would be

a. Partners do not pay income taxes on their share in. partnership income.
b. A partnership is bound by the act of the partners.
c. A partnership is created by mere agreements of the partners. Punzalan 2014
d. A partnership may be terminated by the death or withdrawal of a partner.

5. When property other than cash is invested in a partnership, at what amount should the noncash
property be credited to the contributing partner's capital account?
a. Fair value at the date of contribution.
b. Contributing partner's original cost.
c. Assessed valuation for property tax purposes.
d. Contributing partner's tax basis. Punzalan 2014

6. Partnership capital and drawings accounts are similar to the corporate

a. Paid in capital, retained earnings, and dividends accounts.
b. Retained earnings account.
c. Paid in capital and retained earnings accounts.
d. Preferred and common stock accounts. Punzalan 2014

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 Partnership Formation & Admission of a Partner

7. The Flat and Iron partnership agreement provides for Flat to receive a 20% bonus on profits
before bonus. Remaining profits and losses are divided between Flat and Iron in the ratio of
2:3, respectively. Which partner has a greater advantage when the partnership has a profit or
when it has a loss?

Profit Loss Profit Loss

a. Flat Iron c. Iron Flat
b. Flat Flat d. Iron Iron Punzalan 2014

8. If the partnership agreement does not specify how income is to be allocated, profits and loss
should be allocated
a. Equally.
b. In proportion to the weighted average of capital invested during the period.
c. Equitably so that partners are compensated for the time and effort expended on behalf of
the partnership.
d. In accordance with their capital contribution. Punzalan 2014

9. Which of the following is not a component of the formula used to distribute income?
a. Salary allocation to those partners working.
b. After all other allocation, the remainder divided according to the profit and loss sharing
ratio.
c. Interest on the average capital investments,
d. Interest on notes to partners. Punzalan 2014

10. Which of the following is not considered a legitimate expense of a partnership?

a. Interest paid to partners based on the amount of invested capital.
b. Depreciation on assets contributed to the partnership by partners.
c. Salaries for management hired to run the business.
d. Supplies used in the partners' offices. Punzalan 2014

11. The fact that salaries paid to partners are not a component of partnership income is indicative
of
a. A departure from generally accepted accounting principles.
b. Being characteristic of the entity theory.
c. Being characteristic of the proprietary theory.
d. Why partnerships are characterized by unlimited liability. Punzalan 2014

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12. If a new partner acquires a partnership interest directly from the partners rather than from the
partnership itself,
a. No entry is required.
b. The partnership assets should be revalued.
c. The existing partners' capital accounts should be reduced and the new partner's account
increased.
d. The partnership has undergone a quasi-reorganization. Punzalan 2014

13. Which of the following results in dissolution of a partnership?

a. The contribution of additional assets to the partnership by an existing partner.
b. The receipt of a draw by an existing partner.
c. The winding up of the partnership and the distribution of remaining assets to the
partners.
d. The withdrawal of a partner from a partnership. Punzalan 2014

14. When a new partner is admitted to a partnership, an original partner's capital account may be
adjusted for
a. A proportionate share of the incoming partner's investment.
b. His or her share of previously unrecorded intangible assets traceable to the original
partners.
c. His or her share of previously unrecorded intangible assets traceable to the incoming
partner.
d. None of the above. Punzalan 2014

15. Which of the following best characterizes the bonus method of recording a new partner's
investment in a partnership?
a. Net assets of the previous partnership are not revalued.
b. The new partner's initial capital balance is equal to his or her investment.
c. Assuming that recorded assets are properly valued, the book value of the new
partnership is equal to the book value of the previous partnership and the investment of
the new partner. Punzalan 2014
d. The bonus always results in an increase to the previous partners capital balances.

16. If goodwill is traceable to the previous partners, it is

a. Allocated among the previous partners according to their interest in capital.
b. Allocated among the previous partners only if there are not other assets to be revalued.
c. Allocated among the previous partners according to their original profit and loss sharing
percentages.
d. Not possible for goodwill to also be traceable to the incoming partner. Punzalan 2014

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 Partnership Formation & Admission of a Partner

17. The goodwill and the bonus methods are two means of adjusting for differences between the
net book value and the fair market value of partnership when new partners are admitted. Which
of the following statements about these methods is correct?
a. The bonus method does not revalue assets to market values.
b. The bonus method revalues assets to market values.
c. Both methods result in the same balances in the partner capital accounts.
d. Both methods result in the same total value of partner capital account, but the individual
capital account vary. Punzalan 2014

18. The following is the priority sequence in which liquidation proceeds will be distributed for a
partnership:

a. Partnership drawings, partnership liabilities, partnership loans, partnership capital

balances
b. Partnership liabilities, partnership loans, partnership capital balances.
c. Partnership liabilities, partnership loans, partnership drawings, partnership capital
balances. Punzalan 2014
d. Partnership liabilities, partnership capital balances, partnership loans.

19. The doctrine of marshaling of assets

a. Is applicable only if the partnership is insolvent.
b. Allows partners to first contribute personal assets to unsatisfied partnership creditors.
c. Is applicable if either the partnership is insolvent or individual partners are insolvent.
d. Amount owed to personal creditors and to the partnership for debit capital balances are
shared proportionately from the personal assets of the partners. Punzalan 2014

20. In the liquidation of a partnership it is necessary to (1.) distribute cash to the partners; (2.) sell
non-cash assets; (3.) allocate any gain or loss on realization to the partners; and (4.) pay
liabilities. These steps should be performed in the following order:
a. (2),(3),(4),(1)
b. (2), (3), (1), (4)
c. (3), (2), (1), (4)
d. (3), (2), (4), (T) Punzalan 2014

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21. In the AA-BB partnership, AA and BB had a capital ratio of 3:1 and a profit and loss ratio of
2:1, respectively. The bonus method was used to record CC's admittance as a new partner.
What ratio would be used to allocate, to AA and BB, the excess of CC's contribution over the
amount credited to CC's capital account?
a. AA and BB's new relative ratio.
b. AA and BB's new relative profit and loss ratio.
c. AA and BB's old capital ratio.
d. AA and BB's old profit and loss ratio. Dayag 2013

22. The FF and II partnership agreement provides for FF to receive a 20% bonus on profits
before the bonus. Remaining profits and losses are divided between FF and II in the ratio of 2
to 3, respectively. Which partner has a greater advantage when the partnership has a profit
or when it has a loss?
Profit Loss
a. FF II
b. FF FF
c. II FF
d. II II Dayag 2013

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 Partnership Formation & Admission of a Partner

MCQ - Problems
FORMATION
No Bonus, No Revaluation
Cash Contributed by Partner
23. As of July 1, 2012, 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 equipment 150,000 270,000
Total P705,000 P735,000

Accounts Payable P135,000 P240,000

FF, capital 570,000
GG, capital - 495,000
Total P705,000 P735,000
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 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. 142,500 c. 172,500
b. 52,500 d. 102,500 Dayag 2013

24. Mary admits Jane as a partner in the business. Balance sheet accounts of Mary just before the
admission of Jane show: Cash, P26,000, Accounts receivable, PI20,000, Merchandise
inventory, PI80,000, and Accounts payable, P62,000. It' was agreed that for purposes of
establishing Mary's interest, the following adjustments be made: 1.) an allowance for doubtful
accounts of 3% of accounts receivable is to be established; 2.) merchandise inventory is to be
adjusted upward by P25,000; and 3.) prepaid expenses of P3,600 and accrued liabilities of
P4,000 are to be recognized.

If Jane is to invest sufficient cash to obtain 2/5 interest in the partnership, how much would
Jane contribute to the new partnership?
a. 176,000 c. 95,000
b. 190,000 d. 113,980 Punzalan 2014

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25. Red, White, and Blue form a partnership on May 1,2013. They agree that Red will contribute office
equipment with a total fair value of P40,000; White will contribute delivery equipment with a fair
value of P80,000; and Blue will contribute cash. If Blue wants a one third interest in the capital
and profits, he should contribute cash of:
a. P 40,000 c. P60,000
b. P120,000 d. P180,000 Guerrero 2013

Noncash Contribution
26. On December 1, 2012, 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. 25,000 c. 60,000
b. 30,000 d. 50,000 Dayag 2013

27. On May 1, 2010, Cobb and Mott formed a partnership and agreed to share profits and losses
in the ratio of 3:7, respectively. Cobb contributed a parcel of land that cost him PI0,000. Mott
contributed P40,000 cash. The land was sold for PI8,000 on May 1, 2010, immediately after
formation of the partnership. What amount should be recorded in Cobb's capital account on
formation of the partnership?
a. 18,000 c. 15,000
b. 17,400 d. 10,000 Punzalan 2014

28. On July 1,2013, Monuz and Pardo form a partnership, agreeing to share profits and losses in
the ratio of 4:6, respectively. Monuz contributed a parcel of land that cost him P25,000. Pardo
contributed P50,000 cash. The land was sold for P50,000 on July 1,2013 four hours after
formation of the partnership. How much should be recorded in Monuz capital account on formation
of the partnership?
a. PI0,000 c. P25,000
b. P20,000 d. P50,000 Guerrero 2013

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 Partnership Formation & Admission of a Partner

Cash, noncash contribution

29. Jones and Smith formed a partnership with each partner contributing the following items:
Jones Smith
Cash P 80,000 P40,000
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. P350,000 P270,000
B. P260,O00 PI 80,000
C. P360,O00 P260,000
D. P500,000 P300,000
a. Option A c. Option C
b. Option B d. Option D Dayag 2013

Questions 1 & 2 are based on the following: Dayag 2013

30. On March 1, 2012, II and JJ formed a partnership with each contributing the following assets:
II JJ
Cash P300,000 P700,000
Machinery and equipment 250,000 750,000
Building - 2,250,000
Furniture and fixtures 100,000
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, 2012 the balance in JJ's capital account should be:
a. 3,700,000 c. 3,050,000
b. 3,140,000 d. 2,900,000

31. The same information in Number 2, except that the mortgage loan is not assumed by the
partnership. On March 1, 2012 the balance in JJ's capital account should be:
a. 3,700,000 c. 3,050,000
b. 3,140,000 d. 2,900,000

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32. On January 2, 2010, Abel, Cain, and Josuah formed a partnership. Abel contributed cash of
PI00,000 and a delivery equipment that originally costs him PI20,000, but with a second hand
value of P50,000. Cain contributed PI60,000 in cash. Josuah, whose family sells office
equipment, contributed P50,000 in cash and office equipment that cost his family's dealership
PI00,000 but with a regular selling price of PI20,000. In 2010, the partnership reported net
income of P 120,000. On December 31, 2010, what would be the capital balance of the
partners?
Abel Cain Josuah
a. 257,500 200,000 192,500
b. 190,000 200,000 210,000
c. 260,000 200,000 190,000
d. 187,500 200,000 212,500 Punzalan 2014

33. Roberts and Smith drafted a partnership agreement that lists the following assets contributed
at the partnership's formation:

Contributed by
Roberts Smith
Cash P20,000 P30,000
Inventory 15,000
Building 40,000
Furniture & equipment 15,000

The building is subject to a mortgage of PI0,000, which the partnership has assumed. The
partnership agreement also specifies that profits and losses are to be distributed evenly. What
amounts should be recorded as capital for Roberts and Smith at the formation of the
partnership?
Roberts Smith
a. 35,000 85,000
b. 35,000 75,000
c. 55,000 55,000
d. 60,000 60,000 Punzalan 2014

34. Ben, Joe and Fortune are new CPA's and are to form a partnership. Ben is to contribute cash
of P50,000 and his computer originally costing P60,000 but has a second hand value of P25,000.
Joe is to contribute cash of P80,000. Fortune, whose family is selling computers, is to contribute cash
of P25,000 and a brand new computer plus printer with regular price at P60,000 but which cost
their family's computer dealership, P50,000. Partners agree to share profits equally.

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 Partnership Formation & Admission of a Partner

The capital balances upon formation are:

a. Ben, P 75,000; Joe, P80,000; and Fortune, P85,000.
b. Ben, P110,000; Joe, P80,000; and Fortune, P75,000.
c. Ben, P 80,000; Joe, P80,000; and Fortune, P80,000.
d. Ben, P 88,333; Joe, P88,333; and Fortune, P88,335. Guerrero 2013

Cash, noncash contribution, assumption of debt

35. On April 30, 2010, Alex, Benjie, and Cesar formed a partnership by combining their separate
business proprietorships. Alex contributed cash of P500,000. Benjie contributed property with
a P360,000 carrying amount, a P400,000 original cost, and P800,000 fair market value. The
partnership accepted responsibility for the P3 50,000 mortgage attached to the property. Cesar
contributed equipment with a P300,000 carrying amount, a P750,000 original cost, and P5
50,000 fair value. The partnership agreement specifies that profits and losses are to be shared
equally but is silent regarding capital contributions. What are the capital balances of the
partners at April 30, 2010?
Alex Benjie Cesar
a. 500,000 800,000 550,000
b. 500,000 450,000 550,000
c. 500,000 360,000 300,000
d. 500,000 400,000 750,000 Punzalan 2014

36. On March 1,2013, Santos and Pablo formed a partnership with each contributing the following assets.
Santos Pablo
Cash P30,000 P70,000
Machinery and equipment 25,000 75,000
Building - 225,000
Furniture and fixtures 10,000 -
The building is subject to a mortgage loan of P80,000, which is to be assumed by the partnership.
The partnership agreement provides that Santos and Pablo share profits and losses 30% and
70%, respectively. On March 1, 2013 the balance in Pablo's capital account should be:
a. P290,000 c. P314,000
b. P305,000 d. P370,000 Guerrero 2013

Partner with biggest capital balance

37. On April 30, 2012, XX, YY and ZZ formed a partnership by combining their separate business
proprietorships. XX contributed cash of P75.000. YY contributed property with a P54.000
carrying amount, a P60,000 original cost, and PI20,000 fair value. The partnership accepted
responsibility for the P52.500 mortgage attached to the property. ZZ contributed equipment
with a P45.000 carrying amount, a PI 12,500 original cost, and P82.500 fair value.

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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, 2012, capital
balance?
a. XX c. ZZ Dayag 2013
b. YY d. All capital account balances are equal

38. On April 30, 2010, Al, Ben, and Ces formed a partnership by combining their separate business
proprietorships. Al contributed cash of P50,000. Ben contributed property with a P36,000
carrying amount, a P40,000 original cost, and P80,000 fair value. The partnership accepted
responsibility for the P35,000 mortgage attached to the property. Ces contributed equipment
with a P3 0,000 carrying amount, a P75,000 original cost, and P55,000 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 capital account balance at April 30, 2010?
a. Ai c. Ces Punzalan 2014
b. Ben d. All capital balances are equal

Bonus Method
Adjustment to Unidentifiable Net Assets
39. RR and XX formed a partnership and agreed to divide initial capital equally, even though RR
contributed P25,000 and XX contributed P21,000 in identifiable assets. Under the bonus
approach to adjust the capital accounts. XX's unidentifiable assets should be debited for:
a. 11,500 c. 2,000
b. 4,000 d. 0 Dayag 2013

Cash Settlement
40. Aldo, Bert, and Chris formed a partnership on April 30, with the following assets, measured at their
fair values, contributed by each partner:
Aldo Bert Chris
Cash PI 0,000 PI2,000 P30.000
Delivery trucks 150,000 28,000
Computers 8,500 5,100
Office furniture 3,500 2,500
Totals PI 68,500 P48,600 P32,500
Although Chris has contributed the most cash to the partnership, he did not have the full amount of
P30,000 available and was forced to borrow P20,000. The delivery truck contributed by Aldo has a
mortgage of P90,000 and the partnership is to assume responsibility for the loan.
The partners agreed to equalize their interest.

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 Partnership Formation & Admission of a Partner

Cash settlement among the partners are to be made outside the partnership. Using the Bonus
Method:
a. Bert and Chris should pay Aldo, P4,600 and P20,700 respectively.
b. Aldo should pay Bert and Chris, P25,300.
c. Bert should pay Aldo, P2.5,300 and Chris, P20,700.
d. Chris should pay Aldo, P25,300 and Bert, P4,600. Guerrero 2013

Revaluation
Net adjustments to partners' capital
41. On March 1,2013, Jose and Kiko decides to combine their businesses to form a partnership.
Statement of financial position on March 1 before the formation, showed the following:

Jose Kiko
Cash P9,000 P3,750
Accounts receivable 18,500 13,500
Inventories 30,000 19,500
Furniture and fixture (net) 30,000 9,000
Office equipment (net) 11,500 2,750
Prepaid expenses 6,375 3,000
Total PI 05,375 P51,500
Accounts payable P45/750 P18,000
Capital 59,625 33,500
Total PI 05,375 P51,500
They agreed to following adjustments before the formation:
a. Provide 2% allowance for doubtful accounts.
b. Jose's furniture should be valued at P31,000, while Kiko's office equipment is
underdepreciated by P250.
c. Rent expense incurred previously by Jose was not yet recorded amounting to P1,000, while
salary expense incurred by Kiko was not also recorded amounting to P800.
d. The fair value of inventories amounted to P29,500 for Jose and P21,000 for Kiko.

The net (debit) credit adjustment to partner's capital accounts are:

Jose Kiko
a. (P2,870) (P2,820)
b. P1,870 P2,820
c. P 870 (P180)
d. (P870) P 180 Guerrero 2013

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Withdrawal by a partner
42. Cong and Dong have just formed a partnership. Cong contributed cash of P126,000 and computer
equipment that cost P54,000. The computer had been used in his sole proprietorship and had
been depreciated to P24,000. The fair value of the equipment is P36,000. Cong also contributed
a note payable of PI2,000 to be assumed by the partnership. Cong is to have 60% interest in the
partnership. Dong contributed only P90,000 cash.
Cong should make an additional investment (withdrawal) of:
a. P96,000 c. (P 7 6,800)
b. 84,000 d. (P15,000) Guerrero 2013

Partners’ Contribution
43. On June 1, 2013, May and Nora formed a partnership. May is to invest assets at fair value which
are yet to be agreed upon. She is to transfer her liabilities and is to contribute sufficient cash to bring
her total capital to P210,000 which is 70% of the total capital of the partnership.
Details regarding the book values of May's business assets and liabilities and their corresponding
valuations are:

Book Agreed
values valuations
Accounts receivable P58,000 P58,000
Allowance for doubtful accounts 4,200 5,000
Merchandise inventory 98,400 107,000
Store equipment 32,000 32,000
Accumulated depreciation - Store equipment 19,000 16,400
Office equipment 27,000 27,000
Accumulated depreciation - Office equipment 14,200 8,600
Accounts payable 56,000 56,000

Nora agrees to invest cash of P42,000 and merchandise valued at current market price. The value
of the merchandise to be invested by Nora and the cash to be invested by May are:
a. P 90,000 and P 62,000 respectively
b. P 252,000 and PI38,000 respectively
c. P 48,000 and PI38,000 respectively
d. P 48,000 and P 62,000 respectively Guerrero 2013

Partnership Formation & Admission of a Partner MCQ Problems Page 18

 Partnership Formation & Admission of a Partner

Partner's adjusted capital balances

44. 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:
AA BB
Assets P75.000 PI 13,000
Liabilities 5,000 34,500
What is the capital of AA and BB after the above adjustments?
a. AA, P68,750; BB, P77,250 c. AA, P65,000; BB, P76,000
b. AA,P75,000;BB,P8i;000 d. AA, P65,000; BB, P81.000 Dayag 2013

45. On January 1, 2010, Atta and Boy agreed to form a partnership contributing their respective
assets and equities subject to adjustments. On that date, the following were provided;

Atta Boy
Cash P28,000 P62,000
Accounts receivable 200,000 600,000
Inventories 120,000 200,000
Land 600,000
Building 500,000
Furniture & fixtures 50,000 35,000
Intangible assets 2,000 3,000
Accounts payable 180,000 250,000
Other liabilities 200,000 350,000
Capital 620,000 800,000

The following adjustments were agreed upon:

a. Accounts receivable of P20.000 and P40,000 are uncollectible in A's and B's respective
books.
b. Inventories of P6,000 and P7,000 are worthless in A's and B's respective books.
c. Intangible assets are to be written off in both books.

Partnership Formation & Admission of a Partner MCQ Problems Page 19

 Advance Accounting

What will be the capital balances of the partners after adjustments?

Atta Boy
a. 592,000 750,000
b. 600,000 700,000
c. 592,000 756,300
d. 600,000 750,000 Punzalan 2014

46. The business assets and liabilities of John and Paul appear below:
John Paul
Cash PI 1,000 P22,354
Accounts receivable 234,536 567,890
Inventories 120,035 260,102
Land 603,000
Building - 428,267
Furniture and fixtures 50,345 34,789
Other Assets 2,000 3,600
Total , PI,020,916 P 1,317,002

Accounts payable 178,940 243,6050

Notes payable 200,000 345,000
John, capital 641,976
Paul, capital - 728,352
Total P 1,020,916 1,317,002
John and Paul agreed to form a partnership contributing their respective assets and equities subject
to the following adjustments:
a. Accounts receivable of P20,000 in John's books and P35,000 in Paul's are uncollectible.
b. Inventories of P5,500 and P6,700 are worthless in John's and Paul's respective books.
c. Other assets of P2,000 and P3,600 in John's and Paul's respective books are to be written
off.
The capital account of the partners after the adjustments will be:
a. John's P614,476
Paul's 683,052
b. John's P615,942
Paul's 717,894
c. John's P 649,876
Paul's 712,345
d. John's P613,576
Paul's 683,350 Guerrero 2013

Partnership Formation & Admission of a Partner MCQ Problems Page 20

 Partnership Formation & Admission of a Partner

47. On March 1,2013, Eva and Helen decides to combine their businesses and form a partnership.
Statement of financial position on March 1, before adjustments, showed the following:

Eva Helen
Cash P9,000 P3,750
Accounts receivable 18,500 13,500
Inventories 30,000 19,500
Furniture and fixtures (net) 30,000 9,000
Office equipment (net) 11,500 2,750
Prepaid expenses 6375 3,000
Total P105375 P51,500
Accounts payable 45,750 18,000
Capital 59,625 33,500
Total P105375 P51,500
They agreed to provide 3% for doubtful accounts receivable, and also agree that Helen's furniture
and fixture are underdepreciated by P900.
If each partner's share in equity is to be equal to the net assets invested, the capital accounts of Eva
and Helen would be:
a. PI04,820 and P50,195, respectively
b. P59,070 and P32,195, respectively
c. P58,320 and P32,945, respectively
d. P58,170 and P33,095, respectively Guerrero 2013

Goodwil
48. On September 1,2013, the business assets and liabilities of Amor and Bhea were as follows:

Amor Bhea
Cash P28,000 P62,000
Accounts receivable 200,000 600,000
Inventories 120,000 200,000
Land 600,000
Building - 500,000
Furniture and fixtures 50,000 35,000
Other assets 2,000 3,000
Accounts payable 180,000 250,000
Notes payable 200,000 350,000

Partnership Formation & Admission of a Partner MCQ Problems Page 21

 Advance Accounting

Amor and Bhea agreed to form a partnership contributing, their respective assets and liabilities
subject to the following agreements:
a. Accounts receivable of P20,000 in Amor's books and P40,000 in Bhea's books are
uncollectible.
b. Inventories of P6,000 and P7,000 are obsolete in Amor's and Bhea's respective books.
c. Other assets of P2,000 and P3,000 in Amor's and Bhea's rspective books are to be written
off.
d. Accrued expenses of P2,000 and P5,000 in Amor's and Bhea's books are to be
recognized.
e. Goodwill is to be recognized to equalize their capital accounts after the above adjustments.
The amount of goodwill-to be recognized is:
a. P155,000 c. P151,000
b. P158,000 d. P159,000. Guerrero 2013

Comprehensive
Questions 1 thru 4 are based on the following: Dayag 2013
49. 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
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. 40.000
b. 30,000 d. 68,000

Partnership Formation & Admission of a Partner MCQ Problems Page 22

 Partnership Formation & Admission of a Partner

50. Using the same information in No. 49, 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

51. Using the same information in No. 49 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. 40,000
b. P30,000 d. 68,000

52. Using the same information in No. 49 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

Questions 1 thru 3 are based on the following: Dayag 2013

53. On March 1, 2012, 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 (net) ' 30,000 9,000
Office equipment (net) 11,500 2,750
Prepaid expenses 6,375 3,000
Total P105,375 P51.500

Accounts payable P 45,750 P18,000

Capital 59,625 33,500
Total P105.375 P51.50
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 PI,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 P29.500
For QQ 21,000

Partnership Formation & Admission of a Partner MCQ Problems Page 23

 Advance Accounting

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

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

54. The same information in Number 11, compute the total liabilities after information:
a. 61,950 c. 65,550
b. 63,750 d. 63,950
55. The same information in Number 11, compute the total assets after information:
a. 157,985 c. 160,765
b. 156,875 d. 152,985

Questions 1 & 2 are based on the following: Dayag 2013

56. The business assets of LL and MM appear below:
LL MM
Cash P11,000 P22,354
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 P1,020,916 P1.317.002
Accounts payable P178,940 P243,650
Notes payable 200,000 345,000
LL, capital 641,976 -
MM, capital - 728,352
Total P1,020,916 P1,317.002
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 P6700 are worthless in LL's and MM's respective books.
c. Other assets of P2.000 and P3.600 in LL's and MM's respective books are to be written
off.
The capital account of the partners after the adjustments will be:
a. LL, P615,942; MM, P717,894 c. LL, P640.876; MM, P683,050
b. LL,P640,876; MM, P712,345 d. LL, P614,476; MM, P683,052

Partnership Formation & Admission of a Partner MCQ Problems Page 24

 Partnership Formation & Admission of a Partner

57. The same information in Number 56, how much total assets does the partnership have after
formation?
a. 2,337,918 c. 2,265,118
b. 2,237,918 d. 2,365,218

58. MM, NN, and OO are partners with capital balances on December 31, 2012 of P300,000,
P300,000 and P200,000, respectively. Profits are shared equally. OO 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 of 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) P15,000 each for MM and NN, (2) P150,000.
b. (1) P5,000eachforMM, NN and OO, (2) P145,000.
c. (1) P5,000 each for MM, NN and OO, (2) P195,000.
d. (1) P7,500eachforMMandNN, (2) P145,000. Dayag 2013

59. CC admits DD as a partner in business. Accounts in the ledger for CC on November 30,
2012, 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
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) P35,347; (2) PI 1,971 c. (1) P35,374; (2) P17,687
b. (1) 36,374; (2) 18,487 d. (1) 28,174; (2) 14,087 Dayag 2013

Partnership Formation & Admission of a Partner MCQ Problems Page 25

 Advance Accounting

Questions 1 & 2 are based on the following: Punzalan 2014

The Grey and Redd Partnership was formed on January 2, 2010, Under the partnership agreement,
each partner has an equal initial capital balance. Partnership net income or loss is allocated 60% to
Grey and 40% to Redd. To form the partnership, Grey originally contributed assets costing P3 0,000
with a fair value of P60,000 on January 2, 2010, and Redd contributed P20,000 cash. Drawings by
the partners during 2010 totaled P3,000 by Grey and P9,000 by Redd. The partnership net income
in 2010 was P25,000.

60. Under the goodwill method, what is Redd's initial capital balance in the partnership?
a. 20,000 c. 40,000
b. 25,000 d. 60,000

61. Under the bonus method, what is the amount of bonus?

a. 20,000 bonus to Grey c. 40,000 bonus to Grey
b. 20,000 bonus to Redd d. 40,000 bonus to Redd

62. The partnership of Perez and Reyes was formed on March 31,2013. On this date, Perez
invested P50,000 cash and office equipment valued at P30,000. Reyes in¬ vested P70.000
cash, merchandise valued at PI 10,000, and furniture valued at P100,000, subject to a notes
payable of P50,000 (which the partnership assumes). The partnership provides that Perez and
Reyes share profits and losses 25:75, respectively. The agreement further provides that the
partners should initially have, an equal interest in the partnership capital. Under the goodwill and the
bonus method, what is the total capital of the partners after the formation?
Bonus Goodwill Method
a. P310,000 P4 60,000
b. P360,000 P510,000
c. P3 00,000 P410,000
d. P3 50,000 P 400,000 Guerrero 2013

ADMISSION
Assignment of Interest
63. 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

Partnership Formation & Admission of a Partner MCQ Problems Page 26

 Partnership Formation & Admission of a Partner

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. 310,000 c. 490,000
b. 200,000 d. 400,000 Dayag 2013

By Purchase
New partner's capital balance
No Revaluation of Assets
64. Ranken purchases 50% of Lark's capital interest in the K and L partnership for P22,000. If the
capital balances of Kim and Lark are P40.000 and P30,000, respectively, Ranken's capital
balance following the purchase is
a. 22,000 c. 20,000
b. 35,000 d. 15,000 Punzalan 2014

Bonus Method
65. On June 30, 2012, 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. 12,500 c. 25,000
b. 18,750 d. 31,250 Dayag 2013

66. Partners Andy, Boy and Ken sharing profit and loss based on 4:3:2 ratio have the following
condensed statement of financial position:
Total assets P1,880,000

Liabilities P480,000
Andy, capital 620,000
Boy, capital 400,000
Ken, capital 380,000
Total liabilities and capital P1,880,000

Partnership Formation & Admission of a Partner MCQ Problems Page 27

 Advance Accounting

Dondon will be admitted as a new partner for 20% interest after he pays the three partners with a
minimum of 10%. Thus, the old partner will have to transfer to Dondon 20% of their interest.
a. P376,000 c. P350,000
b. P280,000 d. P200,000 Guerrero 2013

67. Moonbits partnership had a net income of P8,000.00 for the month ended September 30,2013.
Sunshine purchased an interest in the Moonbits partnership of Liz and Dick by paying Liz
P32,000 for half of her capital and half of her 50% percent profit sharing interest on October
1,2013. At this time Liz capital balance was P24,000 and Dick capital balance was P56,000. Liz
should receive a debit to her capital account of:
a. P12,000 c. P16,000
b. P20,000 d. P26,667 Guerrero 2013

Realized gains of old partners

68. The capital accounts of the partnership of NN, VV, and JJ on June 1, 2011 are presented
below with their respective profit and loss ratios:
NN P139,200 1/2
W 208,800 1/3
JJ 96,000 1/6
On June 1, 2011, LL is admitted to the partnership when LL purchased, for PI32,000, 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. 0 c. 62,400
b. 43,200 d. 82,000 Dayag 2013

Partner's balance after admission of new partner

69. 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 P80,000
Other assets 415,000 KK, capital 252,000
LL, capital 126,000
MM, capital 42,000
Total P500,000 Total P500,000

Partnership Formation & Admission of a Partner MCQ Problems Page 28

 Partnership Formation & Admission of a Partner

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. Dayag 2013

70. Presented below is the condensed statement of financial position of the partnership of Go, Lee and
Mao who share profits and losses in the ratio of 6:3:1, respectively:

Cash P85,000 Liabilities P80,000

Other assets 415,000 Go, capital 252,000
Lee, capital 126,000
Mao, capital 42,000
Total P500,000 Total P500,000

The partner agree to sell Gaw 20% of their respective capital and profit and loss interest for a total
payment of P90,000. The payment by Gaw is to be made directly to the individual partners. The
partners agree that implied goodwill is to be recorded prior to-the acquisition by Gaw. The capital
balance of Go, Lee, and Mao respectively after admission of Gaw are:
a. PI98.000; P 99,000 P33,000.
b. P201,600; PI 00,800 P33,600.
c. P216,000; PI08,000 P3 6,000.
d. P255,600; PI26,799 P42,000. Guerrero 2013

71. A, B and C are partners who share profits and losses in the ratio of 5:3:2, respectively. They
agree to sell D 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 of P60,000.00 is
to be recorded prior to admission of D. The condensed statement of financial position of the
ABC Partnership is presented in the next page.

Cash P 60,000 Liabilities PI00,000

Non-cash assets 540,000 A, Capital 250,000
B, Capital 150,000
C, Capital 100,000
Total P600,000 Total P600,000

Partnership Formation & Admission of a Partner MCQ Problems Page 29

 Advance Accounting

The capital of A, B and C, respectively after the payment and admission of D are:
A B C
a. P187,500; PU2,500; P 75,000;
b. P210,000; PI26,000; P 84,000;
c. P280,000; PI68,000; P112,000;
d. P250,000; PI50,000; PI00,000; Guerrero 2013

Payment to Old Partners

72. 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 PI 6,290; 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? Dayag 2013
a. PP,P 9,825; CC, P20,175. c. PP,P10,000; CC, P20,000.
b. PP.P15,000; CC, PI5,000 d. PP,P 9,300; CC, P20,700

73. The following information pertains to ABC Partnership of Amor, Bing, and
Cora:
Amor, capital (20%) P200,000
Bing, capital (30%) 200,000
Cora, capital (50%) 300,000
On this date, the partners agreed to admit Dolly into the partnership.

Assuming Dolly purchased fifty percent of the partners capital and pays P500,000 to the old
partners, how would this amount be distributed to them?
a. 100,000 150,000 250,000
b. 130,000 145,000 225,000
c. 166,667 166,667 166,666
d. 150,000 150,000 200,000 Punzalan 2014

Partnership Formation & Admission of a Partner MCQ Problems Page 30

 Partnership Formation & Admission of a Partner

By Investment
Interest/Capital Ratio
74. Partnership A has an existing capital of P70,000. Two partners currently own the partnership
and split profits 50/50. A new partner is to be admitted and will contribute net assets with a fair
value of P90,000. For no goodwill or bonus (depending on whichever method is used) to be
recognized, what is the interest in the partnership granted the new partner?
a. 33.33% c. 56.25%
b. 50.00% d. 75.00% Punzalan 2014

Cash contribution of new partner

75. 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
P940,000

Accounts payable P210,000

QQ, loan 30,000
LL, capital 310,000
PP, capital 200,000
QQ, capital 190,000
P940.000

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. 140,000 c. 175,000
b. 142,000 d. 177,500 Dayag 2013

Partnership Formation & Admission of a Partner MCQ Problems Page 31

 Advance Accounting

76. Partners AA, BB, and CC divide profits and losses 5:3:2, respectively, and their balance
sheet on September 30, 2012 is as follows:

ABC Partnership
Balance Sheet
September 30,2012

Cash P 80,000
Other assets 720,000
Total assets P800,000

Accounts payable P200,000

AA, capital 148,000
BB, capital 260,000
CC, capital 192,000
Total liabilities and capital P800,000

The assets and liabilities are recorded at approximate current fair values. DD is to be admitted
as a new partner with a 20% interest in capital and earnings in exchange for a cash investment.
Goodwill or bonus will not be considered. How much cash should DD contribute?
a. 120,000 c. 150,000
b. 144,000 d. 160,000 Dayag 2013

77. The following balance sheet is presented for the partnership of A, B, and C, who share profits
and losses in the respectively ratio of 5:3:2.

Assets Liabilities and Capital

Cash 120,000 Liabilities 280,000
Other assets 1,080,000 A, capital 560,000
B, capital 320,000
C, capital 40,000
Total 1,200,000 Total 1,200,000

Assume that the assets and liabilities are fairly valued on the balance sheet, and the
partnership decided to admit D as a new partner with a one-fifth interest and no goodwill or
bonus is to be recorded. How much should D contribute in cash or other assets?
a. 147,200 c. 230,000
b. 184,000 d. 240,000 Punzalan 2014

Partnership Formation & Admission of a Partner MCQ Problems Page 32

 Partnership Formation & Admission of a Partner

78. A condensed statement of financial position for Alba, Barba, and Clara appears below. Alba, Barba, and
Clara share profits and losses in a ratio of 2:3:5, respectively.
Assets
Cash P100,000
Inventory 125,000
Marketable Securities 200,000
Land 100,000
Building-net 500,000
Equities
Alba, capital P425,000
Barba, capital 400,000
Clara, capital 200,000
The partners agreed to admit Darna. The fair market value of the land is appraised at P200,000
and the market value of the marketable securities is P250,000. The assets are to be revalued
prior to the admission of Darna and there is P30,000 goodwill that attaches to the old
partnership.
How much cash will Darna have to invest to acquire a (1) one-fifth interest? or a (2) four-fifth
interest?
a. (1) P301,250; (2) P4,820,000
b. (I) P205,000; (2) PI,205,000
c. (I) P241,000; (2) P2,410,000
d. (1) P300,000; (2) Pl,506,250 Guerrero 2013

79. The following is the condensed statement of financial position of the partnership Jo, Li and Bi
who share profits and losses in the ratio of 4:3:3.

Cash P 180,000 Accounts, payable P 420,000

Other assets 1,660,000 Bi,Loan 60,000
Jo, receivable 40,000 Jo, Capital 620,000
Li, Capital 400,000
Bi, Capital 380,000
Total P1,880,000 Total P1,880,000

Assume that the assets and liabilities are fairly valued on the balance sheet and the partnership
decides to admit Mac as a new partner, with a 20% interest. No goodwill or bonus is to be
recorded. How much Mac should contribute in cash or other assets?
a. P350,000 c. 355,000
b. P280,000 d. P284,000 Guerrero 2013

Partnership Formation & Admission of a Partner MCQ Problems Page 33

 Advance Accounting

80. Partners Alba, Basco, and Castro share profits and losses 50: 30:20, respectively. The
statement of financial position at April 30,2013 follows:

Cash P40,000 Accounts payable PI00,000

Other assets 360,000 Alba, capital 74,000
Basco, capital 130,000
Castro, capital 96,000
Total P400,000 Total P400,000

The assets and liabilities arc recorded and presented at their respective fair values, Jocson is to be
admitted as a new partner with a 20% capital interest and a 20% share of profits and losses in
exchange for a cash contribution. No goodwill or bonus is to be recorded. How much cash should
Jocson contribute?
a. P60,000 c. P75,000
b. P72,000 d. P80,000 Guerrero 2013

Goodwill
81. Dunn and Grey are partners with capital account balances of P60,000 and P90,000,
respectively. They agree to admit Zorn as a partner with one-third interest in capital and profits,
for an investment of P100,000, after revaluing the assets of Dunn and Grey. Goodwill to the
original partners should be
a. 0 c. 50,000
b. 33,333 d. 66,667 Punzalan 2014

Bonus to incoming partner

New Partner’s Capital Balance
82. 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 PI 5,000 for a 20% capital interest in the new partnership.
GG's cost of the land was PI2,000. 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. 12,000 c. 16,000
b. 15,000 d. 19,000 Dayag 2013

Partnership Formation & Admission of a Partner MCQ Problems Page 34

 Partnership Formation & Admission of a Partner

83. On January 31, 2011, 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, 2011, 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 Dayag 2013

Original partner's capital balances

84. Blau and Rubi are partners who share profits and losses in the ratio of 6:4, respectively. On
May 1, 2010, their respective capital accounts were as follows:

Blau P60,000
Rubi 50,000

On that date, Lind was admitted as a partner with one-third interest in capital, and profits for an
investment of P40,000. The new partnership began with total capital of PI 50,000.
Immediately after Lind's admission, Blau's capital should be
a. 50,000 c. 56,667
b. 54,000 d. 60,000 Punzalan 2014

85. The partnership of Cat and Dog provides for 3:2 sharing in profits and losses. Prior to the
admission of a third partner Elf, the capital accounts are Cat, PI 20,000 and Dog, P80,000. Elf
invests P50,000 for a P75,000 interest and partners agreed that the net assets of the new
partnership would be P300,000.

How much is Dog's capital in the new partnership?

a. P105,000 c. P110,000
b. P90,000 d. P136,000 Guerrero 2013

Partnership Formation & Admission of a Partner MCQ Problems Page 35

 Advance Accounting

86. Partners Chito and Ditas share profits in the ratio of 6:4 respectively. On December 31, 2013
their respective capital balances were Chito, P120,000 and Ditas, P100,000. On that date
Meng was admitted as partner with a one-third interest in capital and profits for an investment of
P80,000. The new partnership began in 2011 with total capital of P300,000. Immediately after
Meng's admission, Chito's capital should be:
a. P120,000 c. P100,000
b. P108,000 d. P160,000 Guerrero 2013

87. Ell and Emm are partners sharing profits 60% and 40%, respectively. On January 1, Ell and
Emm decided to admit Enn as a new partner upon his investment of P8,000. On this date, their
interests in the partnership are as follows: Ell, P11,500; Emm,P9,300.
Assuming that the new partner is given a 1/3 interest in the firm, with bonus being allowed the new
partner, the new capital balances of Ell, Emm and Enn, respectively, would be:
a. P11,500, P9,300, and P8,000
b. P12,480, P8,320, and P8,000
c. P11,520, P7,680, and P9,600
d. P 10,540, P8,660, and P9,600. Guerrero 2013

88. The capital account for the partnership of Lucas and Mateo at October 31, 2013 are as
follows:

Lucas, capital P 80,000

Mateo, capital 40,000

The partners share profits and losses in the ratio of 6:4 respectively.

The partnership is in desperate need of cash, and the partners agree to admit Naron as a
partner with one-third in the capital and profits and losses upon his investment of P3 0,000.
Immediately after Naron's admission, what should be the capital balance of Lucas, Mateo and
Naron respectively, assuming goodwill is not to be recognized?
a. P50,000; P50,000 P50,000.
b. P60,000; P60,000; P50,000.
c. P66,667; P33,333; P50,000.
d. P68,000; P32,000; P50,000. Guerrero 2013

Partnership Formation & Admission of a Partner MCQ Problems Page 36

 Partnership Formation & Admission of a Partner

89. Carlos and Deo are partners who share profits and losses in the ratio of 7:3, respectively.
On October 5, 2013, their respective capital accounts were as follows:
Carlos P35,000
Deo 30,000
On that date they agreed to admit Sotto 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 Sotto's admission, what are the capital
balances of Carlos, Deo, and Sotto, respectively?
a. P30,000 P30,000; P30,000
b. P31,500 P28,500; P30,000
c. P31,667, P28,333; P3 0,000
d. P35,000 P3 0,000 P25,000 Guerrero 2013

Capital balance of all partners

90. The capital accounts for the partnership of LL and MM at October 31,2012 are as follows:

LL, capital P 80,000

MM, capital 40,000
P120,000
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? Dayag 2013
a. P50.000; P50.000; P50,000. c. P66.667; P33,333; P50,000.
b. P60.000; P60,000; P60,000. d. P68.000; P3Z000; P50,000.

91. CC and DD are partners who share profits and losses in the ratio of 7:3, respectively. On
October 21,2012, their respective capital accounts were as follows:

CC P35,000
DD 30,000
P65,000
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 balance of CC,
DD, and EE, respectively? Dayag 2013
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;

Partnership Formation & Admission of a Partner MCQ Problems Page 37

 Advance Accounting

92. Pal and Mall are partners with capitals of P200,000 and P100,000 and sharing profits and
losses 3:1 respectively. They agree to admit Kent as partner, Kent invests P150,000 for a 50%
interest in the firm. Pal and Mall transfer part of their capitals to Kent as a bonus.

The capital balances of the partners after Kent's admission are:

a. Pal, P168,750; Mall, P56,250; and Kent, P225,000.

b. Pal, P112,500; Mall, P 37,500; and Kent, P150,000.
c. Pal, P200,000; Mall, P100,000; and Kent, P150,000.
d. Pal, P143,750; Mall, P 81,250; and Kent, P225,000 Guerrero 2013

Bonus to Original Partners

Capital balance of original partner
93. Mitz, Marc and Mart are partners sharing earnings in the ratio of 5:3:2 respectively. As of
December 31, 2010, their capital balance showed P95,000 for Mitz, P80,000 for Marc, and
P60,000 for Mart.
On January 1,2013 the partnership admitted Vince as a new partner and according to the
partnership agreement, Vince will contribute P80,000 in cash to the partnership and will also pay PI
0,000.00 for 15% of Marc's share. Vince will share 20% in the earnings while the ratio of the original
partners will remain proportionately the same as before Vince admission. After Vince' admission,
the total capital of the partnership will be P330,000 while Vince' capital account will be P70,000.

The balance of Marc's capital account after the admission of Vince would be:
a. P81,100 c. P74,600
b. P79,100 d. P72,600 Guerrero 2013

Bonus given to original

94. The capital balances in DEA Partnership are: D, capital P60,000; E, capital P50,000; and A,
capital P40,000 and income ratios are: 5:3:2, respectively. The DEAR Partnership is formed by
admitting R to the firm with cash investment of P60,000 for a 25% interest in capital. What is
the amount of bonus to be credited to A capital in admitting R?
a. 10,000 c. 3,750
b. 7,500 d. 1,500 Punzalan 2014

Capital balance of all partners

95. Pol and Loc are partners with capitals of P200,000 and PI00,000 and sharing profits and
losses 3:1 respectively. They agree to admit Chic as partner. Chic invests P125,000 for a 25%
interest in the firm. Parties agree that the total firm capital after Chic's admission is to be
P425,000.

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 Partnership Formation & Admission of a Partner

The capital balance of the partners after Chic's admission are:

a. Pol, P214,062.50; Loc, P104,687.50; and Chic, P106,250.00
b. Pol, P200,000.00; Loc, P100,000.00; and Chic, P125,000.00
c. Pol, P239,062.50; Loc, P 79,687.50; and Chic, P125,000.00
d. Pol, P250,000.00; Loc, P125,000.00; and Chic, P100,000.00 Guerrero 2013

Revaluation
Original partner's capital balance
96. Gerber, Williams, and George are partners with present capital balances of P50,000, P60,000,
and P20,000, respectively. The partners share profit and losses according to the following
percentages: 60% for Gerber, 20% for Williams, and 20% for George. Larsen is to join the
partnership upon contributing P60,000 to the partnership in exchange for a 25% interest in
capital and a 20% interest in profits and losses. The existing assets of the original partnership
are undervalued by P22,000. The original partners will share the balance of profits and losses
in proportion to their original percentages. What would be the capital balances of the old
partners in the new partnership using the goodwill method?
Gerber Williams George
a. 63,200 64,400 24,400
b. 93,200 74,400 34,400
c. 76,800 65,600 25,600
d. 80,000 70,000 30,000 Punzalan 2014

97. Rio, Sol, and Tom have a partnership. Their capital balances are P96,000, P72,000, and P54,000,
respectively. They split profits equally. They are considering on what basis to admit Vic, a
prospective new partner. Based on appraisal analysis, the net assets of the partnership are
worth P240,000. Vic is willing to put up cash of P24,000, plus a computer with a fair value
of P42,000.
Calculate the capital balances if the existing partners recognize the difference between the fair
value and book value of the partnership's net assets as goodwill.
a. Rio, P102,000; Sol, P78,000; Tom, P60,000; Vic, P66,000
b. Rio, 96,000; Sol, 72,000; Tom, 54,000; Vic, 66,000
c. Rio, 102,000; Sol, 78,000; Tom, 54,000; Vic, 66,000
d. Rio, 96,000; Sol, 78,000; Tom, 60,000; Vic, 66,000 Guerrero 2013

Partnership Formation & Admission of a Partner MCQ Problems Page 39

 Advance Accounting

Capital balance of all partners

98. NN, OO, and PP are partners with present capital balances of P50,000, P60,000, and P20,000,
respectively. The partners share profits and losses according to the following percentages; 60%
for NN, 20% for OO, and 20% for PP, QQ is to join the partnership upon contributing P20,000
cash, plus a machine with a fair market value of P40,000 to the partnership in exchange for a
25% interest in the capital and a 20% interest in the profits and losses. The existing assets of
the original partnership are undervalued by P22,000. The original partners will share the balance
of profits and losses in their original ratios.
Calculate the capital balances of each partner in the new partnership using goodwill method.
NN OO PP QQ
a. P67,400; P65,800; P25,800; P53,000
b. P50,000; P60,000; P20,000; P60,000
c. P80,000; P70,000; P20,000; P20,000
d. P80,000; P70,000; P30,000; P60,000 Guerrero 2013

Comprehensive
Questions 1 thru 3 are based on the following: Dayag 2013
99. In the AD partnership, Allen's capital is P140,000 and Daniel's is P40,000 and they share
income in a 3:1 ratio, respectively. They decide to admit David to 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 P40.000 for a one-fifth interest. What is the
amount of inventory written down?
a. P 4,000 c. P15,000
b. P10,000 d. P20,000

100. Using the same information in No. 99, David directly purchases a one-fifth interest by paying
Allen P34,000 and Daniel P10,000. The land account is increased before David is admitted.
By what amount is the land account increased?
a. P40.000 c. P20.000
b. P36.000 d. PI 0,000

101. Using the same information in No. 99, David invests P40.000 for a one-fifth interest in the
total capital of P220,000. The journal to record David's admission into the partnership will
include:
a. A credit to Cash for P40.000.
b. A debit to Allen, Capital for P3,000.
c. A credit to David, Capital for P40.000.
d. A credit to Daniel, Capital for P1,000

Partnership Formation & Admission of a Partner MCQ Problems Page 40

 Partnership Formation & Admission of a Partner

Questions 1 & 2 are based on the following: Punzalan 2014

Fernando and Jose are partners with capital balances of P30,000 and P70,000, respectively.
Fernando has a 30% interest in profits and losses. All assets of the partnership are at fair market
value except equipment with book value of P300,000 and fair market value of P320,000. At this time,
the partnership has decided to admit Rosa and Linda as new partners. Rosa contributes cash of
P55,000 for a 20% interest in capital and a 30% interest in profits and losses. Linda contributes cash
of P10,000 and an equipment with a fair market value of P50,000 for a 25% interest in capital and a
35% interest in profits and losses. Linda is also bringing special expertise and clients contact into
the new partnership.
102. Using the bonus method, what is the amount of bonus?
a. 24,750 c. 14,000
b. 18,250 d. 7,500

103 Using the goodwill method, what is the amount of goodwill traceable to the original partners?
a. 60,000 c. 31,250
b. 40,000 d. 28,750

Questions 1 & 2 are based on the following: Punzalan 2014

Mitz, Marc, and Mart are partners sharing profits in the ratio of 5:3:2, respectively. As of December
31, 2009, their capital balances were P95,000 for Mitz, P80,000 for Marc, and P60,000 for Mart.
On January 1, 2010, the partners admitted Vince as a new partner and according to their
agreement, Vince will contribute P80,000 in cash to the partnership and also pay P10,000 for 15%
of

Marc's share. Vince will be given a 20% share in profits, while the original partners' share will
be proportionately the same as before. After the admission of Vince, the total capital will be
P330,000 and Vince's capital will be P70,000.

104. The total amount of goodwill to the old partners, upon the admission of Vince would be:
a. 7,000 c. 22,000
b. 15,000 d. 37,000

105 The balance of Marc's capital, after the admission of Vince would be:
a. 72,600 . c. 79,100
b. 74,600 d. 81,100

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 Advance Accounting

106. Ace, Boy and Cid are partners sharing profits in the ratio of 3:3:2. On July 31, their capital
balances are as follows:
Ace P700,000
Boy 500,000
Cid 400,000

The partners agree to admit Deo on the following agreement:

1. Deo is to pay Ace P500,000 for 1/2 interest of Ace's interest.

2. Deo is also to invest P400,000 in the partnership.
3. The total capital of the partnership is to be P2,400,000, of which Dco's interest is to be 25%
What are the capital balances of the partners after the admission of Deo?
Ace Boy Cid
a. P206,250 P206,250 PI 3 7,500
b. 350,000 500,000 400,000
c. 556,250 706,250 537,500
d. 500,000 400,000 350,000 Guerrero 2013

107. Partners Jay and Kay share profits in the ratio of 6:4, respectively. On December 31, 2010, their
respective accounts were Jay, P120,000 and Kay, P100,000. On that date, Loi was admitted as
partner with 1/3 interest in capital and profits for an investment of P80,000. The new partnership
began in 2013 with a total capital of P360,000. Immediately after Loi's admission:

Amount of goodwill to Jay's capital account

be credited to Loi would be
a. P 40,000 PI 08,000
b. 20,000 120,000
c. 40,000 132,000
d. 60,000 132,000 Guerrero 2013

Partnership Formation & Admission of a Partner MCQ Problems Page 42

 Partnership Formation & Admission of a Partner

ANSWER SHEET
1.A 26.D 51.A 76.C 101.B
2.C 27.A 52.D 77.C 102.B
3.C 28.D 53.C 78.A 103.C
4.C 29.C 54.C 79.A 104.B
5.A 30.D 55.A 80.C 105.C
6.A 31.A 56.D 81.C 106.C
7.B 32.D 57.C 82.D 107.C
8.D 33.B 58.B 83.C
9.D 34.A 59.C 84.B
10.A 35.B 60.B 85.B
11.C 36.A 61.D 86.B
12.C 37.C 62.A 87.D
13.D 38.C 63.D 88.D
14.C 39.D 64.D 89.B
15.C 40.A 65.B 90.D
16.C 41.D 66.B 91.B
17.A 42.D 67.A 92.D
18.B 43.D 68.B 93.B
19.C 44.D 69.B 94.D
20.A 45.A 70.C 95.A
21.D 46.A 71.B 96.D
22.B 47.B 72.D 97.A
23.C 48.A 73.B 98.D
24.B 49.C 74.B 99.D
25.C 50.A 75.C 100.A

ANSWER KEY Page 43

 Advance Accounting

Solutions
1. In partnership, each partner is personally and individually liable for all partnership liabilities. In
other words, the liability of the partners in a partnership is unlimited.

2. Partnerships have been affected by the proprietary theory, which looks at the entity through the
eyes of the owners. Characteristics of a partnership that emphasizes that the entity is viewed
as the individual owners include the following:
a. Salaries to partners are viewed as distributions of income rather than a component of
income;
b. Unlimited liability of general partners extends beyond the entity to the individual
partners;
c. Income of the partnership is not taxed at the partnership level but rather than, is included
as part of the partners' individual taxable income;
d. An original partnership is dissolved upon admission or withdrawal of a partner.

3. A general partner may be a secured creditor of the limited partnership A general partner has a
voice in management and has unlimited personal liability. Anyone, including a secured
creditor of the limited partnership, may be a general partner if he/she takes on these
responsibilities.

4. A partnership is created by mere agreements of the partners. A partnership is easily formed

and is relatively free from governmental regulations and restrictions. Decisions can be
made quickly on substantive matters affecting the firm, whereas in a corporation, formal
meetings with the board of directors are often needed.

5. Fair value at the date of contribution. Where a new legal entity exists, noncash assets are
permitted to be recorded at its fair market value; thus, the capital account should be credited
for the current fair value of the assets at the date of the contribution
6. Partnership capital accounts are similar to corporate paid in capital and retained
earnings; while partnership drawing accounts are similar to corporate dividends
accounts.

7. Profit (Flat) Loss (Flat)

Bonus 20% Bonus 0
Balance (2/5 x 80%) 32% P & L (2/5 x 100%) 40%
Total advantage 52% Total advantage 40%
In case of profit Flat has 52%, an advantage, and in case of loss, its only 40%, also an
advantage.

ANSWER KEY Page 44

 Partnership Formation & Admission of a Partner
.

8 The ratio in which partnership profits and losses are divided is known as profit and loss ratio.
Profits and losses are divided in accordance with the agreement of the partners. In the
absence of any agreement, profits and losses are divided in accordance with the partners'
contributed capital.

9 The division of partnership income should be based on an analysis of the correlation between
capital and labor committed to the firm by individual partners and the income that subsequently
is generated. As a result, profits might be divided in one or more of the following ways: 1.)
according to ratio; 2.) according to the capital investments of the partners; and 3.)
according to the labor (or service) rendered by the partners. Interest on notes to partners is
a legitimate expense of a partnership.

10 Again, the division of partnership income should be based on an analysis of the correlation
between capital and labor committed to the firm by individual partners and the income that
subsequently is generated and therefore includes interest paid to partners based on the
amount of their invested capital

11 Suggested answer (c) Being characteristic of the proprietary theory

Partnerships have been affected by the proprietary theory, which looks at the entity through the
eyes of the owners. Characteristics of a partnership that emphasizes that the entity is viewed
as the individual owners include the following:
a. Salaries to partners are viewed as distributions of income rather than a component of
income;
b. Unlimited liability of general partners extends beyond the entity to the individual
partners;
c. Income of the partnership is not taxed at the partnership level but rather than, is included
as part of the partners' individual taxable income;
d. An original partnership is dissolved upon admission or withdrawal of a partner.

12 Suggested answer (c) The -existing partner's capital should be reduced and the new partner's
account increased

When a new partner deals directly with an existing partner or partners rather than with the
partnership entity, the acquisition price is paid to the selling partner/s and not to the
partnership itself. The partnership records the redistribution of capital interests by
transferring all or a portion of the seller's capital to the new partner's capital account but does
not record the transfer of any asset or consideration

Partnership Formation & Admission of a Partner - Solutions Page 45

 Advance Accounting
.

13 Suggested answer (d) Withdrawal of a partner from a partnership

Dissolution is the change in the relation of the partners caused by any partner ceasing to
be associated in the carrying on as distinguished from the winding up of the business.
Generally, a partnership is dissolved upon the death, withdrawal, admission, or bankruptcy
of an individual partner (owner

14 Suggested answer (b) His or her share of previously unrecorded intangible assets
traceable to the original partner

Accounting changes in the ownership of a partnership is influenced heavily by the legal concept
of dissolution. When there is a change in the ownership structure, the original partnership is
dissolved and most often a new partnership is created. This dissolution and
subsequent creation of a partnership indicate that a new legal entity has been created and
accounting should measure properly the initial contributions of capital being made to the new
partnership.

15. Suggested answer (c)Assuming that recorded assets are properly valued, the book value of
the new partnership is equal to the book value of the previous partnership and the investment of
the new partner.
Under the bonus method, total contributed capital of the old and new partner is equal to the total
agreed capital (total capital of the new partnership).

16. Suggested answer (c) Allocated among the previous partners according to their original profit and
loss sharing percentages
Unrecorded goodwill also may be identifiable. If there are no differences between the fair
market value and book value of recorded assets, the new partner's willingness to pay more
than the proportionate book value of the new entity indicates that goodwill existed prior to
the new partner's admission, If this intangible asset could have been sold prior to the
admission of the partner, the realized profit would have been allocated to the old partners.
Therefore, the goodwill is recorded and allocated to the old partners according to their projit
and loss ratio.

17. Suggested answer (a)The bonus method does not revalue assets to market values.
When an incoming partner's contribution is different from that indicated by the book values of
the original partnership, the admission of the partner typically is recorded by either the bonus
method or the goodwill method. Both methods permit the assumption that there is unrecorded
goodwill to be recognized. However, the use of either method does not prevent the
recognition of differences between the book value and fair market value of recorded net assets.

ANSWER KEY Page 46

 Partnership Formation & Admission of a Partner
.

The bonus method strictly follows the principle that net assets should be recorded at historical
cost and simply readjusts capital accounts and makes no changes in existing assets
accounts. While, the goodwill method emphasizes the legal significance of a change in the
ownership structure of a partnership and revalues assets to adjust the total value of
partnership capital.

18. Suggested answer (b)

In the event of liquidation, subject to any agreement to the contrary, the following sequence of
payments should be observed: Amounts owed to creditors other than partners; 2. Amounts
owed to partners other than for capital and profits (i.e. partners' loans to the
partnership; 3. Amounts owed to partners as capital 4. Amounts owed to partners as profits
not currently closed to partners' capital accounts.

19. Suggested answer (c)

The provisions that call for the contribution of personal assets to a liquidating
partnership illustrate the characteristics of unlimited liability. However, such personal liability
depends on the legal doctrine of marshaling of assets. This doctrine, which is applied when the
partnership and/or one or more of the partners are insolvent, states that:

a. Partnership assets are first available for the payment of partnership debts. Any
excess assets are available for payment of the individual partner's debts, but only to
the extent of the partner's interest in the capital of the partnership;

b. Personal assets of a partner are applied against personal debts, ranked in the order
of priority as follows: I.) Amounts owed to personal creditors; 2.) Amounts owed to
partnership creditors; and 3.) Amounts owed to partners by way of contribution.

20. Suggested answer (a) 2, 3, 4, 1

Unlike a dissolution where the partnership continues its business purpose, liquidation
results in the partnership's ending or terminating its business. The process of liquidation
consists of the conversion of partnership assets into a distributable form and the distribution
of these assets to creditors and
owners. All liquidation expenses and gains or losses from conversion of partnership
assets also must be allocated to the partners before assets actually are distributed to the
individual partners. Failure to consider these factors may result in the premature or incorrect
distribution of assets to a partner.

Partnership Formation & Admission of a Partner - Solutions Page 47

 Advance Accounting
.

21.
The bonus method implied that the old partner either received a bonus from the new partner,
or they paid a bonus to the new partner. In this case, CC, the new partner invested
an amount in excess of the amount credited to CC's capital account. Accordingly, the
excess should be treated as a bonus to AA and B8. This bonus should be treated as an
adjustment to the old partners' capital accounts and should be allocated by using AA
and BB's old profit and loss ratio.

22. (b)
Whether there is a profit or a loss, FF will have a greater advantage. When there is
a profit, FF will obtain a 20% bonus on profits before the bonus, and also take 40% of
the profit after the bonus. II on the other hand, will receive only 60% of the profit after
the bonus. The following example illustrates this:

FF II Profit
P&Lratio 40% 6D%
20% Bonus 200 0 200
Share in profit 320 480 800
Total distribution 520 480 1,000
In case of a loss, it can easily be seen, since FF has a smaller percentage share in
the loss.

23. (c)
GG's adjusted capital* : P 405,000
Divided by: GG's P&L percentage 40%
Total Agreed Capital PI,012,500
Multiplied by: FF's P&L percentage 60%
FF's agreed capital P 607,500
Less: FF's adjusted contributed capital* 435,000
Additional cash to be invested by FF P 172,500 (c)
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 accts ( 120,000) ( 45,000)
Adjusted contributed capital

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24. Mary capital before adjustments 264,000

Allowance for doubtful accounts (3% x 120,000) ( 3,600)
Merchandise inventory 25,000
Prepaid expenses 3,600
Accrued liabilities ( 4,000)
Mary capital after adjustments 285,000

Total partnership capital (285,000/ 3/5) 475,000

Multiply by Jane interest 2/5
Cash to be invested by Jane 190,000

Again, when assets other than cash are invested into the partnership, it is necessary for the
partners to agree upon the value of such assets. The assets are recorded in accordance with
the agreement, and the partners' capital accounts are credited for the amounts of the
respective investments. The effects of the adjustments to the capital accounts should be in
accordance with the accounting equation (Asset = Liabilities + Capital)

In this case where Jane will have an interest of 2/5, Mary should have an interest of 3/5. Since
no goodwill or bonus was mentioned in the problem, the adjusted capital of Mary represents her
3/5 interest, which will be used as basis to determine the total partnership capital.

25. Total agreed capital [P40,000 + P80,000) - 2/3] PI 80,000

Blue's interest 1/3
Cash to be contributed by Blue P60,000

26. (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.

27. The importance of proper valuation of assets invested by partners cannot be overemphasized.
In order to achieve equity, assets invested by partners should be reported at their fair market
value Fair value is determined by making reference to the following: cash transactions of the
same or similar assets, quoted market prices, and independent appraisals.

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28. The requirement is Monuz' capital account balance upon formulation of the part¬ nership. As in
the case with all entities, investment in the capital of a partnership should be measured at the fair
value of the assets contributed. In this case, the fair value of the land would be measured by its
sales price on the date of sale (P50,000) which is also the date of the partnership formulation.
Recording the land of Monuz' cost would result in the partners sharing the gain from the sale in
accordance with their profit and loss ratio. This is not equitable since the gain accrued while the land
was held by Monuz.

29. (c)
Jones Smith
Assets at fair value
Jones: P80.000 + P400.000 P480.000
Smith: P40,000 + P280.000 P320,000
Less: Liabilities assumed 120,000 60,000
Capital

30. (d)
JJ
Cash P 700,000
Machinery and equipment 750,000
Building 2,250,000
Total assets invested P3,700,000
Less: Mortgage loan 800,000
Capital balance of JJ on March 1, 2012 P2,900,000
Refer fo No. 1 for discussion. 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.

31. (a)
JJ
Cash P 700,000
Machinery and equipment 750,000
Building 2,250,000
Total assets invested P3,700,000
Less: Mortgage loan 0
Capital balance of JJ in March 1,2012 P3,700,000
Refer to Nos. 1 and 2 for discussion.

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32. Cash contributed P100,000 P160,000 P 50,000

Noncash contributed 50,000 120,000
Capital balances beginning 150,000 160,000 170,000
Distribution of net income:
(150/480x120,000) 37,500
(160/480x120,000) 40,000
(170/480x120,000) 42,500
Capital balances, 12/31/06 P187,500 P200,000 P212,500
Noncash assets contributed by partners to form a partnership should be recorded at its fair
value. Profits and losses are divided in accordance with the agreement of the partners,
normally, the profit and loss ratio. In the absence of any agreement, profits and losses are
divided in accordance with the partners' contributed capital

33. Roberts Smith

Cash P20,000 P30,000
Inventory 15,000
Building (net of P10,000 mortgage ) 30,000
Furniture & equipment 15,000
P35,000 P75,000
Generally, individual capital accounts should be credited for the fair market value at the date
of contribution, of the assets contributed by that partner. The partner's capital credit is based
upon the net assets contributed by the particular partner, thus the liabilities assumed by the
partnership reduced the fair market value of the building invested.
34. The non-cash assets contributed by the partners should be valued at the current fair value at
the time of the partnership formation. Therefore the capital balances of the partners upon the
formation are:

Ben (P50,000 + 25,000) P?'5,000

Joe 80,000
Fortune (25,000 + 60,000) 85,000

35. Contributions @ fair value P500,000 P800,000 P550,000

Less liabilities assumed - 350,000 -
Capital balance, 4/30/06 P500,000 P450,000 P550,000
Again, any noncash asset contributed into the partnership should be valued at the fair value of
the noncash asset contributed, any liabilities assumed by the partnership, reduces the
partners' capital balance. As a general guideline, what is to be recorded as a credit to
partners' capital is the fair value of the net assets contributed.

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36. Assets contributed by Pablo P370,000

Less mortgage assumed by partnership 80,000
Capital balance of Pablo P290,000
Note that the profit and loss sharing ratio is irrelevant to the solution of this problem.

37. (c)
XX YY ZZ
Cash : P75.000
Property PI 20,000
Equipment P82,500
Less: Mortgage assumed 52,500
Capital balances P75,000 P 67,500 82,500 (c)
Refer to Nos. 2 and 3 for discussion.
38.
Al capital 50,000
Ben capital (80,000 - 35,000) 45,000
Ces capital 55,000
At the date of the formation of the partnership, all assets contributed by the partners are
recorded in the books of the partnership at their fair values, and all liabilities assumed by the
partnership are recorded at their present values.
39. (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.
40. Total contributed capital:
Aldo(PI68,500-P90,000) P 78,500
Bert 48,600
Chris 32,500
Total PI 59,600
Divided by +3
Agreed capital of each partner P 53,200
Capital adjustment:
Aldo(P78,500-P53,200) (P25,300)
Bert(P53,200-P48,600) P4,600
Chris (P53,200 - P32,500) P 20,700

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Therefore, Bert and Chris should pay Aldo P4,600 and P20,700 respectively outside the
partnership.
41. Jose Kiko
Allowance for doubtful accounts (P370) (P270)
Furniture and fixtures 1,000
Office equipment (250)
Accrued expenses (1,000) (800)
Inventories ( 500) 1,500
Net adjustments (P870) PI80
42. Total agreed capital (P90,000 / 40%) P225,000
Cong's interest x 60%
Cong's agreed capital PI35,000
Less: contributed capital
Cash PI 26,000
Computer equipment 36,000
Note payable ( 12,000) 150,000
Withdrawal by Cong (P 15,000)
43. Total agreed capital (P210,000/70%) P300,000
Nora's interest x 30%
Nora's capital P 90,000
Cash investment 42,000
Merchandise to be invested by Nora P48,000

May's agreed capital P210,000

Contributed capital at agreed valuation (net assets) 148,000
Cash to be invested by May P62,000
44. (d)
AA EB
Assets P75,000 PI 13,000
Less: Liabilities 5,000 34,500
Unadjusted capital P70,000 P 78,500
Add (deduct): adjustments:
Increase in inventory 4,000
Allowance for doubtful accounts ( 1,000) ( 1,500)
Accounts payable ( 4,000)
Adjusted capital balances P65,000 P 81,000 (d)

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45. Capital balances before adjustments 620,000 800,000

a. Uncollectible accounts receivable (20,000) (40,000)
b. Worthless inventories ( 6,000) ( 7,000)
c. Intangible assets written off ( 2,000) ( 3,000)
Adjusted capital balances 592,000 750,000
When assets other than cash are invested into the partnership, it is necessary for the partners
to agree upon the value of such assets. The assets are recorded in accordance with
the agreement, and the partners' capital accounts are credited for the amounts of the
respective investments. The effects of the adjustments to the capital accounts should be in
accordance with the accounting equation (Asset - Liabilities + Capital).
46 John Paul
Capital balance before adjustments P641,976 P728,352
Adjustments:
Uncollectible accounts ( 20,000) ( 35,000)
Inventories written off ( 5,500) ( 6,700)
Other assets written off ( 2,000) ( 3,600)
Capital balances after adjustments P614,476 P683,052
47. Eva's initial investment:
Net assets (or capital balance), per balance sheet P 59,625
Less: Provision for doubtful account (P18,500 x 3%) 555
Eva's share in the partnership's equity P59,070
Helen's initial investment:
Net assets (or capital balance), per balance sheet P33.500
Less: Provision for doubtful account (P13,500 x 3%) P405
Underdepreciation of furniture & fixtures 900 1,305
Helen's share in the partnership's equity P32,195
48. Amor Bhea
Unadjusted capital (total assets less liabilities) P620,000 P800.000
Adjustments:
a. Accounts receivable written off ( 20,000) ( 40,000)
b. Obsolete inventories ( 6,000) ( 7,000)
c. Other assets written off ( 2,000) ( 3,000)
d. Accrued expenses ( 2,000) ( 5,000)
Adjusted capital P590,000 P745,000
Goodwill to be recognized 155,000
Agreed capital P745,000 P745,000

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49. (C)
Goodwill of A, B, C, and D partnership P30.000
Goodwill of X, and Y partnership 10,000
Total goodwill P40,000

50. (a)
A X
Unadjusted capital balances P50.000 P60,000
Undervalued tangible assets:
A: P20,000 x 40% 8,000
X: P8.000 x 50% 4,000
Goodwill:
A: P30,000 x 40% 12,000
X: P10,000x50% 5,000
Adjusted capital balances P70,000 P69,000

51 .
(a) - Zero, since bonus method was used to account for the undervalued
tangible assets and goodwill.

52.
A: P50.000 + (P2.400* x 40%) P50,960
X: P60,000 - (P2,400* 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) P 6,000
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 PI 5,000
Bonuses to X and Y: This is the portion of 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) P 5,600
Goodwill of PI0,000 x 70% (A, B, C, and D's new profit and
loss sharing percentage) 7,000
Total Bonus to X and Y P12,600
Net Bonus to A, B, C, and D P 2,400
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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 30,000
Total P50,000
X and Y:
Undervalued assets P 8,000
Goodwill 10,000
Total PI 8,000
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 recognized on the books 50,000 18,000
P 2,400
53. (c)
Debit (credit) adjustments to capital accounts: PP QQ
Allowance for doubtful accounts:
PP: 2% x P18,500 P(370)
QQ:2%xP13,500 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-PI 9,500) 1,500
Net adjustments

54. (c)
Unadjusted total liabilities (P45,750 + PI8,000) P 63,750
Add (deduct): adjustments:
Accrued rent expense 1,000
Accrued salary expense 800
Adjusted total liabilities after formation P 65,550
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55. (a)
Unadjusted total assets (P105,375 + P51.500) P156.875
Add (deduct): adjustments:
Allowance for doubtful accounts (P370 + P270) ( 640)
Furniture and fixtures 1,000
Office equipment ( 250)
Inventory (Pl,500-P500) 1,000
Adjusted total assets after formation PI 57,985

56. (d)
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

57. (c)
Unadjusted total assets (PI,020,916 + PI,317,200) P2,337,918
Add (deduct): Adjustments:
Uncollectible receivables (P20.000 + P35,000) ( 55,000)
Write-off of inventories (5,500 + P6,700) ( 12,200)
Write-off of other assets (P2,000 + P3.600) ( 5,600)
Adjusted total assets after formation P2,265,l 18

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

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(2) Notes payable to OO:

Unadjusted capital of OO P200,000
Less: Share in the decrease of equipment 5,000
Adjusted capital of OO P195,000
Less: Equipment received at second-hand value 50,000
Value of notes payable PI45,000
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

59. (c)
Unadjusted capital of CC P33.000
Add (deduct): Adjustments:
Allowance for doubtful accounts (3% x PI 4,200) ( 426)
Increase in merchandise inventory (P23,000 - P20.000) 3,000
Prepaid salary 600
Accrued rent expense ( 800)
Adjusted capital balance of CC P35,374
Divided by: Capital interest of CC 2/3
Total capital of the partnership P53,061
Less: Adjusted capital balance of CC 35,374
Capital balance of DD : PI7,687 (c)

60. Contributed Agreed Increase

Capital Capital (Decrease)
Grey 60,000 60,000
Redd 20,000 60,000 40,000
Total 80,000 120,000 40,000

The partnership agreement provides for equal initial capital. Thus under the goodwill method,
the capital credit for Redd should be the same as the contribution of Grey, thereby increasing
the total agreed capital to P 120,000, which is P40.000 more than the total contributed capital
(goodwill).
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61. Contributed Agreed Increase

Capital Capital (Decrease)
Grey 60,000 40,000 (20,000)
Redd 20,000 40,000 20,000
Total 80,000 80,000
The partnership agreement provides for equal initial capital. Thus under the bonus method,
the capital credit for Redd should be the same as the contribution of Grey, resulting to
P20,000 bonus from Grey to Redd

62. Contributed capital:

Perez (P50,000 + P30,000) P80,000
Reyes (P70,000 + P110,000 + P100,000 - P50,000) 230,000
Total P310,000

Total agreed capital:

Bonus Method P310,000

Goodwill Method (P310,000 + P150,000) P4 60,000

63. (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 entitles 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 (P140.000 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 P70.000,
then the amount of the transfer entry is P70.000, regardless of whether Yessir pays
Betty P70.000 or some other amount. Therefore, the capital of fhe partnership after
the assignment of interest remains the same at P400.000.

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64. Suggested answer (d) 15,000

Ranken's capital (50% x 30,000) 15,000

When a new partner deals directly with an existing partner or partners rather than with the
partnership entity, the acquisition price is paid to the selling partner/s and not to the
partnership itself. The partnership records the redistribution of capital interests by transferring
all or a portion of the seller's capital to the new partner's capital account but does not record
the transfer of any asset or consideration.

65 . (b)
Amount paid P 25,000
Less: Book value of interest acquired:
P150.000 x 1/8 18,750
Gain of West and Tern

66. The old partners will have to transfer to Dondon 20% of their total capital of
P 1,400,000 or P280,000.

67. Under admission by purchase only the transfer of the capital purchase by the selling partner
(Liz) to the buying partner (Sunshine) is recorded. Therefore 50% of the capital of Liz
(P24,000) ©r P 12,000 is to be debited to her capital account.

68 . (b)
Amount paid P132.000
Less: Book value of interest acquired:
(PI39,200 + P208.800 + P96.000) x 1/5 88,800
Gain P 43,200
The problem is simpler than it appears at first glance because it states that LL
acquired a onefifth interest in the firm directly from NN and W and no goodwill is to be
recorded. In other words, this was a transaction between partners.

69. (b)
No goodwill is to be recognized in cases of admission of new partner (refer to No.
53 for further discussion) therefore, book value method is used.

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The capital balances after admission are as follows:

KK: P252.000 x 80%= P201,600
LL: PI26,000 x 80%= 100,800
MM: P 42,000 x 80%= 33,600 (b)

70. First compute the implied goodwill as follows:

Total implied goodwill (P90,000 - 20%) P450,000

Total capital before admission 420,000
Goodwill to old partners, 6:3:1 P 30,000

The computation of the capital balances of the old partners are as follows:

Go (252,000 +18,000) - (20% x270,000) =P216,000

Lee(126,000 + 9,000) - (20% xl35,000) = 108,000
Mao( 42,000+ 3,000) - (20% x 45,000) = 36,000

71 A B C
Capital before goodwill P250,000 PI50,000 PI00,000
Goodwill recorded (60,000)
P/L ratio, 5:3:2 30,000 18,000 12,000
Capital after goodwill 280,000 168,000 112,000
Less: 25% purchased by D 70,000 42,000 28,000
Capital after admission of D P210,000 P126,000 P84,000

72.
PP CC Total
Capital balances before net incomeP24.000 P48,000 P72,000
Net income (24: 48) or (1 /3: 2/3) 5,430 10,860 16,290
Drawings (5,050) (8,000) (13,050)
Capital balances before admission P24,380 P50,860 P75,240
Amount paid
P30.000
Less: Book value of interest acquired (P75,240 x 114) 18,810
Gain of PP and CC P11,190

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Therefore, the P30.000 cash should be allocated as follows:

PP CC Total
Capital balances before admissionP24,380 P50,860 P75,240
Required capital balances
[P &L ratio- 1/3; 2/3 of
P56,430(P75,240-PI 8,810)] 18,810 37,620 56,430
Transfer of capital to needed to
bring back to original capital ratio P5.570 P13,240 P18.810
Add: Personal gain (refer above)1/3:2/33 730 7,460 11,190
Personal cash distribution P9.300 P20,700 P30,000 (d)

73. Suggested answer (b) 130,000, 145,000, 225,000

Amor Bing Cora

Interest purchased (1/2) 100,000 100,000 150,000
Excess payment (150,000) P&L Total 130,000 145,000
225,000

A new partner may be admitted to the partnership by acquiring all or part of the capital interest
of one or more existing partners in exchange for some consideration. The partnership records
the redistribution of capital interest by transferring all or a portion of the seller's capital to the
new partner's capital account but does not record the transfer of any asset. Any difference
between the amount paid by the new partner, which is not recorded in the books of the
partnership, is allocated to the selling partners based on their profit or loss ratio.

74. Suggested answer (c) 56.25%

Capital contributed by the new partner 90,000

Divide by total contributions (70,000 + 90,000) 160,000
New Partner's interest 56.25%
Since no goodwill or bonus to be recognized, the capital contribution is equal to the capital
credited to partners.

75. (c)
Total agreed capital of the new partnership
(P310,000 + P200.000 + P190,000 / 80% P875.000
Less: Contribution of old partners (LL, PP, and QQ) 700,000
Cash investment of FF PI75,000 (c)
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or, alternatively:
Total agreed capital of the new partnership P875,000
Multiplied by: capital interest of FF 20%
PI 75,000 (c)
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 rather than total
interest.

76. (C)
Total agreed capital of the new partnership
(PI 48,000 + P260,000 + PI 92,000) +80% P750.000
Less: Contributions of old partners (AA, BB, and CC) 600,000
Cash investment of DD PI50,000

or, alternatively:
Total agreed capital of the new partnership P750,000
Multiply by: capital interest of DD 20%
PI 50,000

Since no goodwill or bonus is to be recorded, DD must invest an amount equal to 20%

of the total agreed capital of the new partnership after DD's contribution. The old
partners' capital account of P600.000 represents 80% of the total agreed capital
of the new partnership.

77. Suggested answer (c) 230,000

Total capital of the old partnership
(560,000 + 320,000 + 40,000) 920,000
Divide by profit and loss (old partnership) 4/5
Total capital of the new partnership 1,150,000
Multiply by profit and loss of D 1/5
Required contribution by D 230,000

If the book value of the original partnership's net assets approximates fair market value or no
bonus, no goodwill to be recognized, the incoming partner's contribution would be expected
to be equal to the portion of the equity that the new partner is acquiring.

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78. Total capital before adjustments PI,025,000

Adjustments:
Land PI 00,000
Marketable securities 50,000
Goodwill 30,000 180,000
Total capital before admission PI,205,000

(1) (Pl,025,000 + 4/5) x 1/5 = P 301,250

(2) (PI, 025,000 -h 1/5) x 4/5 = P4,280,000

79. Total agreed capital of the new partnership (PI,400,000 + 80%) Pl,750,000
Total contributed capital of the old partners 1,400,000
Mac's contribution P350,000

80. Total agreed capital (300,000+ 80%) P375,000

Total contributed capital of the old partners 300,000
Jocson contribution P 75,000

81. Suggested answer: (c) 50,000

Contributed Agreed Increase
Capital Capital (Decrease)
Old partners P150,000 P200,000 P50,000
New Partner 100,000 (1/3) 100,000 -_
Total P250,000 P 300,000 P50,000

When a partnership has operated with considerable success, the partners may admit a new
partner with the provision that (a) part of the new partner's investment shall be allowed as a bonus
to the old partners, or (b) partnership goodwill shall be established and credited to the old partners.
When the total agreed capital is more than the contributed capital, there is goodwill. Since the
combined capitals of the old partners was increase to P200,000, the increase in capital of
P50,000 should be recognized as goodwill and distributed to them using their original profit
and loss ratio.

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82. (d)
Since bonus method is recognized, the total aqreed capital of the
partnership should equal to the total contributed capital.
Total agreed capital (P60,000 + P2C000 + PI 5,000) P95,000
Multiplied by: GG's capital interest 20%
Agreed capital to be credited to GG PI9,000
The investment made by GG is in the form of non-cash assets; therefore,
they should be recorded based on agreed value (or fairvalue).

83. (c)
Total agreed capital of the new partnership (equal to total
contributed capital') P260.000
Multiplied by: interest acquired 20%
Capital account to be credited to Ole P 52,000
Total contributed capital (PI20,000 + P 40,000 cash investment + P30.000 adjustment
to fair value ) = P260.000.
For illustration purposes, goodwill method for admission and retirement of
partner(s) is presented in the appendix of this chapter.

84. Suggested answer: (b) 54,000

Contributed Agreed Increase
Capital Capital (Decrease)
Old partners P110,000 P100,000 (P10,000)
New partner 40,000 (1/3) 50,000 10,000
Total P150,000 P150,000

Blau's.capital before admission of Lind P 60,000

Less share in bonus to Lind (10,000 x 60%) 6,000
Blau's capital after admission of Lind P 54,000
When a partnership is in urgent need of additional funds or the partners may desire the services
of a certain individual, a new partner may be admitted with the provision that (a) part of the
capitals of the old partners shall be allowed as a bonus to the new partner, or (b) goodwill shall
be established and credited to the new partner.
When the total contributed capital is equal to the agreed capital, there is bonus. In this case,
the amount by which the interest allowed to the new partner exceeds his investment may be
considered as bonus contributed by the old partners. The bonus is deducted from the capitals of
the old partners based in their original profit and loss ratio.

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85. Total agreed capital P300,000

Total contributed capital 250,000
Goodwill P 50,000
To new partner, Elf (P75,000 - P50,000) 25,000
To Cat and Dog, 3:2 P 25,000
Dog's capital [P80,000 + (P25,000 x 40%)] P90,000

86. Agreed capital ofMeng (300,000x1/3) P100,000

Contributed capital of Meng 80,000
Bonus to Meng from Chito & Ditas, 6:4 P 20,000

Therefore, Chito's capital now would be P108,000 (120,000 - 12,000).

87. Total agreed capital (11,500+ 9,300+ 8,000) P28,800

Enn's interest 1/3
Agreed capital of Enn P 9,600
Contributed capital of Enn 8,000
Bonus to Enn from Ell & Emm 6:4 P 1,600

The new partner's capital balances are:

Ell (Pll,500 - 960) P10,540

Emm (9,300 - 640) 8,660
Enn 9,600

88. Under the bonus method the total contributed capital (P120,000 + 30,000) is equal to the total
agreed capital after admission of Naron therefore:

Total agreed capital P 150,000

Naron's interest 1/3
Agreed capital of Naron P50,000
Contributed capital of Naron 30,000
Bonus to Naron from Lucas and Mateo, 6:4 P20,000

The new capital balances now would be:

Lucas (80,000 - 12,000) P68,000

Mateo (40,000 - 8,000) 32,000
Naron 50,000
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89. The requirement is the balances in the capital accounts of a partnership after the admission of a
new partner. In this case the new partner is investing P25,000 for a one-third interest in the new
total capital of P90,000. This means that a bonus of P5,000 [(l/3)(P90,000)-25,000] is being
credited to the new partner for contribution of some intangible element in addition to his tangible
contribution. The bonus to the new partner is charged to the old partner in their profit and loss ratio.

Carlos [P35,000-7/10 (P5,000)J P 31,500

Deo[P30,000-3/10 (P5,000)J 28,500
Sotto fP90,000 + 3)] 30,000
90. (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 (PI20,000 + P30.000) PI50,000
Multiplied by: NN's capital interest 1/3
Agreed capital to be credited to NN P 50,000
Contributed/Invested capital of NN 30,000
Bonus to NN (new partner) P 20,000
The bonus to NN will be deducted to LL and MM:
LL: [P80,000 - (P20,000 x 3/5)] P 68,000
MM: [P40,000 - (P20,000 x 2/5)] 32,000
NN 50,000
Total agreed capital PI50,000

91. (b)
Total agreed capital of the new partnership P 90,000
Less: Total contributed capital (P35,000 + P30,000 + P25,000) .. 90,000
P0
Following the admission of EE, the partnership began with a total capital of P90.000,
and EE received a one-third interest: therefore his capital balance 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
EE (P90.000 x 1/3) 30,000
Total agreed capital P90,000

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92. Total agreed capital (P200,000 + P100,000 + P150,000) P450,000

Agreed capital of Kent (450,000 x 50%) P225,000

Contributed capital of Kent 150,000
Bonus from Pal & Mall, 3:1 to Kent P 75,000

Therefore the capital balances of the partners after admission of Kent are:

Pol (200,000 - 56,250) P143,750

Mall (100,000 - 18,750) 81,250
Kent 225,000

93 Mitz Marc Mart Vince

Capitals before admission P 95,000 P80,000 P60,000
Admission of Vince:
By purchased (80,000 x 15%) - ( 12,000) PI 2,000
By investment 80,000
Capital balances 95,000 68,000 60,000 92,000
Goodwill to old partners, 5:3:2
- (P330,000-315,000) 7,500 4,500 3,000
Bonus to old partners, 5:3:2
(P92,000-70,000) 11,000 6,600 4,400 ( 22,000)
Capital after admission PI 13,500 P79,100 P67,400 P70,000

94. Suggested answer: (d) 1,500

Contributed Agreed Increase

Capital Capital (Decrease)
Old partners " 150,000 157,500 7,500
New partner 60,000 52,500 25% (7,500)
Total 210,000 210,000 -

Bonus to A (7,500 x 20%) 1,500

Under the bonus method of admitting a new partner into the partnership, the total contributed
capital (including that of the new partner) is equal to the new partnership capital. Accordingly,
any bonus to the old partners shall be allocated using their old profit and loss ratio.

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95. Agreed capital of Chic (425,000 x 25%) PI 06,250

Contributed capital of Chic 125,000
Bonus to Pol and Loc, 3:1 P 18,750

Therefore the capital balances of the partners after admission of Chick are:

Pol (P200,000 + 14,062.50) P214,0 62.50

Loc (P100,000 + 4,687.50) 104,687.50
Chic 106,250.00

96. Suggested answer (d) 80,000, 70,000, 30,000

Gerber Williams George Total
Capital contributions 50,000 60,000 20,000 130,000
Asset revaluation 13,200 4,400 , 4,400 22,000
Total 63,200 64,400 24,400 152,000
Goodwill to old partners 16,800 5,600 5,600 28,000
Total capital 80,000 70,000 30,000 180,000

Contributed Agreed Increase

Capital Capital (Decrease)
Old partners 152,000 180,000 28,000
New partner 60,000 60,000 25% -
Total . 212,000 240,000 28,000

Again, under the goodwill method total contributed capital is less than the total agreed capital.

97. Net assets at fair value before admission of Vic P 240,000

Net assets at book value (P96,000 + P72,000 + P54,000) 222,000
Goodwill to old partners (equally) P18,000

Capital balances after goodwill:

Rio (P96,000 + P6,000) PI 02,000

Sol (P72,000 + P6,000) 78,000
Tom (P54,000 + P6,000) 60,000
Vic (P24,000 + P42,000) 66,000

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98. Total capital before adjustments P 130,000

Undervaluation of assets 22,000
Total capital before admission P 152,000
Contributed capital of QQ 60,000
Total contributed capital 212,000
Total agreed capital (P60,000 /25%) 240,000
Goodwill P28,000

NN OO PP QQ
Capital balances before adjustments P50,000 P60,000 P20.000
Undervaluation of assets, P22,000 13,200 4,400 4,400
QQ's contribution (P20.000 + P40,000) 60,000
Goodwill to old partners, P28,000 16,800 5,600 5,600
Capital balances after admission P80,000 P70,000 P30,000 P60,000

99. (d)
Total agreed capital after the admission of David:
(P40.000 x 5) P 200,000
Less: Contribution/Investment of David 40,000
Capital balances of AD before the admission of David P 160,000
Capital contribution (PI40,000 + P 40,000 180,000
Reduction of inventory

100. (a)
Amount paid: (P34.000 + P10,000) P 44,000
Less: Book value of interest acquired:
(P140,000+P40,000) x 1/5 36,000
Excess P 8,000
Divided by / capitalized at l/5
Amount of land to be increased P 40,000

101. (b)
Total agreed capital (given P220,000
Multiplied by: David's capital interest l/5
Agreed capital to be credited to David P 44,000
Contributed/Invested capital of David 40,000
Bonus to David (new partner) P 4,000

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Incidentally, the entry to admit David should be:

Cash 40,000
Allen, capital (4,000 x 3A) 3,000
Daniel, capital (4,000 x V<) 1,000
David, capital 44,000

102. Suggested answer: (b) 18,250

Contributed Agreed Increase

Capital Capital (Decrease)
Old partners P 100,000 P 118,250 P 18,250
New partner 115,000 (45%) 96,750 (18,250)
Total P 215,000 P 215,000
The goodwill and bonus methods are two means of adjusting for differences between the net
book value and the fair market value of partnership when new partners are admitted. The
goodwill method revalues assets to market value; while the bonus method does not revalue
assets to market value. Further, under the bonus method, the total contributed capital is equal
to the total agreed capital

103. Suggested answer: (c) 31,250

Contributed Agreed Increase
Capital Capital (Decrease)
Old partners P100,000 P151,250 P 51,250
New partner 115,000 (45%) 123,750 8,750
Total P 215,000 P 275,000 P 60,000

Total increase in capital 60,000

Less undervalued equipment (320,000 - 300,000) 20,000
Balance 40,000
Goodwill to Linda 8,750
Goodwill to original partners 31,250
Again, when there is a difference between the book value and fair market value of the,
partnership when new partners are admitted, the goodwill method revalues assets to market
value. Ordinarily, to determine the new capital of the partnership, contributed capital of the
new partner may be divided by his interest in capital. In this case, where Linda will be provided
with goodwill for bringing her expertise and clients contact to the partnership, the
capital of Rosa was used instead, because it serves as concrete basis with no goodwill
involved, in determining the new capital of the partnership. Thus, the new capital of the
partnership is P275.000 (55,000/20%).
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104. Suggested answer: (b) 15,000

Contributed Agreed Increase
Capital Capital (Decrease)
Old partners
[235,000-(15% x 80,000) 223,000 260,000 37,000
New partner
[80,000 +(15% x 80,000) 92,000 70,000 (22,000)
Total 315,000 330,000 15,000
Again, when the total agreed capital is more than the contributed capital, there is goodwill and
this amount of PI5,000 will be distributed to the old partners using their original profit and loss
ratio. However, in the above computations, it should be pointed out that aside from goodwill,
the new partner provides bonus to old partners in the amount of P22,000 (decrease in the new
partner's capital).

105. Suggested answer: (c) 79,100

Marc's capital before Vince's admission 80,000
Interest purchased by Vince (15% x 80,000) (12,000)
Share in goodwill (30% x 15,000) 4,500
Share in bonus (30% x 22,000) 6,600
Marc's capital after Vince's admission 79,100
When an incoming partner purchases a portion or all of the interest of one or more of the original
partners, the partnership assets remains unchanged and the related amount paid for the purchase
should not be recorded in the books of the partnership for this is regarded as a personal
transaction between the selling partner/s and the buyer.
Bonus to old partners is recorded by making transfer from the contributed capital of the new
partner to the old partners' capital accounts, which gives the new partners a capital credit less
than his actual investment. While, Goodwill to old partners should be recognized by a debit
to Goodwill account, and the resulting credit should be to old partners' capital accounts
allocated based on their profit and loss ratio.

106. Ace Boy Cid Deo

Capital balances before admission of Deo P700,000 P500,000 P400,000 P
Admission of Deo:
By Purchase from Ace (1/2) (350,000) 350,000
By investment 400,000
Capital balances P350,000 500,000 400,000 750,000
Goodwill to old partners, 3:3:2, P550,000 206,250 206,250 137,500
Goodwill to net partner, P200,000 200,000
Capital balances after admission P556,250 P706.250 P537,500 P950,000
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Goodwill computation:

Total agreed capital of the new partnership P2,400,000

Total contributed capital (P350,000 + P500,000 + P400,000 +
P750,000) 1,650,000
Goodwill P 750,000
To new partner [(P2,400,000 x 1/4) - P400,000] 200,000
To old partners P 550,000

107. Agreed capital of old partners (P3 60,000 x 2/3) P240,000

Contributed capital of old partners (P120,000 + P100,000) 220,000
Goodwill to old partners, 6:4 P 20,000

Agreed capital of new partner (P360,000 x 1/3) P120,000

Contributed capital of new partner 80,000
Goodwill to new partner P40,000

Jay's capital before goodwill P120,000

Goodwill (P20,000x 60%) 12,000
Jay's capital PI32,000

Partnership Formation & Admission of a Partner - Solutions Page 73