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Chapter 1: Partnership Formation

On January 1, 2015, Ernie and Bert both sole proprietors decided to form a
partnership to expand both of their businesses. According to their agreement, they
will split profits and losses 75:25 and their initial capital will also reflect that ratio.
The following are Ernie and Berts Statement of Financial Position:

ASSETS
Cash

Ernie Proprietor
Statement of Financial Position
December 31, 2014
LIABILITIES AND EQUITY

50,000
65,000
Accounts Receivable
100,000
55,000
Inventories
75,000
80,000
Equipment
250,000
Ernie,
90,000
Accumulated depreciation- Equipment (185,000)
TOTAL ASSETS
290,000
290,000

Accounts payable
Accrued expenses
Notes payable
capital
TOTAL LIABILITIES&EQUITY

Bert Proprietor
Statement of Financial Position
December 31, 2014
LIABILITIES AND EQUITY
30,000
Accounts Payable

ASSETS
Cash
75,000
Accounts receivable
110,000
Accrued expenses
90,000
Inventories
85,000
Notes Payable
100,000
Equipment
300,000
Bert, Capital
160,000
Accumulated Depreciation- Equipment (100,000)
TOTAL ASSETS
425,000
TOTAL LIABILITIES&EQUITY
425,000
The values reflected in the Statement of Financial Position are already at fair values
except fo the following accounts:
Ernies Accounts Receivable is now 20,000 less than what is stated in his Statement
of Financial Position. Both inventories of Ernie and Bert are now 90,000 and 70,000
respectively. Equipment for Bert has an assessed value of 275,000, appraised value
of 250,000 and book value of 200,000. Additional accrued expenses are to be
established in the amount of 10,000 for Bert only while additional accounts payable
in the amount of 5,000 for Ernie. It is also agreed that all liabilities will be assumed

by the partnership, except for the notes payable of Bert which will be personally
paid by him.
1. How much is the adjusted capital balance of Bert upon formation?
A. 91,250
B. 185,000
C. 285,000
D. 310,000
Answer: ( C )
2. How much is the capital credit to Ernie upon formation?
A. 80,000
B. 273,750
C. 292,000
D. 255,500
Answer: ( B )
3. How much should Ernie invest as additional cash to be in conformity with
their initial capital agreement?
A. 193,750
B. 212,000
C. 175,500
D. 205,000
Answer: ( A )
Bonnie and Clyde enters into a partnership agreement in which Bonnie is to have
55% interest in the partnership and 35% in the profits and losses, while Clyde will
have 45% interest in the partnership and 65% in the profits and losses. Bonnie
contributed the following:
Building
Equipment
Land

Cost
235,000
168,000
500,000

Fair value
255,000
156,000
525,000

The building and the equipment has a mortgage of 50,000 and 35,000 respectively.
Clyde is to contribute 150,000 cash and equipment. The partners agreed that only
the building mortgage will be assumed by the partnership.
1. How much is the fair market value of the equipment which Clyde contributed?
A. 615,818
B. 989,143
C. 546,273
D. 574,909
Answer: ( D )
2. How much is the total asset of the partnership upon formation?
A. 1,892,143
B. 1,701,818

C. 1,660,909
D. 1,632,273
Answer: ( C )

Theories (letter of answer is underlined)


1 The partnership agreement is an express contract among the partners (the
owners of the business). Such an agreement generally does not include
a.
A limitation on a partners liability to creditors.
b.
The rights and duties of the partners.
c.
The allocation of income between the partners.
d.
The rights and duties of the partners in the event of partnership dissolution.
2. A partnership records a partners investment of assets in the business at
a.
The market value of the assets invested.
b.
A special value set by the partners.
c.
The partners book value of the assets invested.
d.
Any of the above, depending upon the partnership agreement.
?3. When property other than cash is invested in a partnership, at what amount
should the noncash property be credited to the contributing partners capital
account?
a.
Fair value at the date of recognition.
b.
Contributing partners original cost.
c.
Assessed valuation for property tax purposes.
d.
Contributing partners tax basis.
?4. When property other than cash is invested in a partnership, at what amount
should the noncash property be credited to the contributing partners capital
account?
a.
Fair value at the date of contribution.
b.
Contributing partners original cost.
c.
Assessed valuation for property tax purposes.
d.
Contributing partners tax basis.
5. Four individuals who were previously sole proprietors form a partnership. Each
partner contributes inventory and equipment for use by the partnership. What
basis should the partnership use to record the contributed assets?
a.
Inventory at the lower of FIFO cost or market.
b.
Inventory at the lower of weighted-average cost or market.
c.
Equipment at each proprietors carrying amount.
d.
Equipment at fair value.

1. A contract where two or more persons bind themselves to contribute money, property, or industry
to a common fund with the intention of dividing the profits among themselves.
a. Voluntary Association
b. Corporation
c. Partnership
d. Sole Proprietorship
Answer: (c)
2. A partnership formed for the exercise of a profession which is duly registered is an example of:
a. Universal partnership of profits
b. Universal partnership of all present property
c. Particular partnership
d. Partnership by estoppel
Answer: (c)
3. One of the following is not a characteristic of contract of partnership.
a. Real, in that the partners must deliver their contributions in order for the partnership contract
to be perfected
b. Principal, because it can stand by itself
c. Preparatory, because it is a means by which other contracts will be entered into
d. Onerous, because the parties contribute money, property, or industry to the common fund
Answer: (a)
4. One of the following is not a requisite of a contract of partnership. Which is it?
a. There must be a valid contract
b. There must be a mutual contribution of money, property, or industry to a common fund
c. It is established for the common benefit of the partners which is to obtain profits and divide
the same among themselves
d. The articles are kept secret among members
Answer: (d)
5. The minimum capital in money or property except when immovable property or real rights
thereto are contributed, that will require the contract of partnership to be in a public instrument
and be registered with the Securities and Exchange Commission (SEC).
a. P5, 000.00
b. P10, 000.00
c. P3, 000.00
d. P30, 000.00
Answer: (c)
6. Roberts and Smith drafted a partnership agreement that lists the following assets contributed at
the partnerships formation:
Contributed by
Roberts
Smith
Cash
P 20,000
P 30,000
Inventory
15,000
Building
40,000
Furniture & Equipment
15,000

The building is subject to a mortgage of P 10,000, 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
Suggested Answer: (b) 35,000 & 75,000
Roberts: 20,000 + 15,000 = P35, 000
Smith: 30,000 + 15,000 + 40,000 10,000 = P75,000.
The partners capital credit is based upon the net assets contributed by the particular partner,
thus the liabilities assumed reduced the fair market value of the building invested.
7. 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 P30,000 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 an P9,000 by Redd.
The partnership net income in 2010 was P25,000
Under the goodwill method, what is Redds initial capital balance in the partnership?
a. 20,000
b. 25,000
c. 40,000
d. 60,000
Suggested Answer: (d) 60,000
Contributed Capital
Agreed Capital
Increase (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 P120,000, which is P40,000 more than the total contributed capital
(goodwill).
8. Using the information in No. 2, under the bonus method, what is the amount of bonus?
a. 20,000 bonus to Grey
b. 20,000 bonus to Redd
c. 40,000 bonus to Grey
d. 40,000 bonus to Redd
Suggested Answer: (b) 20,000 bonus to Redd
Grey

Contributed Capital
60,000

Agreed Capital
40,000

Increase (Decrease)
(20,000)

Redd
Total

20,000
80,000

40,000
80,000

20,000

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 for Grey, resulting to P20,000
bonus from Grey to Redd.
9. On May 1, 2010, the business assets of John and Paul appear below:
Cash
Accounts Receivable
Inventories
Land
Building
Furniture & Fixture
Other Assets
Total

Accounts Payable
Notes Payable
John, Capital
Paul, Capital\
Total

John
11,000
234,536
120,035
603,000

50,345
2,000
P 1, 020, 916
178,940
200,000
641, 976

P 1, 020, 916

Paul
22,354
567,890
260,102

428,267
34,789
3,600
P 1, 317, 002
P 243,650
345,000
728,352
P1, 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 Johns books and P35, 000 in Pauls are uncollectible.
b. Inventories of P5, 500 n P6, 700 are worthless in Johns and Pails respective books.
c. Other assets of P2, 000 and P3, 600 in Johns and Pauls respective books are to be written
off.
The capital accounts of John and Paul, respectively, after the adjustments will be:
a. 614, 476 683, 052
c. 640, 876
712, 345
b. 615, 942 717, 894
d. 613,576
683, 350
Suggested Answer: (a) 614, 476
683, 052
John: 641, 976 20, 000 5, 500 2, 000 = P 614, 476
Smith: 728, 352 35, 000 6, 700 3, 600 = P 683, 052
10. Based on No. 4, how much assets does the partnership have?
a. 2, 317, 918
b. 2, 237, 918
c. 2, 265, 118
d. 2, 365, 218
Suggested Answer: (c) 2, 265, 118
John: 1, 020, 916 20, 000 5, 500 2, 000 = P 993, 416
Smith: 1, 317, 002 35, 000 6, 700 3, 600 = P 1, 271, 702
Total: 2, 337, 918 55, 000 12, 200 5, 600 = P 2, 265, 118

Problems
1.
LF, EZ, and GT are partners with capital balances of P67,200, P108,000 and
P38,000 respectively, sharing profits and losses in the ratio of 2:5:1. SG is admitted
as a new partner bringing with him expertise and is to invest cash for a 15% interest
in the partnership considering the transfer of capital from him of P18,000 upon his
admission.
Upon admission of SG, which of the following statements is false?
A. The capital account of GT will be credited in the amount of P2,250
B. The total agreed capital of the old partners is P18,000 greater than their
contributed capital
C. The capital balance of EZ amount to P119,250
D.Cash will be debited in the amount of P40,800.
2. On June 1, 2013, AZ invited MG to join him in his business. MG agreed provided
that AZ will adjust the accumulated depreciation of his equipment account to a
certain amount, and will recognize additional accrued expenses of P40,000. After
that, MG is to invest additional pieces of equipment make her interest equal to 45%.
If the capital balances of AZ before and after adjustment were 556,00 and 484,000
respectively, what is the effect in the carrying value of the equipment as a result of
the admission of MG?
A. 364,000
B. (32,000)
C. 396,000
D. (324,000)
3.
TM and SJ, having capital balances of P980,000 and P525,000 respectively,
decided to admit GD into the partnership. If TM and SJ share profit in proportion of
3;1 respectively, and SJ's capital balance after GD's investment is P589,750, how
much was invested by GD?
A. P848,750
B. P1,174,250
C. P588,000
D. P847,000
4. RD formed a partnership on February 10, 2009. R contributed cash of P150,000,
while D contributed inventory with a fair value of P120,000. Due to R's expertise in
selling, D agreed that R should have 60% of the total capital of the partnership. R
and D agreed to recognize goodwill. what is the total capital of the RD partnership
after the goodwill is recognized?
A.P450,000
B.P330,000
C.P300,000
D.P270,000
5. In AD partnership, Allen's capital is P140,000 and Daniel's capital is P40,000 and
they share a net income ratio of 3:1 respectively. They decided to admit David in
the partnership. What amount will David invest to give him 1/5 interest in the
partnership if no bonus/goodwill is recorded?
A.P60,000

B.P36,000
C.P50,000
D.P45,000

Theories
1. ZEE acquired the assets (net of liabilities) of partner BEE in exchange for cash.
The acquisition price exceeds the fair value of the net assets acquired. How should
ZEE determines the amount to be reported for the plant and equipment, and for
long-term debt of the acquired debt of partner BEE?
A. Plant and equipment: Fair value ; Long-term debt: BEE's carrying amount
B. Plant and equipment: Fair value ; Long-term debt: Fair value
C. Plant and equipment: BEE's carrying amount; Long-term debt: Fair Value
D. Plant and equipment: BEE's carrying amount; Long-term debt: BEE's carrying
amount
2. Goodwill represents the excess cost of an acquisition over the:
A. Sum of the fair values assigned to an intangible assets less liabilities assumed
B. Sum of the fair values assigned to tangible and intangible assets acquired less
liabilities assumed
C. Sum of the fair values assigned to intangibles acquired less liabilities assumed
D. Book value of an acquired company
3. When a partnership is formed, noncash assets contributed by partners should be
recorded:
I.At their respective book values for income tax purposes
II.At their respective fair values for financial accounting purposes
A. I only
B. II only
C. Both I and II
D. Neither I nor II
4. A limited liability company (LLC):
I.Is governed by the laws of the states in which it is formed
II.provides liability protection to its investors
III.does not offer pass-through taxation benefits of partnership
A. Both I and III
B. III
C. Both I and II
D. I, II, III
5. Transferable interest of a partner includes all of the following except:
A.the partner's share in profits and losses
B.the right to receive distributions
C.the right to receive any liquidating distribution
D.the authority to transact any of the partnerships business operation

Answers
Problem
1. D
2. A
3. D
4. C
5. D
Theories
1. B
2. B
3. B
4. C
5. D

1. A partnership is a(n):
I. accounting entity.
II. taxable entity.
a. I only
b. II only
c. Neither I nor II
d. Both I and II
2. Which of the following is NOT a feature of a general partnership?
a. mutual agency
b. limited life
c. limited liability
d. none of these
3. A partner's tax basis in a partnership is comprised of which of the following items?
I. The partner's tax basis of assets contributed to the partnership.
II. The amount of the partner's liabilities assumed by the other partners.
III. The partner's share of other partners' liabilities assumed by the
partnership.
a. I plus II minus III
b. I plus II plus III
c. I minus II plus III
d. I minus II minus III
4. Which of the following accounts could be found in the general ledger of a
partnership?

a. Option A
b. Option B
c. Option C
d. Option D
5. Which of the following accounts could be found in the PQ partnership's general
ledger?
I. Due from P
II. P, Drawing
III. Loan Payable to Q
a. I, II
b. I, III
c. II, III
d. I, II, and III
6. Anton and Bauzon formed a partnership and agreed to divide initial capital equally,
even though Anton contributed P100,000 and Bauzon contributed P84,000 in
identifiable assets. Under the bonus method, to adjust capital accounts, Bauzon's
intangible assets should be debited for:
a. 0
b. 16,000
c. 8,000
d. 46,000
7. Roy, Sam and Tim decided to engage in a real estate venture as a partnership. Roy
invested P140,000 cash and Sam provided an office and furnishings valued at
P220,000. (There is a 60,000 note payable remaining on the furnishings to be assumed
by the partnership). Although Tim has no tangible assets to invest, both Roy and Sam
believe that Tim's expert salesmanship provides an adequate investment. The partners
agree to receive an equal capital interest in the partnership. Using the bonus method,
what is the capital balance of Tim?
a. 0
b. 50,000
c. 100,000
d. 140,000
8. Lara and Mitra formed a partnership on July 1, 2011 and invested the following
assets: P130,00 cash by Lara, and P200,000 cash and P50000 computer equipment by

Mitra. The computer equipment has a note payable amounting to P10,000, which was
assumed by the partnership. The partnership agreement provides that Lara and Mitra
will have an equal capital credit. Using the goodwill method, the amount of goodwill to
be recorded upon formation of partnership is:
a. 100,000
b. 110,000
c. 120,000
d. 140,000
9. Ana and Elsa form a new partnership. Ana invests P300,000 in cash for her 60%
interest in the capital and profits of the business. Elsa contributes land that has an
original cost of P40,000 and a fair market value of P70,000, and a building that has a
tax basis of P50,000 and a fair market value of P90,000. The building is subject to a
P40,000 mortgage that the partnership will assume. What amount of cash should Elsa
contribute?
a. 40,000
b. 80,000
c. 110,000
d. 150,000
10. Jones and Smith formed a partnership with each partner contributing the following
items:

Assume that for tax purposes Jones and Smith agree to share equally in the
liabilities assumed by the Jones and Smith partnership.
What is each partner's tax basis in the Jones and Smith partnership?

a. Option A
b. Option B
c. Option C
d. Option D

ANSWERS & SOLUTIONS (Chapter 1)


1. a
2. c
3. c
4. d
5. d
6. a
Zero, because under the bonus method, a transfer of capital is only required.
7. c
Roy
Cash

Sam

Tim

P140,000

P220,000

Office Equipment
Note payable

________

_( 60,000)

______

Net asset invested

P140,000

P160,000

Agreed capitals, equally (P300,000/3) = P100,000

8. b
Lara

Mitra

Cash
Computer equipment
Note payable
Net asset invested

P130,000 P200,000

50,000

________ _( 10,000)
P130,000 P240,000

Goodwill (P240,000 - P130,000) =P110,000

9. b
Total Capital (P300,000/60%)
P500,000
Elsa's interest
______40%
Elsa's capital
Less: Non-cash asset contributed at market value
Land
P 70,000
Building
90,000

P200,000

Mortgage Payable
Cash contribution
P 80,000

( 40,000)

10. a
Jones: (80000+300000) - 120000 + (180000/2) = 350000
Smith: (40000+200000) - 60000 + (180000/2) = 270000

_120,000

1.1 THEORIES.
1. A partnership is a(n):
I. accounting entity.
II. taxable entity.
A. I only
B. II only
C. Neither I nor II
D. Both I and II
2. Anton and Garcia formed a partnership, each contributing assets to the
business. Anton contributed inventory with a current market value in excess
of its carrying amount. Garcia contributed real estate with a carrying amount
in excess of its current market value. At what amount should the partnership
record each of the following assets?
Inventory
Real Estate
a. Carrying Amount Market Value
b. Market Value
Carrying Amount
c. Carrying Amount Carrying Amount
d. Market Value
Market Value
3. On June 30, 2015, a partnership was formed by Mendoza and Lopez. Mendoza
contributed cash. Lopez, previously sole proprietor, contributed noncash
assets including a realty subject to mortgage which was assumed by the
partnership. Lopezs capital account at June 30, 2015 should be recorded at:
a. The fair value of the property on June 30, 2015 less the
mortgage payable
b. Lopezs carrying amount of the property on June 30, 2015
c. Lopezs carrying amount of the property on June 30, 2015 less the
mortgage payable
d. The fair value of the property on June 30, 2015
4. Two individuals who were previously sole proprietors formed a partnership.
Property other than cash which is part of the initial investment in the
partnership would be recorded for financial accounting purposes at the :
a. Proprietors book values or the fair value of the property at the date of
the investment whichever is higher.
b. Proprietors book values or the fair value of the property at the date of
the investment whichever is lower.
c. Proprietors book values of the property at the date of the investment
d. Fair value of the property at the date of investment
5. A unique feature of partnerships (compared with publicly owned corporations)
is that:
a. Limited liability with respect to damages arising from
professional services
b. Greater allowable tax deductions for retirement plans
c. Ease of formation
d. Book value

1.2 PROBLEMS.
1. On May 1, 2015, Cat and Meow formed a partnership and agreed to share
profits and losses in the ratio of 3:7, respectively. Cat contributed a parcel of
land that cost her P10,000. Meow contributed P40,000 cash. The land has a
fair value of P15,000. Cat insisted that the value of land should be P18,000.
The partners agreed to value the land at P18,000. What amount should be
recorded in Cats capital account on formation of the new partnership?
a. P18,000

b. P17,400

c. P15,000

d. P10,000

2. On July 1, Manny and Floyd formed a partnership, agreeing to share profits


and losses in the ratio of 4:6, respectively. Manny contributed a parcel of land
that cost him P25,000. Floyd contributed P50,000 cash. The land was sold for
P50,000 on July 1, four hours after formation of the partnership. How much
should be recorded in Mannys capital account on the partnership formation?
a. P10,000

b. P20,000

c. P25,000

d. P50,000

Use the following question for 3 & 4


On March 1, 2014, cat and Fish formed a partnership with each contributing
the following assets:
Cash
Machinery
Building
Furnitures and Fixtures

Cat
P30,000
P25,000
P10,000

Fish
P70,000
P75,000
P225,000
-

3. On March 1, 2015, the capital account of Fish would show a balance of:
a. P280,000
370,000

b. P305,000

c. 314,000

d.

4. Assuming that the partners agreed to bring their respective capital in


proportion to their respective profit and loss ratio, and using Fish capital as
the base, how much cash is to be invested by Cat?
a. P19,000

b. P30,000

c. P40,000

d. P55,000

5. On October 1, 2015, Albano and Armando formed a partnership and agreed


to share profits and losses in the ratio 3:7 respectively. Albano contributed a
parcel of land that cost him P2,000,000. Armando contributed P3,000,000 in
cash. The land has a quoted price of P3,600,000 on October 1, 2015. What
amount should be recorded in Albanos capital account upon formation of the
partnership?
a. P3,600,000
b. P3,000,000
d. P2,000,000

c.

P3,480,000

1. Jones and Smith formed a partnership with each partner contributing the
following items:
Jones
Cash
Building cost to Jones
- fair value
Inventory - cost to Smith
fair value
Mortgage Payable

Smith

P 80,000
300,000
400,000

P 40,000

200,000
280,000
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 partners capital account for financial accounting purposes?
A. Jones: P 360,000,
B. Jones: P 350,000,
C. Jones: P 260,000,
D. Jones: P 500,000,

Smith: P 260,000
Smith: P 270,000
Smith: P 180,000
Smith: P 300,000

2. The business assets of LL and MM appear below:


Cash
Accounts Receivable
Inventories
Land
Building
Furniture and Fixture
Other Assets
Total

LL
P 11,000
234,536
120,035
603,000
50,345
2,000
P 1,020,916

MM
P 22,354
567,890
260,102
428,267
34,789
3,600
P 1,317,002

Accounts Payable
Notes Payable
LL, capital
MM, capital
Total

P 178,940
200,000
641,976
P 1,020,916

P 243,650
345,000
728,352
P 1,317,002

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 LLs books and P35,000 in MMs are
uncollectible.
b. Inventories of P5,500 and P6,700 are worthless in LLs and MMs
respective books.

c. Other assets of P2,000 and P3,600 in LLs and MMs 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
b. LL: P614,476, MM: 683,052
c. LL: P640,876, MM: P712,345
d. LL: P640,876, MM: 683,050
3. The same information in number 2, how much total assets does the
partnership have after formation?
a. P2,265,118
b. P2,337,918
c. P2,237,918
d. P2,365,218
4. On March 1, 2015, PP and QQ decide to combine their businesses and form a
partnership. Their balance sheets on March1, before adjustments, showed the
following:
PP
Cash
Accounts Receivable
Inventories
Furniture and Fixtures (net)
Office Equipment (net)
Prepaid Expenses
Total
Accounts Payable
Capital
Total

QQ

P 9,000
18,500
30,000
30,000
11,500
6,375
P 105,375

P 3,750
13,500
19,500
9,000
2,750
3,000
P51,500

P45,750
59,625
P105,375

P18,000
33,500
P51,500

They agreed to have the following items recorded in their books:


1. Provide 2% allowance for doubtful accounts.
2. PPs furniture and fixtures should be P31,000, while QQs office equipment
is underdepreciated by P250.
3. Rent expense incurred previously by PP was not yet recorded amounting
to P1,000, while salary expense incurred by QQ was not also recorded
amounting to P800.
4. The fair market value of inventory amount to:
For PP ...............................P29,500
For QQ ...............................P21,000
Compute the net (debit) credit adjustment for PP and QQ:
PP
QQ
a. P 2,870
P 2,820
b. (2,870)
(2,820)
c.
870
180
d.
(870)
180

5. The same information in number 4, compute the total liabilities after


formation:
a.
P 65,550
b.
61,950
c.
63,750
d.
63,950

1. Which of the following is not a characteristic of most partnership?


a. Limited liability
b. Limited life
c. Mutual agency
d. Ease of formation
Suggested answer (a) limited liability
The liability of the partners in a partnership is unlimited.

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.
Suggested answer (c) A partnership is characterized by limited liability

3. 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
d. A partnership may be terminated by the death or withdrawal of a partner
Suggested answer (c) A partnership is created by mere agreements of the
partners

4. When property other than cash is invested in a partnership, at what amount


should the noncash property be credited to the contributing partners capital
account?
a. Fair value at the date of contribution
b. Contributing partners original cost
c. Assessed valuation for property tax purposes
d. Contributing partners tax basis
Suggested answer (a)
Fair value at the date of contribution

5. 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
Suggested answer (a)
Partnership capital accounts are similar to corporate paid in capital and retained
earnings; while partnership drawing accounts are similar to corporate dividends
accounts

For questions 6-10:


On May 1, 2015, the business assets of Jessyreen and Leilani appear below:

Cash
Accounts receivable

Jessyreen

Leilani

P 11, 000

P 22, 354

234, 536

Inventories

120, 035

Land

603, 000

Building
Furniture and fixtures

567, 890
260, 102

428, 267
50, 345

34,789

Other assets

_ _2, 000__

__ 3,600_

Total

P 1,020,916

P 1,317,002

Accounts payable

P 178,940

Notes payable

P 243,650

200,000

John, capital

345,000

641,976

Paul, capital

________

Total

P 1,020,916

728, 352
P1,317,002

Jessyreen and Leilani agreed to form a partnership contributing their respective


assets and equities subject to the following adjustments:
a. Accounts receivable of P20,000 in Jessyreens books and P35,000 in
Leilanis are uncollectible
b. Investors of P5,500 and P6,700 are worthless in Jessyreens and Leilanis
respective books
c. Other assets of P2,00 and P3,600 in Jessyreens and Leilanis respective
books are to be written off
6. The capital accounts of the partners after adjustments will be:
a. Jessyreens
Leilanis

614,476
683, 052

b. Jessyreens
Leilanis

615, 942
717, 894

b. Jessyreens
Leilanis

640, 876
712, 345

b. Jessyreens
Leilanis

613, 576
683, 350

Suggested answer (a)


Jessyreen
Unadjusted capital balances

Leilani

p641,976

P728,352

Uncollectible accounts

(20,000)

(35,000)

Worthless inventories

(5,500)

Adjustments:

Other assets written off

(2,000)

Adjusted capital balances P614,476

(6,700)
(3,600)
P683,052

7. How much assets does the partnership have?


a. 2,337,918
b. 2,237,918
c. 2,265,118
d. 2,365,218
Suggested answer (c)
Jessyreen
Unadjusted asset bals.

Leilani

Total

1020916

1317002

Uncollectible accounts

(20000)

(35000)

Worthless inventories

(5500)

2337918

Adjustments:

Other assets written off


Adjusted assets bals.

(2000)
993416

(55000)

(6700)
(3600)

(12200)
(5600)

1271702

2265118

8. Shamira offered to join for a 20% interest in the firm. How much cash should he
contribute?
a. 330,870
b. 337,487
c. 344,237
d. 324,382
Suggested answer (d)
New capital of the partnership [(614476+683052)/80%]
Multiply by
Cash to be contributed by Shamira

P1621910

20%
P324382

9. After Shamiras admission, the profit and loss sharing ratio was agreed to be
40:40:20, based on capital credits. How much should the cash settlement be
between Jessyreen and Leilani.
a. 33,602
b. 32,930

c. 32,272
d. 34,288

Suggested answer (d)


Jessyreen
Capital balances at P614476

Leilani
683052

40:40:20 ratio
New capital ratio:
@ 40% each (1621910)

648764

648764

P34288

(P34288)

Cash settlement bet.


Jessyreen and Leilani

10. During the first year of their operations, the partnership earned P325,000.
Profits were distributed in the agreed manner. Drawings were made in these
amounts: Jessyreen, p50,000; Leilani, 65,000; Shamira, P28,00.
How much are the capital balances after the first year?
a. Jessyreen, capital

750,627

Leilani, capital

735,177

Shamira, capital

372,223

b. Jessyreen, capital

728,764

Leilani, capital

713,764

Shamira, capital

361,382

c. Jessyreen, capital

757,915

Leilani, capital

742,315

Shamira, capital

375, 837

d. Jessyreen, capital

743,121

Leilani, capital

727,825

Shamira, capital

368,501

Suggested answer (b)

Capital balances at

Jessyreen

Leilani

Shamira

P648764

P648764

P324382

(50000)

(65000)

(28000)

40:40:20 ratio
Drawings

Share in profit (40:40:20) 130000


Capital balances

P728764

130000
P713764

65000

P361382

Use following information for question 1 to 5


On July 1, 2015, A and B decided to form a partnership. The firm is to take over the
business assets and assume liabilities, and the capitals are to be based on net assets
transferred after the ff. adjustments:

A and Bs inventory is to be valued at 31,000 and 22,000 respectively.


Accounts receivable of 2,000 in As book and 1,000 in Bs books are uncollectible.
Accrued salaries of 4,000 for A and 5,000 for B are still to be recognized in the
books.
Unused office supplies of A and B amounted to 5,000 and 1,500.
Prepaid rent of 7,000 and 4,500 are to be recognized in the books A and B,
respectively.
A is to invest or withdraw cash necessary to have a 40% interest in the firm.
Balance sheet for A and B before adjustments
Cash
Accounts receivable
Inventory
Office supplies
Equipment
Accum. Depreciation- Equipment
Total Assets
Accounts Payable
Capitals
Total Liabilities and Capital

A
31,000
26,000
32,000
20,000
(9,000)
100,000

B
50,000
20,000
24,000
5,000
24,000
(3,000)
120,000

28,000
72,000
100,000

20,000
100,000
120,000

1. The additional investment (withdrawal) made by A:


a. (15,000)
c. 3,000
b. (6,667)
d. 8,333
2. The total assets of the partnership after formation:

a. 235,333
b. 230,000

c. 220,333
d. 212,000

3. The total liabilities of the partnership after formation:


a. 57,000
c. 54,000
b. 48,000
d. 51,000
4. The total capital of the partnership after formation:
a. 180,000
c. 163,333
b. 178,000
d. 155,000
5. The total capital balances of A and B in the combined balanced sheet:
a. A, 81,250; B, 72,000
c. A, 100,000; B, 75,000
b. A, 81,250; B, 75,000
d. A, 62,000; B, 93,000
6. On June 1, 2015, T, U and V formed a partnership by combining their separate
business proprietorships. T contributed cash of 100,000. U contributed
property with a 80,000 carrying amount, a 95,000 original cost, and
120,000 fair value. The partnership accepted the responsibility for the
55,500 mortgage attached to the property. V contributed equipment with a
65,000 carrying amount, a 90,000 original cost, and 78,000 fair value. The
partnership agreement specifies that P & L are to be shared equally but is
silent regarding capital contributions. Which partner has the largest capital
balance at the beginning of the partnership?
a. T
c. V
b. U
d. All capital account balances are equal
7. For financial accounting purposes, assets of an individual partner contributed
to a partnership are recorded by the partnership at:
a. Historical cost
c. Fair market value
b. Book value
d. Lower of cost or market
8. A unique feature of partnership:
a. They do not have to follow GAAP c. Books have to be maintained on the
tax basis
b. They are not governed by laws
d. They do not file income tax
return
9. Which of the following is not an advantage of a partnership over a
corporation?
a. Ease of formation
c. The elimination of taxes at the entity
level
b. Unlimited liability
d. All of the above
10. A partners withdrawal of assets from a limited liability partnership that is
considered a permanent reduction in that partners equity is debited to the
partners:
a. Drawing account
c. Capital account
b. Retained earnings account
d. Loan receivable account

1. A partner who is entitled to a share of the profits from a partnership is


known as:
a) A salaried partner.
b) A managing partner.
c) An equity partner.
d) A limited liability partner.

Answer: An equity partner.


A partner on a fixed salary is known as a salaried partner.

2. The maximum number of persons who are legally allowed to operate in a


partnership is:
a) 2
b) 20
c) There is no legal limit
d) 100

Answer: There is no legal limit

3. Sparkle Ltd is a private limited company limited by shares. It has one


director. How many shareholders does the law require it to maintain?
a) One provided it is a different person from the director.

b) Five.
c) Two.
d) One which can be the same person as the director.

Answer: One which can be the same person as the director.


The law allows private limited companies to exist with one shareholder who
is the same person as the director.

4. Which one of the following statements about limited liability partnerships


(LLPs) is incorrect?
a) An LLP has a legal personality separate from that of its members.
b) The liability of each partner in an LLP is limited.
c) Members of an LLP are taxed as partners.
d) A limited company can convert to an LLP.

Answer: A limited company can convert to an LLP.


A general partnership can convert to an LLP but a limited company cannot.

5. An organisation running a business has the following attributes: the assets


belong to the organisation, it can create a floating charge over its assets,
change in membership does not alter its existence, and members cannot
transfer their interests to others. What type of organisation is it?
a) A private limited company

b) A limited liability partnership


c) A general partnerships
d) A private limited company

Answer: A limited liability partnership.


In the question the attributes of the organisation are the same for LLPs as
companies except members of a company (private and public) can transfer
their interests to others.

6. Roberts and Smith drafted a partnership agreement that lists the following
assets contributed at the partnerships formation:
Contributed by
Roberts
Smith
Cash
$20,000
$30,000
Inventory
-15,000
Building
-40,000
Furniture & equipment
15,000
-The building is subject to a mortgage of $10,000, 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
Answer: (b) The requirement is to determine the amounts to be recorded as
capital for Roberts and Smith at the formation of the partnership. Unless
otherwise agreed upon by the partners, individual capital accounts should be
credited for the fair market value (on the date of contribution) of the net
assets contributed by that partner. It is necessary to assume that the
amounts listed are fair market values. The amount of net assets that Roberts
contributed is $35,000 ($20,000 + $15,000). The fair market value of the net
assets Smith contributed is $75,000 ($30,000 + $15,000 + $40,000
$10,000). The partners profit and loss sharing ratio does not affect the initial
recording of the capital accounts.

7. On April 30, year 1, Algee, Belger, and Ceda formed a partnership by


combining their separate business proprietorships. Algee contributed cash of
$50,000. Belger contributed property with a $36,000 carrying amount, a
$40,000 original cost, and $80,000 fair value. The partnership accepted
responsibility for the $35,000 mortgage attached to the property. Ceda
contributed equipment with a $30,000 carrying amount, a $75,000 original
cost, and $55,000 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 April 30, year 1 capital account
balance?
a. Algee.
b. Belger.
c. Ceda.
d. All capital account balances are equal.
Answer: (c) The requirement is to determine which partner has the largest
capital account balance. Use the solutions approach to solve the problem.
Algee
Belger
Ceda
Partner contribution
50,000
80,000
55,000
Less: Liabilities assumed
by the partnership
0
(35,000)
0
Ending capital balance $50,000
$45,000
$55,000
Each partner values his contribution to the partnership at its fair market
value. The fair market value becomes the partners balance in his capital
account and is basis to the partnership under
generally accepted accounting principles. Any liabilities assumed by the
partnership, reduces the partners capital balance by the amount assumed.
8. Abel and Carr formed a partnership and agreed to divide initial capital
equally, even though Abel contributed $100,000 and Carr contributed
$84,000 in identifiable assets. Under the bonus approach to adjust the
capital accounts, Carrs unidentifiable asset should be debited for
a. $46,000
b. $16,000
c. $ 8,000
d. $0
Answer: (d) Under the bonus method, unidentifiable assets (i.e., goodwill) are
not recognized. The total resulting capital is the FV of the tangible
investments of the partners. Thus, there would be no unidentifiable assets
recognized by the creation of this new partnership.

9. Ellis and Nossiter are partners sharing profits in a 30:70 ratio. The
following data summarizes 2004 activity:
Partnership net income, 2004 $68,000
Ellis capital, 1/1/2004
90,000
Ellis additional investment in 2004 10,000
Ellis drawings in 2004
12,000
Nossiter capital, 1/1/2004
80,000
Nossiter drawings in 2004
20,000
What amount of net income is allocated to Nossiters capital account for
2004?
a. $26,600
b. $27,600
c. $34,000
d. $47,600
Answer: (d) (68,000.7)
10. Ellis and Nossiter are partners sharing profits in a 30:70 ratio. The
following data summarizes 2004 activity:
Partnership net income, 2004 $68,000
Ellis capital, 1/1/2004
90,000
Ellis additional investment in 2004 10,000
Ellis drawings in 2004
12,000
Nossiter capital, 1/1/2004
80,000
Nossiter drawings in 2004
20,000
What is the value of Elliss capital account at 12/31/2004?
a. $20,400
b. $108,400
c. $111,400
d. $120,400
Answer: (b) (90,000+10,000-12,000+(68,000.3))
Chapter 1 Partnership Formation
1.On July 1,1997, 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
1,1997 four hours after formation of the partnership. How much should be recorded
in Munoz capital account on formation of the partnership?

a)
b)
c)
d)

P10,000
P20,000
P25,000
P50,000

2.Moonbits partnership had a net income of P8,000.00 for the month ended
September 30,1997.
Sunshine purchased an interest in the Moonbits partnership of Liz and Dick by
paying Liz P 32,000.00 for half of her capital and half of her 50 percent profit
sharing interest on October 1,1997. At this time Liz capital balance was P24,000.00
and Dick capital balance was P56,000.00. Liz should receive a debit to her capital
account of:
a)
b)
c)
d)

P
P
P
P

12,000.00
20,000.00
16,000.00
26,667.00

3.On March 1,1997, Santos and Pablo formed a partnership with each contributing
the following assets:

Cash
Machinery and Equipment
Building
Furniture & Fixtures

Sa
ntos
P 30,000
25,000
-010,000

Pabl
o
P 70,000
75,000
225,000
-0-

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 1,1997 the balance in
Pablos capital account should be:
a)
b)
c)
d)

P
P
P
P

290,000.00
305,000.00
314,000.00
370,000.00

4. The business assets of John and Paul appear below:

Cash

John
P 11,000

Paul
P 22,354

Accounts Receivable
Inventories
Land
Building
Furniture & Fixtures
Other Assets
Total

234,536
120,035
603,000
50,435
2,000
P 1,020,916

Accounts Payable
Notes Payable
John, Capital
Paul, Capital
Total

178,940
200,000
641,976
P 1,020,916

567,890
260,102
428,267
34,789
3,600
P 1,317,002
243,650
345,000
728,352
P 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 P 20,000 in Johns books and P 35,000 in Pauls are
uncollectible.
b. Inventories of P 5,500 and P 6,700 are worthless in Johns and Pauls
respective books.
c. Other assets of P 2,000 and P 3,600 in Johns and Pauls respective books are
to be written off.
The capital account of the partners after the adjustment will be:
a) Johns
Pauls
b) Johns
Pauls
c) Johns
Pauls
d) Johns
Pauls

P
P
P
P
P
P
P
P

614,476
683,052
615,942
717,894
649,876
712,345
613,576
683,350

5. The following is the condensed balance sheet of the partnership Jo, Li and Bi who
share profits and losses in the ratio of 4:3:3.

Cash
Other Assets
Jo, receivable

Total

P
180,000
1,660,000
40,000

P1,880,000

Accounts
Payable
Bi, Loan
Jo, Capital
Li, Capital
Bi, Capital

P
420,000
60,000
620,000
400,000
380,000

Total

P1,880,0
00

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 contributes to cash or other assets?
a)
b)
c)
d)

P
P
P
P

350,000
280,000
355,000
284,000

Solution and Explanation

1. D. The requirement is Munoz capital account balance upon formulation of the


partnership. As in the case with all entities, investment in the capital of a
partnership should be measured at the fair market value of the assets contributed.
In this case, the FMV of the land would be measured at the fair market value by its
sales price on the date of sale (P50,000) which is also the date of the partnership
formation. Recording the land of Munoz 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.
2. A. Under the 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) or P 12,000 is to be debited to her capital account.
3. A. P 290,000.00
Assets contributed by Pablo
Less: Mortgage assumed by partnership
Capital balance of Pablo

P 370,000
(80,000)
P 290,000

Note that the profit and loss sharing ratio is irrelevant to the solution of this
problem.
4. A.

Johns

P 614,476

Pauls

P 683,052

Capital balance before adjustments


Adjustments:
Uncollectible accounts
Inventories Written Off
Other Assets written off
Capital balances after adjustments

John
P641,976

Paul
P 728,352

(20,000)
(5,500)
(2,000)
P 614,476

(35,000)
6,700
(3,600)
P 683,052

5. A. P 350,000
Total agreed capital of the new partnership ( 1,400,000 80% )
P 1,750,000
Total contributed capital of the old partners
( 1,400,000)
Macs contribution

350,000

1. Partnership capital and drawing accounts are similar to the corporate


A. Paid-in capital, retained earnings, and dividend accounts
B. Retained earnings account.
C. Paid-in capital and retained earnings accounts.
D. Preferred and common stock accounts
2. For individuals who were previously sole proprietors form a partnership. Each partner
contributes inventory and equipment for use by the partnership. What basis should the
partnership use to record the contributed assets?
A. Inventory at the lower of FIFO cost or market.
B. Inventory at the lower of weighted-average cost or market.
C. Equipment at each proprietors carrying amount.
D. Equipment at fair value.
3. Meca and Came formed a partnership on January 1,2015 with each contributing the
following assets:
Meca
Came
Cash
P30,000
P70,000
Machinery
25,000
75,000
Inventory
10,000
Building
225,000
The building is subject to a mortgage loan of P90,000 which is to be assumed by the
partnership. On January 1,2015, the capital account of Came would show a balance of:
A. P280,000
B. P305,000
C. P314,000
D. P370,000
4. Alma and Becca have just formed a partnership. Alma contributed cash of P176,400 and
office equipment that cost P75,600. The equipment had been used in his sole
proprietorship and had been 70% depreciated, the current value of the equipment is
P50,400. Alma also contributed a note payable of P16,800 to be assumed by the
partnership. Alma is to have a 30% interest in the partnership. Becca contributed
P256,000 land at fair market value. Becca should make additional investment of
a. P234,000
b. P490,000
c. P256,000
d. P210,000
5. The business assets of LL and MM appears 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

50,345

34,789

2,000

3,600

Furniture and Fixtures


Other Assets

Accounts Payable

P1,020,916

P1,317,002

P178,940

P 243,650

Notes Payable

200,000

345,000

LL,Capital

641,976

-------------

MM, Capital

----------

728,352

P1,020,916 P1,317,002
LL and MM agreed to form a partnership contributing their respective assets and equities
subject to the following adjustments:
a. Accounts receivable of P20,000 in LLs books and P35,000 in MMs are
uncollectible.
b. Inventories of P5,500 and P6,700 are worthless in LLs and MMs respective books.
c. Other assets of P2,000 and P3,600 in LLs and MMs 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
6. Langley invests his delivery van in a computer repair partnership with McCurdy. What
amount should the van be credited to Langleys partnership capital?
A. The tax basis.
B. The fair value at the date of contribution.
C. Langleys original cost.
D. The assessed valuation for property tax purposes.
7. On April 30, 1993, Algee, Belger, and Ceda formed a partnership by combining their
separate business proprietorships. Algee contributed cash of $50,000, Belger contributed
property with a $36,000 carrying amount, a $40,000 original cost, and $80,000 fair value.
The partnership accepted responsibility for the $35,000 mortgage attached to the
property. Ceda contributed equipment with a $30,000 carrying amount, a $75,000
original cost, and $55,000 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 April 30, 1993, capital account balance?
A. Algee.
c. Ceda.
B. Belger.
d. All capital account balance are equal.
8. Jamby and Minam just formed a partnership. Jamby contributed cash of P2,205,000 and
office equipment that cost P945,000. The equipment had been used in her sole
proprietorship and had been 70% depreciated, the appraised value of the equipment is
P630,000. Jamby also contributed a note payable of P210,000 to be assumed by the
partnership. Jamby is to have 60% interest in the partnership. Miriam contributed only
P1,575,000 merchandise inventory at fair market value. Assume the use of bonus method,
the partners capital must be in conformity with their profit and loss ratio upon formation.
In the formation of a partnership, which of the following is true?
A.
B.
C.
D.

The agreed capital of Jamby upon formation is P2,625,000


The total agreed capital of the partnership is P4,375,000
The capital of Miriam will increase by P105,000 as a result of the transfer of capital
There is either an investment or withdrawal of asset under the bonus method

9. Alley and Barvey established a partnership on December 1, 20x4. They agreed that Alley
will contribute cash of P20,000; Land of P15,000 and Building of P50,000. Alleys
accounts payable of P10,000 is to be assumed by the partnership. Barvey will contribute
cash of P30,000 and furniture and fixtures of P25,000.
Assume that each partner initially should have an equal interest in partnership capital
with no contribution of intangible asset (bonus method). How much are the capital
balances of each partner?
a. P85,000 for Alley and P55,000 for Barvey
b. P65,000 for Alley and P65,000 for Barvey.
c. P75,000 for Alley and P55,000 for Barvey
d. P75,000 for Alley and P75,000 for Barvey.
10. The partnership agreement is an express contract among the partners (the owners of the
business). Such an agreement generally does not include
a. A limitation on a partners liability to creditors.
b. The rights and duties of the partners.
c. The allocation of income between the partners.
d. The rights and duties of the partners in the event of partnership dissolution.
1. The partnership form of business is:
a. An economic entity.
b. A separate legal entity, just as a corporation is a legal entity.
c. A taxable entity.
d. A fiscal entity.
2. A distinct and major advantage of the professional corporation form of
organization in comparison with the partnership form of organization
is:
a. Limited liability with respect to damages arising from
professional services.
b. Greater allowable tax deductions for retirement plans.
c. Ease of formation
d. Book value
e. Historical cost
3. Which of the following is not a characteristic of a partnership?
a. The partnership itself pays no income taxes.
b. It is easy to form a partnership.
c. Any partner can be held personally liable for all debts of the
business.
d. A partnership requires written Articles of Partnership.
e. Each partner has the power to obligate the partnership for
liabilities.
4. The advantages of the partnership form of business organization,
compared to corporations, include

a.
b.
c.
d.
e.

Single taxation
Ease of raising capital
Mutual Agency
Limited Liability
Difficulty of formation

5. 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 a separate, 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.

PROBLEMS
6. Albert, Claude, and Jamie form a partnership by contributing P25,000,
P70,000, and P80,000, respectively. In addition, the partners agree that
Albert should receive P20,000 of goodwill because of his special skills
relevant to this business. What amount of capital will exist for Claude
when the partnership is formed?
a. P60,000
b. P65,000
c. P70,000
d. Some other amount
7. Bill and Ken enter into a partnership agreement in which Bill is to have
a 60% interest in capital and profits and Ken is to have a 40% interest
in capital and profits. Bill contributes the following:
Land
Building
Equipment

Cost
P10,000
P100,000
P20,000

Fair value
P20,000
P60,000
P15,000

There is a P30,000 mortgage on the building that the partnership


agrees to assume. Ken contributes P50,000 cash to the partnership. Bill
and Ken agree that Kens capital account should equal Kens P50,000
cash contribution and that goodwill (revaluation of asset) should be
recorded. Goodwill (revaluation of asset) should be recorded in the
amount of:
a. P10,000

b. P15,000
c. P16,667
d. P20,000
8. Paul, Jeremy, and Juan are forming a partnership. Juan contributes a
building having an historical cost, accumulated depreciation, and
market value of P290,000, P100,000, and P400,000, respectively. The
building is initially recorded on the partnerships books at Juans book
value (P190,000). Two years later the building is sold for a P270,000
gain. What portion of the profit or loss should be allocated to Juan?
a. P20,000
b. P90,000
c. P210,000
d. P230,000
9. Jones and Smith formed a partnership with each partner contributing
the following items:
Cash
Building-Cost to
Jones
-Fair Value
Inventory- Cost
Smith
-Fair Value
Mortgage
Payable
Account Payable

Jones
P80,000
300,000

Smith
P40,000

400,000
200,000
280,000
120,000
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 partners capital account for financial accounting
purposes?
a. Jones- P350,000 and Smith- P270,000
b. Jones- P260,000 and Smith- P180,000
c. Jones- P360,000 and Smith- P260,000
d. Jones- P500,000 and Smith- P300,000
10.
On July 1, ML and PP formed a partnership, agreeing to share
profits and losses in the ratio of 4:6, respectively. ML contributed a
parcel of land that cost her P25,000. PP contributed P50,000 cash. The
land was sold for P50,000 on July 1, four hours after formation of the

partnership. How much should be recorded in MLs capital account on


the partnership formation?
a. P10,000
b. P20,000
c. P25,000
Chapter 1

1. B.
2. A.
3. D.
4. A.
5. C.
6. C.
7. A.
8. B.
9. C.
10. D.
d. P50,000

1.1 A partnership is formed by two individuals who were previously sole proprietors.
Property other than cash which is part of the initial investment in the partnership would
be recorded for financial accounting purposes at the:
a. Proprietors book values or the fair value of the property at the date of the investment,
whichever is higher
b. Proprietors book values or the fair value of the property at the date of the investment,
whichever is lower.
c. Proprietors book values of the property at the date of the investment.
d. Fair value of the property at the date of the investment.
1.2. When property other than cash is invested in a partnership, at what amount should
the non-cash property be credited to the contributing partners capital account?
a. Contributing partners tax basis.
b. Contributing partners original cost.
c. Assessed valuation for property tax purposes.
d. Fair value at the date of contribution.

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


a.
b.
c.
d.

Partners do not pay income taxes on their share in partnership income.


A partnership is bound by the act of the partners
A partnership is created by mere agreements of the partners
A partnership may be terminated by the death or withdrawal of a partner.

1.4. When property other than cash i invested in a partnership, at what amount should
the noncash property be credited to the contributing partners capital account?
a.
b.
c.
d.

Fair value at the date of contribution


Contributing partners original cost
Assessed valuation for property tax purposes
Contributing partners tax basis

1.5. Partnership capital and drawings are similar to the corporate


a.
b.
c.
d.

Paid in capital, retained earnings and dividends accounts


Retained earnings account
Paid in capital and retained earnings accounts
Preferred and common stock accounts

PROBLEMS
1.6. Abena and Buendia establish a partnership to operate a used-furniture business
under the name of A and B Furniture. Abena contributes furniture that cost P60,000 and
has a fair value of P90,000. Buendia contributes P30,000 cash and delivery equipment
that cost P40,000 and has a fair value of P30,000. The partners agree to share profits
and losses 60% to Abena and 40% to Buendia.
The peso amount of gain (loss) that will result if the initial noncash contributions of the
partners are recorded at cost rather than fair market value will be
a.
b.
c.
d.

P30,000 and (P10,000) to Abena and Buendia, respectively


P12,000 and P8,000 to Abena and Buendia, respectively
(P18,000) and P18,000 to Abena and Buendia, respectively
P 18,000 and (P18,000) to Abena and Buendia, respectively

1.7. On April 30, 2003, Bautista, Jimenez and Laxamana formed a partnership by
combining their separate business proprietorships. Bautista contributed cash of
P100,000. Jimenez contributed property with a carrying amount of P72,000, original
cost of P80,000, and fair value of P160,000. The partnership accepted responsibility
for the P70,000 mortgage attached to the property. Laxamana contributed equipment
with a carrying amount of P60,000, original cost of P150,000, and fair value of 110,000.
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 as of April 30, 2003?

a. Bautista
b. Jimenez

c. Laxamana
d. All capital account balances are equal

1.8. G. Macalino and W. Nolasco form a partnership and agree to divide initial capital
equally, even though Macalino contributed P100,000 and Nolasco gave P84,000 in
identifiable assets.
Under the bonus approach to adjust capital accounts, Nolascos unidentifiable assets
should be debited for
a . P8,000

c. P-0-

b . P16,000

d . P46,000

1.9. L. Molina and R. Nepomuceno enter into a partnership agreement in which Molina
is to have a 60% interest in capital and profits and Nepomuceno is to have a 40%
interest in capital and profits. Molina contributes the following:
Cost

Fair Value

Land

P 20,000

P 40,000

Building

200,000

120,000

Equipment

40,000

30,000

There is a P60,000 mortgage on the building that the partnership agrees to assume.
Nepomuceno contributes P100,000 cash to the partnership. Molina and Nepomuceno
agree that Nepomucenos capital account should equal Nepomucenos P100,000 cash
contribution and that goodwill should be recorded.
Goodwill should be recorded in the amount of
a. P20,000

c. P33,333

b. P30,000

d. P40,000

1.10. On March 1, 2003, Z Roxas and B. Poe decided to combine their business and
form a partnership. The balance sheet of Roxas and Poe on March 1, before adjustment
is presented below.
Roxas

Poe

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

6,375

3,000

P105,375

P51,500

P 45,750

P 18,000

Prepaid Expenses

Accounts Payable
Z. Roxas, Capital

59,625

B. Poe, Capital

33,500
P105,375

P 51,500

They agreed to provide 3% for doubtful accounts on their accounts receivable and
found Poes furniture to be under depreciated by P900.
If each partners share in equity is to be equal to the net assets invested, the capital
accounts of Roxas and Poe would be:
a. P58,170 and P33,095 respectively
b. P58,320 and P32,945 respectively
c. P59,070 and P32,195 respectively
d. P104,820 and P50,195 respectively
1.
Which of the following is not a characteristic of a partnership?
a. The partnership itself pays no income taxes
b. It is easy to form a partnership
c. Any partner can be held personally liable for all debts of the business
d. A partnership requires written Article of Partnership
2.
The partnership form of business is:
a. An economic entity
b. A taxable entity
c. A fiscal entity
d. A separate legal entity, just as a corporation is a legal entity
3.
Which of the following is not an advantage of partnership over a
corporation?
a. Ease of formation
b. Unlimited liability

c. The elimination of taxes at the entity level


d. All of the above
4.
A partners withdrawal of assets from a limited liability partnership that
is considered a permanent reduction of in that partners equity is debited to
the partners:
a. Drawing account
b. Retained earnings account
c. Capital account
d. Loan receivable account
5. For financial accounting purposes, assets of an individual partner
contributed to partnership are recorded by the partnership at:
a. Historical cost
b. Book value
c. Fair market value
d. Lower of cost or market
6. On December 1, 2009, DD and EE formed a partnership with each
contributing the following asset at fair market values:

The land and building are subject to a mortgage loan of P54,000 that the
partnership will assume. The partnership agreement provides that DD and EE
share profits and losses, 40% and 60%, respectively and partners agreed to
bring their capital balances in proportion to the profit and loss ratio and using
the capital balance of EE as the basis. The additional cash investment made
by DD should be:
a. 18,000
b. 85,500
c. 134,100
d. 166, 250
DD, Capital= 9+13.5+13.5=36
EE, Capital= 18+90+27-54=81
81/.60=135
135*.40=56-36=18
A
7. JJ and KK are joining their separate business to form a partnership. Cash and
noncash asset are to be contributed for a total capital of 300,000. The
noncash assets to be contributed and liabilities to be assumed are:

The partners capital are to be equal after all contributions of assets and
assumptions of liabilities. The total assets of the partnership.
a. 318,750
b. 300,000
c. 281,250
d. 225,000
Equity=Assets-Liabilities
300,000=X-(11,250+7,500)
Assets=X=318,750 A
8. Refer to number 8, the amount of cash that each partner must contribute.
a. JJ=75,000; KK=18750
b. JJ=75,000; KK=11,250
c. JJ=161,250; KK= 157,500
d. JJ= 127,500; KK= 11,250
For JJ; 150,000=Cash to be contrubuted+22,500+33,750+30,000+(-11250)
Cash to be contributed=75,000
For KK; 150,000=Cash to be contributed+67,500+71,250+(-7500)
Cash to be contributed=18,750
A

9. Jones and Smith formed a partnership with each partner contributing the

following items:
Assume that for tax purposes Jones and Smith agree to share equally in the
liabilities assumed by the Jones and Smith partnership. Refer to the above
information. What is the balance in each partners capital account for
financial accounting purposes?

10.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 taken certain equipment
with second-hand value of P50,000 and a note for the balance of OOs
interest. The equipment are carried on the books at P65,000. Brand new
equipment may cost P80,000. Compute for: (1) OOs acquisition of the
second-hand equipment will result to reduction in capital; (2) the value of the
note that will OO get from the partnerships liquidation,
a. (1) 15,000 each for MM and NN (2) 150,000
b. (1) 5,000 each for MM, NN, and OO (2) 145,000
c. (1) 5,000 each for MM, NN, and OO (2) 195,000
d. (1) 7,500 each for MM and NN (2) 145,000

1. Cat and Dog formed a partnership, each contributing assets to the business. Cat
contributed inventory with a current market value in excess of its carrying
amount. Dog contributed real estate with a carrying amount in excess of its
current market value. At what amount should the partnership record each of the
following assets?

a.

Inventory
Market value

Real estate
Market value

b.
c.
d.

Market value
Carrying amount
Carrying amount

Carrying amount
Market value
Carrying amount

2. Recording of Cash Investment


a. Face Value
3.

c. memorandum entry d. none of these

Recording of Property Investment


a. Face Value

4.

b. Agreed value

b. Agreed value

c. memorandum entry d. none of these

Recording of the investment(industry)


a. Face Value

b. Agreed value

c. memorandum entry d. none of these

5. Which of the following statements are true when comparing corporations and
partnerships?
a. Partnership entities provide for taxes at the same rates used by corporations
b. In theory, partnerships are more able to attract capital
c. Like corporations, partnerships have an infinite life
d. Unlike shareholders, general partners may have liability beyond their capital
balances

Problems
1. On May 1, 2015, Cat and Meow formed a partnership and agreed to share
profits and losses in the ratio of 3:7, respectively. Cat contributed a parcel of
land that cost her P10,000. Meow contributed P40,000 cash. The land has a
fair value of P15,000. Cat insisted that the value of the land should be
P18,000. The partners agreed to value the land at P18,000. What amount
should be recorded in Cats capital account on formation of the new
partnership?
a. P18,000 b. P17,400 c. P15,000 d. P10,000

2. On July 1, Manny and Floyd formed a partnership, agreeing to the profit and
loss in the ratio of 4:6, respectively. Manny contributed a parcel of land that
cost him P25,000. Floyd contributed P50,000 cash. The land was sold for
P50,000 on July 1, for hours after formation of the partnership. How much
should be recorded in Mannys capital account on the partnership formation?
a. P10,000 b. P20,000 c. P25,000 d. P50,000
3. Bill and Ken enter into a partnership agreement in which Bill is to have a 60%
interest in capital and profits and Ken is to have a 40% interest in capital and
profits. Bill contributes the ff:
Cost
Fair Value
Land
Building
Equipment

P10,000
P100,000
P20,000

P20,000
P60,000
P15,000

There is a P30,000 mortgage on the building that the partnership agrees to


assume. Ken contributes P50,000 cash to the partnership. Bill and Ken agree
that Kens capital account should equal Kens P50,000 cash contribution and
that goodwill should be recorded. Goodwill should be recorded in the amount
of:
a. P10,000 b. P15,000 c. P16,667 d.

P20,000

Solution:
Cash contribution of Ken P50,000
Divided by Ken capital interest
40%
Total agreed capital
P125,000
Less: Bills Contribution
65,000
Kens agreed capital
P 60,000
Less: Kens contribution
50,000
Goodwill
P 10,000
For 4 and 5
Cat admits Dog as partner in business. Accounts in the ledger for Cat on November
30, 2015, just before the admission of Dog, show the following balances:
Cash
P6,800
Accounts Receivable
P14,200
Merchandise Inventory
P20,000
Accounts Payable
P8,000
Cat, capital
P33,000
It is agreed that or the purposes of establishing Cats 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.
4. Dog is to invest sufficient cash to obtain a 1/3 interest in the partnership.
Cats adjusted capital before the admission of Dog
a. P28,174 b. P35,347 c. P35,374 d. P36,374
5. The amount of cash investment by Dog
a. P11,971 b. P35,347 c. P17,687 d. P18,790
Solution:
Cat, capital
P33,000
Less: Allowance for
doubtful accounts
426
P53,061
Accrued rent
1/3
expense
800
P17,687
Total
P 31,774
Add: Inventory
3,000
Prepaid rent
600
Cats adjusted capital
P 35,374

Cats capital contribution


P35,347
Divided by Cats capital interest

Total agreed capital


Multiply by Dogs capital interest
Dogs cash contribution

2/3