PARTNERSHIP FORMATION

Problem 1.

On June 1, 2013, DM, the sole proprietor of the VMX Company, expands the company and establish a partnership with
BQ, and LK. The partners plan to share profits and losses as follows: DM, 40%; BQ, 35% and LK, 25%. DM asked BQ to
join the partnership because his image and reputation are expected to be valuable during the formation. BQ is also
contributing P420, 000 cash and a building that was acquired for P4, 040,000, with carrying amount of P3, 480,000, and a
fair market value of P1, 960,000. The building is subject to a P792, 000 mortgage that the partnership did not assume. LK
is contributing P848, 000 cash and marketable securities costing P1,344,000 to LK but are currently worth P1,900,000.
DM’s investment in the partnership is the VMX Company. The Statement of Financial Position for the VMX Company
follows:

VMX Company
Statement of Financial Position
June 1, 2013

Assets Liabilities
Cash P1, 560,000 Accounts Payable P1, 748,000
Accounts Receivable 1, 824,000 Notes Payable 2, 368,000
Inventory 1, 576,000 DM, Capital 3, 316,000
Equipment, net 2, 472,000
Total Assets P7, 432,000 Total Liabilities and Equity P 7,432,000

The partner’s agree that 35% of the inventory is considered worthless, the equipment is worth ¾ of its carrying amount,
and 85% of the accounts receivable is collectible. DM plans to pay off the accounts payable with his personal assets. The
other partners have agreed that partnership will assume the notes payable. The partners agreed that their capital
balances upon formation will be in conformity with their profit and loss ratio.

Which of the following is false?

a. Assuming the partners will either invest or withdraw cash, using DM as the base, BQ and LK will both invest cash
with a total amount of P303, 200.
b. Assuming the partners will either invest or withdraw cash, using BQ as the base, DM and LK will both withdraw
cash with a total amount of P 1,948,800.
c. Assuming the partners will either invest or withdraw cash, using LK as the base, DM and BQ will both invest cash
with a total amount of P2, 243,200.
d. If the transfer of the capital method is used, the capital accounts of DM and LK will be debited in the amount of
P121, 280 and P560, 800, respectively.

Problem 2.

On June 1, 2013 MP and CV agreed to invest equal amounts and share profits equally to form a partnership. MP invested
P195, 000 cash price and a piece of equipment. CV invested some assets which are shown below:
Book Value (in piso)
Accounts Receivable 25,000
Inventory 70,000
Machineries, net 140,000
Intangibles 57,500
The assets invested by CV are not properly valued, P2, 000 of the accounts receivable are proven to be uncollectible.
Inventories are to be written down to P65, 000. Included in the machineries is an obsolete apparatus acquired for P24,
000 with an accumulated depreciation balance of P21, 000. Part of the intangibles is a patent with a carrying value of P3,
500 which was sued by a competitor. CV unsuccessfully defended the case and the final decision of the court was
released on May 29, 2013.

What is the fair value of the equipment invested by MP? 84,000

Problem 3.

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 piece of equipment to make her interest equal to 45%. If the capital balances of AZ
before and after adjustment were P556,000 and P484,000,

What is the effect in the carrying value of the equipment as a result of the admission of MG? 364,000

Problem 4.

On June 1, 2011, May and Nora formed a partnership. May is to invest assets at fair values. She is to transfer her
liabilities and is to contribute sufficient cash to bring her 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 fair values
are:
Book Value Fair Value
Accounts Receivable 53,800 53,000
Inventory 98,400 107,000
Equipment 25,800 34,000
Notes Payable 56,000 56,000

Nora agrees to invest cash of P42, 000 and merchandise valued at current market price.

a. What is value of the merchandise to be invested by Nora? 48,000

b. What is the amount of cash to be invested by May? 72,000

Problem 5.

Candy and Dandy have just formed a partnership. Candy contributed cash of P126, 000 and computer equipment that
cost P54, 000. The fair value of the computer is P36, 000. Candy has a notes payable on the computer of P12, 000 to be
assumed by the partnership. Candy is to have 60% capital interest in the partnership. Dandy contributed only P90,000.
The profit and ratios of the partners as agreed is equally.

Candy should make an additional investment (withdrawal of)? 15,000

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