Chapter 1: Partnership Formation 2. How much is the capital credit to Ernie upon formation?

A. 80,000
On January 1, 2015, Ernie and Bert both sole proprietors decided to form a partnership to expand both B. 273,750
of their businesses. According to their agreement, they will split profits and losses 75:25 and their initial C. 292,000
capital will also reflect that ratio. D. 255,500
Answer: ( B )
The following are Ernie and Bert’s Statement of Financial Position:
3. How much should Ernie invest as additional cash to be in conformity with their initial capital
Ernie Proprietor agreement?
Statement of Financial Position A. 193,750
December 31, 2014 B. 212,000
ASSETS LIABILITIES AND EQUITY C. 175,500
D. 205,000
Cash 50,000 Accounts payable 65,000 Answer: ( A )
Accounts Receivable 100,000 Accrued expenses 55,000
Inventories 75,000 Notes payable 80,000
Equipment 250,000 Ernie, capital 90,000 Bonnie and Clyde enters into a partnership agreement in which Bonnie is to have 55% interest in the
Accumulated depreciation- Equipment (185,000) partnership and 35% in the profits and losses, while Clyde will have 45% interest in the partnership and
TOTAL ASSETS 290,000 TOTAL LIABILITIES&EQUITY 290,000 65% in the profits and losses. Bonnie contributed the following:

Bert Proprietor Cost Fair value

Statement of Financial Position Building 235,000 255,000
December 31, 2014 Equipment 168,000 156,000
ASSETS LIABILITIES AND EQUITY Land 500,000 525,000
Cash 30,000 Accounts Payable 75,000
Accounts receivable 110,000 Accrued expenses 90,000 The building and the equipment has a mortgage of 50,000 and 35,000 respectively. Clyde is to
Inventories 85,000 Notes Payable 100,000 contribute 150,000 cash and equipment. The partners agreed that only the building mortgage will be
Equipment 300,000 Bert, Capital 160,000 assumed by the partnership.
Accumulated Depreciation- Equipment (100,000)
TOTAL ASSETS 425,000 TOTAL LIABILITIES&EQUITY 425,000 1. How much is the fair market value of the equipment which Clyde contributed?
A. 615,818
The values reflected in the Statement of Financial Position are already at fair values except fo the B. 989,143
following accounts: C. 546,273
D. 574,909
Ernie’s Accounts Receivable is now 20,000 less than what is stated in his Statement of Financial Position. Answer: ( D )
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 2. How much is the total asset of the partnership upon formation?
expenses are to be established in the amount of 10,000 for Bert only while additional accounts payable A. 1,892,143
in the amount of 5,000 for Ernie. It is also agreed that all liabilities will be assumed by the partnership, B. 1,701,818
except for the notes payable of Bert which will be personally paid by him. C. 1,660,909
D. 1,632,273
1. How much is the adjusted capital balance of Bert upon formation? Answer: ( C )
A. 91,250
B. 185,000
C. 285,000
D. 310,000
Answer: ( C )
Theories (letter of answer is underlined) a. Universal partnership of profits
b. Universal partnership of all present property
1 The partnership agreement is an express contract among the partners (the owners of the business). c. Particular partnership
Such an agreement generally does not include d. Partnership by estoppel
a. A limitation on a partner’s liability to creditors. Answer: (c)
b. The rights and duties of the partners.
c. The allocation of income between the partners.
3. One of the following is not a characteristic of contract of partnership.
d. The rights and duties of the partners in the event of partnership dissolution.
a. Real, in that the partners must deliver their contributions in order for the partnership contract
2. A partnership records a partner’s investment of assets in the business at to be perfected
a. The market value of the assets invested. b. Principal, because it can stand by itself
b. A special value set by the partners. c. Preparatory, because it is a means by which other contracts will be entered into
c. The partner’s book value of the assets invested. d. Onerous, because the parties contribute money, property, or industry to the common fund
d. Any of the above, depending upon the partnership agreement. Answer: (a)

?3. When property other than cash is invested in a partnership, at what amount should the noncash 4. One of the following is not a requisite of a contract of partnership. Which is it?
property be credited to the contributing partner’s capital account? a. There must be a valid contract
a. Fair value at the date of recognition. b. There must be a mutual contribution of money, property, or industry to a common fund
b. Contributing partner’s original cost.
c. It is established for the common benefit of the partners which is to obtain profits and divide
c. Assessed valuation for property tax purposes.
the same among themselves
d. Contributing partner’s tax basis.
d. The articles are kept secret among members
?4. When property other than cash is invested in a partnership, at what amount should the noncash Answer: (d)
property be credited to the contributing partner’s capital account?
a. Fair value at the date of contribution. 5. The minimum capital in money or property except when immovable property or real rights
b. Contributing partner’s original cost. thereto are contributed, that will require the contract of partnership to be in a public instrument
c. Assessed valuation for property tax purposes. and be registered with the Securities and Exchange Commission (SEC).
d. Contributing partner’s tax basis. a. P5, 000.00
b. P10, 000.00
5. Four individuals who were previously sole proprietors form a partnership. Each partner contributes c. P3, 000.00
inventory and equipment for use by the partnership. What basis should the partnership use to record d. P30, 000.00
the contributed assets? Answer: (c)
a. Inventory at the lower of FIFO cost or market.
b. Inventory at the lower of weighted-average cost or market.
6. Roberts and Smith drafted a partnership agreement that lists the following assets contributed at
c. Equipment at each proprietor’s carrying amount.
d. Equipment at fair value. the partnership’s formation:
Contributed by
Roberts Smith
1. A contract where two or more persons bind themselves to contribute money, property, or industry Cash P 20,000 P 30,000
to a common fund with the intention of dividing the profits among themselves. Inventory 15,000
a. Voluntary Association Building 40,000
b. Corporation Furniture & Equipment 15,000
c. Partnership
d. Sole Proprietorship The building is subject to a mortgage of P 10,000, which the partnership has assumed. The
Answer: (c) 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?
2. A partnership formed for the exercise of a profession which is duly registered is an example of: Roberts Smith
 a. 35,000 85,000 The partnership agreement provides for equal initial capital. Thus under the bonus method, the
b. 35,000 75,000 capital credit for Redd should be the same as the contribution for Grey, resulting to P20,000
c. 55,000 55,000 bonus from Grey to Redd.
d. 60,000 60,000
9. On May 1, 2010, the business assets of John and Paul appear below:
Suggested Answer: (b) 35,000 & 75,000
John Paul
Roberts: 20,000 + 15,000 = P35, 000 Smith: 30,000 + 15,000 + 40,000 – 10,000 = P75,000. Cash P 11,000 P 22,354
Accounts Receivable 234,536 567,890
The partner’s capital credit is based upon the net assets contributed by the particular partner,
Inventories 120,035 260,102
thus the liabilities assumed reduced the fair market value of the building invested. Land 603,000
Building 428,267
7. The Grey and Redd Partnership was formed on January 2, 2010. Under the partnership Furniture & Fixture 50,345 34,789
agreement, each partner has an equal initial capital balance. Partnership net income or loss is Other Assets 2,000 3,600
allocated 60% to Grey and 40% to Redd. To form the partnership, Grey originally contributed Total P 1, 020, 916 P 1, 317, 002
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. Accounts Payable P 178,940 P 243,650
The partnership net income in 2010 was P25,000 Notes Payable 200,000 345,000
John, Capital 641, 976
Paul, Capital\ 728,352
Under the goodwill method, what is Redd’s initial capital balance in the partnership? Total P 1, 020, 916 P1, 317, 002
a. 20,000
b. 25,000 John and Paul agreed to form a partnership contributing their respective assets and equities
c. 40,000 subject to the following adjustments:
d. 60,000 a. Accounts receivable of P20, 000 in John’s books and P35, 000 in Paul’s are uncollectible.
b. Inventories of P5, 500 n P6, 700 are worthless in John’s and Pail’s respective books.
Suggested Answer: (d) 60,000 c. Other assets of P2, 000 and P3, 600 in John’s and Paul’s respective books are to be written
off.
Contributed Capital Agreed Capital Increase (Decrease)
Grey 60,000 60,000 The capital accounts of John and Paul, respectively, after the adjustments will be:
Redd 20,000 60,000 40,000 a. 614, 476 683, 052 c. 640, 876 712, 345
Total 80,000 120,000 40,000 b. 615, 942 717, 894 d. 613,576 683, 350
The partnership agreement provides for equal initial capital. Thus under the goodwill method , Suggested Answer: (a) 614, 476 683, 052
the capital credit for Redd should be the same as the contribution of Grey, thereby increasing the John: 641, 976 – 20, 000 – 5, 500 – 2, 000 = P 614, 476
total agreed capital to P120,000, which is P40,000 more than the total contributed capital Smith: 728, 352 – 35, 000 – 6, 700 – 3, 600 = P 683, 052
(goodwill).
10. Based on No. 4, how much assets does the partnership have?
8. Using the information in No. 2, under the bonus method, what is the amount of bonus? a. 2, 317, 918
a. 20,000 bonus to Grey b. 2, 237, 918
b. 20,000 bonus to Redd c. 2, 265, 118
d. 2, 365, 218
c. 40,000 bonus to Grey
d. 40,000 bonus to Redd Suggested Answer: (c) 2, 265, 118
John: 1, 020, 916 – 20, 000 – 5, 500 – 2, 000 = P 993, 416
Suggested Answer: (b) 20,000 bonus to Redd 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
Contributed Capital Agreed Capital Increase (Decrease)
Grey 60,000 40,000 (20,000)
Redd 20,000 40,000 20,000 Problems
Total 80,000 80,000
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.
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. On June 1, 2013, AZ invited MG to join him in his business. MG agreed provided that AZ will adjust the 2. Goodwill represents the excess cost of an acquisition over the:
accumulated depreciation of his equipment account to a certain amount, and will recognize additional A. Sum of the fair values assigned to an intangible assets less liabilities assumed
accrued expenses of P40,000. After that, MG is to invest additional pieces of equipment make her B. Sum of the fair values assigned to tangible and intangible assets acquired less liabilities assumed
interest equal to 45%. If the capital balances of AZ before and after adjustment were 556,00 and 484,000 C. Sum of the fair values assigned to intangibles acquired less liabilities assumed
respectively, what is the effect in the carrying value of the equipment as a result of the admission of D. Book value of an acquired company
MG?
A. 364,000 3. When a partnership is formed, noncash assets contributed by partners should be recorded:
B. (32,000) I.At their respective book values for income tax purposes
C. 396,000 II.At their respective fair values for financial accounting purposes
D. (324,000) A. I only
B. II only
3. TM and SJ, having capital balances of P980,000 and P525,000 respectively, decided to admit GD C. Both I and II
into the partnership. If TM and SJ share profit in proportion of 3;1 respectively, and SJ's capital balance D. Neither I nor II
after GD's investment is P589,750, how much was invested by GD?
A. P848,750 4. A limited liability company (LLC):
B. P1,174,250 I.Is governed by the laws of the states in which it is formed
C. P588,000 II.provides liability protection to its investors
D. P847,000 III.does not offer pass-through taxation benefits of partnership
A. Both I and III
4. RD formed a partnership on February 10, 2009. R contributed cash of P150,000, while D contributed B. III
inventory with a fair value of P120,000. Due to R's expertise in selling, D agreed that R should have 60% C. Both I and II
of the total capital of the partnership. R and D agreed to recognize goodwill. what is the total capital of D. I, II, III
the RD partnership after the goodwill is recognized?
A.P450,000 5. Transferable interest of a partner includes all of the following except:
B.P330,000 A.the partner's share in profits and losses
C.P300,000 B.the right to receive distributions
D.P270,000 C.the right to receive any liquidating distribution
D.the authority to transact any of the partnership’s business operation
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
Answers
Problem
1. D
2. A
3. D
4. C
5. D
Theories a. Option A
1. B b. Option B
2. B c. Option C
3. B d. Option D
4. C
5. 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
1. A partnership is a(n):
I. accounting entity. a. I, II
II. taxable entity. b. I, III
c. II, III
a. I only d. I, II, and III
b. II only
c. Neither I nor II
d. Both I and II 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
2. Which of the following is NOT a feature of a general partnership? identifiable assets. Under the bonus method, to adjust capital accounts, Bauzon's
a. mutual agency intangible assets should be debited for:
b. limited life a. 0
c. limited liability b. 16,000
d. none of these c. 8,000
d. 46,000
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. 7. Roy, Sam and Tim decided to engage in a real estate venture as a partnership. Roy
II. The amount of the partner's liabilities assumed by the other partners. invested P140,000 cash and Sam provided an office and furnishings valued at
III. The partner's share of other partners' liabilities assumed by the P220,000. (There is a 60,000 note payable remaining on the furnishings to be assumed
partnership. 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
a. I plus II minus III agree to receive an equal capital interest in the partnership. Using the bonus method,
b. I plus II plus III what is the capital balance of Tim?
c. I minus II plus III a. 0
d. I minus II minus III b. 50,000
c. 100,000
4. Which of the following accounts could be found in the general ledger of a d. 140,000
partnership?
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 ANSWERS & SOLUTIONS (Chapter 1)
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 1. a
be recorded upon formation of partnership is: 2. c
a. 100,000 3. c
b. 110,000 4. d
c. 120,000 5. d
d. 140,000 6. a

9. Ana and Elsa form a new partnership. Ana invests P300,000 in cash for her 60% Zero, because under the bonus method, a transfer of capital is only required.
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 7. c
tax basis of P50,000 and a fair market value of P90,000. The building is subject to a
Roy Sam Tim
P40,000 mortgage that the partnership will assume. What amount of cash should Elsa
contribute? Cash P140,000 – –
a. 40,000
Office Equipment – P220,000 –
b. 80,000
c. 110,000 Note payable ________ _( 60,000) ______
d. 150,000
Net asset invested P140,000 P160,000 P –
10. Jones and Smith formed a partnership with each partner contributing the following
items:
Agreed capitals, equally (P300,000/3) = P100,000

8. b

Lara Mitra

Cash P130,000 P200,000

Computer equipment – 50,000

Note payable ________ _( 10,000)

Assume that for tax purposes Jones and Smith agree to share equally in the
liabilities assumed by the Jones and Smith partnership. Net asset invested P130,000 P240,000

What is each partner's tax basis in the Jones and Smith partnership?
Goodwill (P240,000 - P130,000) = P110,000

9. b
Total Capital (P300,000/60%) P500,000
Elsa's interest ______40%
a. Option A Elsa's capital P200,000
b. Option B Less: Non-cash asset contributed at market value
c. Option C Land P 70,000
d. Option D Building 90,000
Mortgage Payable ( 40,000) _120,000
Cash contribution P 80,000
 1.1 THEORIES.
10. a 1. A partnership is a(n):
I. accounting entity.
Jones: (80000+300000) - 120000 + (180000/2) = 350000 II. taxable entity.
A. I only
Smith: (40000+200000) - 60000 + (180000/2) = 270000 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. Lopez’s 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. Lopez’s carrying amount of the property on June 30, 2015
c. Lopez’s 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 Jones Smith
the ratio of 3:7, respectively. Cat contributed a parcel of land that cost her P10,000. Meow Cash P 80,000 P 40,000
contributed P40,000 cash. The land has a fair value of P15,000. Cat insisted that the value of
Building - cost to Jones 300,000
land should be P18,000. The partners agreed to value the land at P18,000. What amount should
- fair value 400,000
be recorded in Cat’s capital account on formation of the new partnership?
Inventory - cost to Smith 200,000
a. P18,000 b. P17,400 c. P15,000 d. P10,000 - fair value 280,000
Mortgage Payable 120,000
2. On July 1, Manny and Floyd formed a partnership, agreeing to share profits and losses in the Accounts Payable 60,000
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
Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed
the partnership. How much should be recorded in Manny’s capital account on the partnership
by the Jones and Smith partnership. What is the balance in each partner’s capital account for
formation?
financial accounting purposes?
a. P10,000 b. P20,000 c. P25,000 d. P50,000
A. Jones: P 360,000, Smith: P 260,000
Use the following question for 3 & 4 B. Jones: P 350,000, Smith: P 270,000
C. Jones: P 260,000, Smith: P 180,000
On March 1, 2014, cat and Fish formed a partnership with each contributing the following
D. Jones: P 500,000, Smith: P 300,000
assets:

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

Cash P30,000 P70,000 LL MM
Machinery P25,000 P75,000 Cash P 11,000 P 22,354
Building - P225,000 Accounts Receivable 234,536 567,890
Furnitures and Fixtures P10,000 - Inventories 120,035 260,102
Land 603,000 -
3. On March 1, 2015, the capital account of Fish would show a balance of: Building - 428,267
Furniture and Fixture 50,345 34,789
a. P280,000 b. P305,000 c. 314,000 d. 370,000 Other Assets 2,000 3,600
Total P 1,020,916 P 1,317,002
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 Accounts Payable P 178,940 P 243,650
invested by Cat? Notes Payable 200,000 345,000
LL, capital 641,976 -
a. P19,000 b. P30,000 c. P40,000 d. P55,000
MM, capital - 728,352
Total P 1,020,916 P 1,317,002
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 LL and MM agreed to form a partnership by contributing their respective assets and equities
1, 2015. What amount should be recorded in Albano’s capital account upon formation of the subject to the following adjustments:
partnership? a. Accounts Receivable of P20,000 in LL’s books and P35,000 in MM’s are uncollectible.
b. Inventories of P5,500 and P6,700 are worthless in LL’s and MM’s respective books.
a. P3,600,000 b. P3,000,000 c. P3,480,000 d. P2,000,000 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:
1. Jones and Smith formed a partnership with each partner contributing the following items: a. LL: P615,942, MM: P717,894
b. LL: P614,476, MM: 683,052
 c. LL: P640,876, MM: P712,345 c. 63,750
d. LL: P640,876, MM: 683,050 d. 63,950
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 1. Which of the following is not a characteristic of most partnership?
c. P2,237,918
a. Limited liability
d. P2,365,218
4. On March 1, 2015, PP and QQ decide to combine their businesses and form a partnership. Their b. Limited life
balance sheets on March1, before adjustments, showed the following: c. Mutual agency

PP QQ d. Ease of formation
Cash P 9,000 P 3,750 Suggested answer (a) limited liability
Accounts Receivable 18,500 13,500
Inventories 30,000 19,500 The liability of the partners in a partnership is unlimited.
Furniture and Fixtures (net) 30,000 9,000
Office Equipment (net) 11,500 2,750
Prepaid Expenses 6,375 3,000 2. Which of the following is not a characteristic of the proprietary theory that influences accounting for
Total P 105,375 P51,500 partnerships?
a. Partner’s salaries are viewed as a distribution of income rather than a component of net
Accounts Payable P45,750 P18,000
income.
Capital 59,625 33,500
Total P105,375 P51,500 b. A partnership is not viewed as separate entity, distinct, taxable entity.
c. A partnership is characterized by limited liability.
They agreed to have the following items recorded in their books:
1. Provide 2% allowance for doubtful accounts. d. Changes in the ownership structure of a partnership result in the dissolution of the
2. PP’s furniture and fixtures should be P31,000, while QQ’s office equipment is partnership.
underdepreciated by P250. Suggested answer (c) A partnership is characterized by limited liability
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: 3. An advantage of the partnership as a form of business organization would be
For PP ...............................P29,500
a. Partners do not pay income taxes on their share in partnership income
For QQ ...............................P21,000
b. A partnership is bound by the act of the partners
Compute the net (debit) credit adjustment for PP and QQ: c. A partnership is created by mere agreements of the partners
PP QQ
a. P 2,870 P 2,820 d. A partnership may be terminated by the death or withdrawal of a partner
b. (2,870) (2,820) Suggested answer (c) A partnership is created by mere agreements of the partners
c. 870 180
d. (870) 180
5. The same information in number 4, compute the total liabilities after formation: 4. When property other than cash is invested in a partnership, at what amount should the noncash
a. P 65,550 property be credited to the contributing partner’s capital account?
b. 61,950 a. Fair value at the date of contribution
 b. Contributing partner’s original cost Paul, capital ________ 728, 352
c. Assessed valuation for property tax purposes Total P 1,020,916 P1,317,002
d. Contributing partner’s tax basis
Suggested answer (a) Jessyreen and Leilani agreed to form a partnership contributing their respective assets and equities
subject to the following adjustments:
Fair value at the date of contribution
a. Accounts receivable of P20,000 in Jessyreen’s books and P35,000 in Leilani’s are uncollectible
b. Investors of P5,500 and P6,700 are worthless in Jessyreen’s and Leilani’s respective books
5. Partnership capital and drawings accounts are similar to the corporate
c. Other assets of P2,00 and P3,600 in Jessyreen’s and Leilani’s respective books are to be
a. Paid in capital, retained earnings, and dividends accounts
written off
b. Retained earnings account
6. The capital accounts of the partner’s after adjustments will be:
c. Paid in capital and retained earnings accounts
a. Jessyreen’s 614,476
d. Preferred and common stock accounts
Leilani’s 683, 052
Suggested answer (a)
b. Jessyreen’s 615, 942
Partnership capital accounts are similar to corporate paid in capital and retained earnings; while
Leilani’s 717, 894
partnership drawing accounts are similar to corporate dividends accounts
b. Jessyreen’s 640, 876
Leilani’s 712, 345
For questions 6-10:
b. Jessyreen’s 613, 576
On May 1, 2015, the business assets of Jessyreen and Leilani appear below:
Leilani’s 683, 350
Jessyreen Leilani
Suggested answer (a)
Cash P 11, 000 P 22, 354
Jessyreen Leilani
Accounts receivable 234, 536 567, 890
Unadjusted capital balances p641,976 P728,352
Inventories 120, 035 260, 102
Adjustments:
Land 603, 000
Uncollectible accounts (20,000) (35,000)
Building 428, 267
Worthless inventories (5,500) (6,700)
Furniture and fixtures 50, 345 34,789
Other assets written off (2,000) (3,600)
Other assets _ _2, 000__ __ 3,600_
Adjusted capital balances P614,476 P683,052
Total P 1,020,916 P 1,317,002

Accounts payable P 178,940 P 243,650

Notes payable 200,000 345,000
7. How much assets does the partnership have?
John, capital 641,976
a. 2,337,918
 b. 2,237,918
c. 2,265,118
d. 2,365,218 Suggested answer (d)
Suggested answer (c) Jessyreen Leilani
Jessyreen Leilani Total Capital balances at P614476 683052
Unadjusted asset bals. 1020916 1317002 2337918 40:40:20 ratio
Adjustments: New capital ratio:
Uncollectible accounts (20000) (35000) (55000) @ 40% each (1621910) 648764 648764
Worthless inventories (5500) (6700) (12200) Cash settlement bet.
Other assets written off (2000) (3600) (5600) Jessyreen and Leilani P34288 (P34288)
Adjusted assets bals. 993416 1271702 2265118

8. Shamira offered to join for a 20% interest in the firm. How much cash should he contribute? 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;
a. 330,870
Shamira, P28,00.
b. 337,487
How much are the capital balances after the first year?
c. 344,237
a. Jessyreen, capital 750,627
d. 324,382
Leilani, capital 735,177
Suggested answer (d)
Shamira, capital 372,223
New capital of the partnership [(614476+683052)/80%] P1621910
b. Jessyreen, capital 728,764
Multiply by 20%
Leilani, capital 713,764
Cash to be contributed by Shamira P324382
Shamira, capital 361,382
c. Jessyreen, capital 757,915
9. After Shamira’s admission, the profit and loss sharing ratio was agreed to be 40:40:20, based on
Leilani, capital 742,315
capital credits. How much should the cash settlement be between Jessyreen and Leilani.
Shamira, capital 375, 837
a. 33,602
d. Jessyreen, capital 743,121
b. 32,930
Leilani, capital 727,825
c. 32,272
Shamira, capital 368,501
d. 34,288

Suggested answer (b)

Jessyreen Leilani Shamira
Capital balances at P648764 P648764 P324382 b. ₱48,000 d. ₱51,000

40:40:20 ratio
4. The total capital of the partnership after formation:
Drawings (50000) (65000) (28000) a. ₱180,000 c. ₱163,333
b. ₱178,000 d. ₱155,000
Share in profit (40:40:20) 130000 130000 65000
Capital balances P728764 P713764 P361382 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
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 6. On June 1, 2015, T, U and V formed a partnership by combining their separate business
and assume liabilities, and the capitals are to be based on net assets transferred after the ff. proprietorships. T contributed cash of ₱100,000. U contributed property with a ₱80,000
adjustments: 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
 A and B’s inventory is to be valued at 31,000 and 22,000 respectively. contributed equipment with a ₱65,000 carrying amount, a ₱90,000 original cost, and
 Accounts receivable of 2,000 in A’s book and 1,000 in B’s books are uncollectible. ₱78,000 fair value. The partnership agreement specifies that P & L are to be shared
 Accrued salaries of 4,000 for A and 5,000 for B are still to be recognized in the books. equally but is silent regarding capital contributions. Which partner has the largest capital
 Unused office supplies of A and B amounted to 5,000 and 1,500. balance at the beginning of the partnership?
 Prepaid rent of 7,000 and 4,500 are to be recognized in the books A and B, respectively. a. T c. V
 A is to invest or withdraw cash necessary to have a 40% interest in the firm. b. U d. All capital account balances are equal

Balance sheet for A and B before adjustments 7. For financial accounting purposes, assets of an individual partner contributed to a
A B partnership are recorded by the partnership at:
Cash ₱ 31,000 ₱ 50,000 a. Historical cost c. Fair market value
Accounts receivable 26,000 20,000 b. Book value d. Lower of cost or market
Inventory 32,000 24,000
Office supplies 5,000
8. A unique feature of partnership:
Equipment 20,000 24,000
Accum. Depreciation- Equipment (9,000) (3,000) a. They do not have to follow GAAP c. Books have to be maintained on the tax
Total Assets ₱ 100,000 120,000 basis
b. They are not governed by laws d. They do not file income tax return
Accounts Payable ₱ 28,000 20,000
Capitals 72,000 100,000 9. Which of the following is not an advantage of a partnership over a corporation?
Total Liabilities and Capital ₱ 100,000 ₱ 120,000 a. Ease of formation c. The elimination of taxes at the entity level
b. Unlimited liability d. All of the above
1. The additional investment (withdrawal) made by A:
a. ₱(15,000) c. ₱3,000 10. A partner’s withdrawal of assets from a limited liability partnership that is considered a
b. ₱(6,667) d. ₱8,333 permanent reduction in that partner’s equity is debited to the partner’s:
a. Drawing account c. Capital account
2. The total assets of the partnership after formation: b. Retained earnings account d. Loan receivable account
a. ₱235,333 c. ₱220,333
b. ₱230,000 d. ₱212,000 1. A partner who is entitled to a share of the profits from a partnership is known as:
a) A salaried partner.
3. The total liabilities of the partnership after formation: b) A managing partner.
a. ₱57,000 c. ₱54,000 c) An equity partner.
d) A limited liability partner. Answer: A limited liability partnership.
In the question the attributes of the organisation are the same for LLPs as companies except
Answer: An equity partner. members of a company (private and public) can transfer their interests to others.
A partner on a fixed salary is known as a salaried partner.
6. Roberts and Smith drafted a partnership agreement that lists the following assets
2. The maximum number of persons who are legally allowed to operate in a partnership is: contributed at the partnership’s formation:
a) 2 Contributed by
b) 20 Roberts Smith
c) There is no legal limit Cash $20,000 $30,000
d) 100 Inventory -- 15,000
Building -- 40,000
Answer: There is no legal limit Furniture & equipment 15,000 --

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
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 10. Ellis and Nossiter are partners sharing profits in a 30:70 ratio. The following data
balance. Use the solutions approach to solve the problem. summarizes 2004 activity:
Algee Belger Ceda
Partner contribution 50,000 80,000 55,000 Partnership net income, 2004 $68,000
Less: Liabilities assumed Ellis capital, 1/1/2004 90,000
by the partnership 0 (35,000) 0 Ellis additional investment in 2004 10,000
Ending capital balance $50,000 $45,000 $55,000 Ellis drawings in 2004 12,000
Nossiter capital, 1/1/2004 80,000
Each partner values his contribution to the partnership at its fair market value. The fair market Nossiter drawings in 2004 20,000
value becomes the partner’s 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. What is the value of Ellis’s capital account at 12/31/2004?
a. $20,400
b. $108,400
8. Abel and Carr formed a partnership and agreed to divide initial capital equally, even though c. $111,400
Abel contributed $100,000 and Carr contributed $84,000 in identifiable assets. Under the bonus d. $120,400
approach to adjust the capital accounts, Carr’s unidentifiable asset should be debited for
a. $46,000 Answer: (b) (90,000+10,000-12,000+(68,000×.3))
b. $16,000
c. $ 8,000
d. $0 Chapter 1 Partnership Formation

1.On July 1,1997, Monuz and Pardo form a partnership, agreeing to share profits and losses in the ratio
Answer: (d) Under the bonus method, unidentifiable assets (i.e., goodwill) are not recognized.
of 4:6,respectively. Monuz contributed a parcel of land that cost him P25,000. Pardo contributed
The total resulting capital is the FV of the tangible investments of the partners. Thus, there
P50,000 cash. The land was sold for P50,000 on July 1,1997 four hours after formation of the
would be no unidentifiable assets recognized by the creation of this new partnership.
partnership. How much should be recorded in Munoz capital account on formation of the partnership?
9. Ellis and Nossiter are partners sharing profits in a 30:70 ratio. The following data summarizes a) P10,000
2004 activity: b) P20,000
c) P25,000
Partnership net income, 2004 $68,000
d) P50,000
Ellis capital, 1/1/2004 90,000
2.Moonbits partnership had a net income of P8,000.00 for the month ended September 30,1997.
Ellis additional investment in 2004 10,000
Ellis drawings in 2004 12,000 Sunshine purchased an interest in the Moonbits partnership of Liz and Dick by paying Liz P 32,000.00 for
Nossiter capital, 1/1/2004 80,000 half of her capital and half of her 50 percent profit sharing interest on October 1,1997. At this time Liz
Nossiter drawings in 2004 20,000 capital balance was P24,000.00 and Dick capital balance was P56,000.00. Liz should receive a debit to
her capital account of:
What amount of net income is allocated to Nossiter’s capital account for 2004?
a. $26,600 a) P 12,000.00
b. $27,600 b) P 20,000.00
c. $34,000 c) P 16,000.00
d. $47,600 d) P 26,667.00
3.On March 1,1997, Santos and Pablo formed a partnership with each contributing the following assets:
Answer: (d) (68,000×.7)
 Santos Pablo a) John’s P 614,476
Cash P 30,000 P 70,000 Paul’s P 683,052
Machinery and Equipment 25,000 75,000 b) John’s P 615,942
Building -0- 225,000 Paul’s P 717,894
Furniture & Fixtures 10,000 -0- c) John’s P 649,876
Paul’s P 712,345
d) John’s P 613,576
The building is subject to a mortgage loan of P80,000, which is to be assumed by the partnership. The
Paul’s P 683,350
partnership agreement provides that Santos and Pablo share profits and losses 30% and 70%,
respectively. On March 1,1997 the balance in Pablo’s capital account should be:

a) P 290,000.00
b) P 305,000.00
c) P 314,000.00
d) P 370,000.00

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

John Paul Cash P 180,000 Accounts Payable P 420,000

Cash P 11,000 P 22,354 Other Assets 1,660,000 Bi, Loan 60,000
Accounts Receivable 234,536 567,890 Jo, receivable 40,000 Jo, Capital 620,000
Inventories 120,035 260,102 Li, Capital 400,000
Land 603,000 Bi, Capital 380,000
Building 428,267
Furniture & Fixtures 50,435 34,789 Total P1,880,000 Total P1,880,000
Other Assets 2,000 3,600
Total P 1,020,916 P 1,317,002
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
Accounts Payable 178,940 243,650
Mac contributes to cash or other assets?
Notes Payable 200,000 345,000
John, Capital 641,976 a) P 350,000
Paul, Capital 728,352 b) P 280,000
Total P 1,020,916 P 1,317,002 c) P 355,000
d) P 284,000
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 John’s books and P 35,000 in Paul’s are uncollectible.
b. Inventories of P 5,500 and P 6,700 are worthless in John’s and Paul’s respective books.
c. Other assets of P 2,000 and P 3,600 in John’s and Paul’s respective books are to be written off.
The capital account of the partners after the adjustment will be:
 Capital balance before adjustments P641,976 P 728,352
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 P 614,476 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)

Mac’s contribution P 350,000

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

Solution and Explanation A. Paid-in capital, retained earnings, and dividend accounts
B. Retained earnings account.
1. D. The requirement is Munoz’ capital account balance upon formulation of the partnership. As in the
C. Paid-in capital and retained earnings accounts.
case with all entities, investment in the capital of a partnership should be measured at the fair market
D. Preferred and common stock accounts
value of the assets contributed. In this case, the FMV of the land would be measured at the fair market
2. For individuals who were previously sole proprietors form a partnership. Each partner
value by its sales price on the date of sale (P50,000) which is also the date of the partnership formation. contributes inventory and equipment for use by the partnership. What basis should the
Recording the land of Munoz’ cost would result in the partners sharing the gain from the sale in partnership use to record the contributed assets?
accordance with their profit and loss ratio. This is not equitable since the gain accrued while the land A. Inventory at the lower of FIFO cost or market.
was held by Monuz. B. Inventory at the lower of weighted-average cost or market.
C. Equipment at each proprietor’s carrying amount.
2. A. Under the admission by purchase only the transfer of the capital purchase by the selling partner D. Equipment at fair value.
(Liz) to the buying partner (Sunshine) is recorded. Therefore 50% of the capital of Liz (P24,000) or P 3. Meca and Came formed a partnership on January 1,2015 with each contributing the
12,000 is to be debited to her capital account. following assets:
Meca Came
3. A. P 290,000.00 Cash P30,000 P70,000
Machinery 25,000 75,000
Assets contributed by Pablo P 370,000 Inventory 10,000 -
Less: Mortgage assumed by partnership (80,000) Building 225,000
Capital balance of Pablo P 290,000 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
Note that the profit and loss sharing ratio is irrelevant to the solution of this problem. 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
4. A. John’s P 614,476 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
Paul’s P 683,052 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
John Paul
a. P234,000 b. P490,000 c. P256,000 d. P210,000
5. The business assets of LL and MM appears below: A. Algee. c. Ceda.
LL MM B. Belger. d. All capital account balance are equal.
Cash P11,000 P22,354
8. Jamby and Minam just formed a partnership. Jamby contributed cash of P2,205,000 and
Accounts Receivable 234,536 567,890 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
Inventories 120,035 260,102 P630,000. Jamby also contributed a note payable of P210,000 to be assumed by the
Land 603,000 ---------- 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,
Building ---------- 428,267 the partners’ capital must be in conformity with their profit and loss ratio upon formation.
Furniture and Fixtures 50,345 34,789 In the formation of a partnership, which of the following is true?

Other Assets 2,000 3,600 A. The agreed capital of Jamby upon formation is P2,625,000
B. The total agreed capital of the partnership is P4,375,000
P1,020,916 P1,317,002 C. The capital of Miriam will increase by P105,000 as a result of the transfer of capital
Accounts Payable P178,940 P 243,650 D. 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
Notes Payable 200,000 345,000 will contribute cash of P20,000; Land of P15,000 and Building of P50,000. Alley’s
LL,Capital 641,976 ------------- 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.
MM, Capital ---------- 728,352 Assume that each partner initially should have an equal interest in partnership capital
P1,020,916 P1,317,002 with no contribution of intangible asset (bonus method). How much are the capital
LL and MM agreed to form a partnership contributing their respective assets and equities balances of each partner?
subject to the following adjustments: a. P85,000 for Alley and P55,000 for Barvey
a. Accounts receivable of P20,000 in LL’s books and P35,000 in MM’s are b. P65,000 for Alley and P65,000 for Barvey.
uncollectible. c. P75,000 for Alley and P55,000 for Barvey
b. Inventories of P5,500 and P6,700 are worthless in LL’s and MM’s respective books. d. P75,000 for Alley and P75,000 for Barvey.
c. Other assets of P2,000 and P3,600 in LL’s and MM’s respective books are to be
written off. 10. The partnership agreement is an express contract among the partners (the owners of the
The capital account of the partners after the adjustments will be: business). Such an agreement generally does not include
a. LL, P615,942; MM, P717,894 c. LL, P640,876; MM, P683,050 a. A limitation on a partner’s liability to creditors.
b. LL, P640,876; MM, P712,345 d. LL, P614,476; MM, P683,052 b. The rights and duties of the partners.
6. Langley invests his delivery van in a computer repair partnership with McCurdy. What c. The allocation of income between the partners.
amount should the van be credited to Langley’s partnership capital? d. The rights and duties of the partners in the event of partnership dissolution.
A. The tax basis.
B. The fair value at the date of contribution.
C. Langley’s original cost. 1. The partnership form of business is:
D. The assessed valuation for property tax purposes. a. An economic entity.
7. On April 30, 1993, Algee, Belger, and Ceda formed a partnership by combining their
b. A separate legal entity, just as a corporation is a legal entity.
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. c. A taxable entity.
The partnership accepted responsibility for the $35,000 mortgage attached to the d. A fiscal entity.
property. Ceda contributed equipment with a $30,000 carrying amount, a $75,000 2. A distinct and major advantage of the professional corporation form of organization in
original cost, and $55,000 fair value. The partnership agreement specifies that profits and comparison with the partnership form of organization is:
losses are to be shared equally but is silent regarding capital contributions. Which
partner has the largest April 30, 1993, capital account balance? a. Limited liability with respect to damages arising from professional services.
 b. Greater allowable tax deductions for retirement plans. 7. Bill and Ken enter into a partnership agreement in which Bill is to have a 60% interest in
c. Ease of formation capital and profits and Ken is to have a 40% interest in capital and profits. Bill
d. Book value contributes the following:
e. Historical cost Cost Fair value
3. Which of the following is not a characteristic of a partnership? Land P10,000 P20,000
a. The partnership itself pays no income taxes. Building P100,000 P60,000
Equipment P20,000 P15,000
b. It is easy to form a partnership.
c. Any partner can be held personally liable for all debts of the business.
There is a P30,000 mortgage on the building that the partnership agrees to assume. Ken
d. A partnership requires written Articles of Partnership.
contributes P50,000 cash to the partnership. Bill and Ken agree that Ken’s capital
e. Each partner has the power to obligate the partnership for liabilities.
account should equal Ken’s P50,000 cash contribution and that goodwill (revaluation of
4. The advantages of the partnership form of business organization, compared to
asset) should be recorded. Goodwill (revaluation of asset) should be recorded in the
corporations, include
amount of:
a. Single taxation
a. P10,000
b. Ease of raising capital
b. P15,000
c. Mutual Agency
c. P16,667
d. Limited Liability
d. P20,000
e. Difficulty of formation
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
5. Which of the following is NOT a characteristic of the proprietary theory that influences P400,000, respectively. The building is initially recorded on the partnership’s books at
accounting for partnerships? Juan’s book value (P190,000). Two years later the building is sold for a P270,000 gain.
a. Partners’ salaries are viewed as a distribution of income rather than a What portion of the profit or loss should be allocated to Juan?
component of net income. a. P20,000
b. A partnership is not viewed as a separate, distinct, taxable entity. b. P90,000
c. A partnership is characterized by limited liability. c. P210,000
d. Changes in the ownership structure of a partnership result in the dissolution of d. P230,000
the partnership.
PROBLEMS
9. Jones and Smith formed a partnership with each partner contributing the following
6. Albert, Claude, and Jamie form a partnership by contributing P25,000, P70,000, and items:
P80,000, respectively. In addition, the partners agree that Albert should receive P20,000 Jones Smith
of goodwill because of his special skills relevant to this business. What amount of capital Cash P80,000 P40,000
will exist for Claude when the partnership is formed? Building-Cost to 300,000
Jones
a. P60,000
-Fair Value 400,000
b. P65,000
Inventory- Cost 200,000
c. P70,000 Smith
d. Some other amount -Fair Value 280,000
Mortgage Payable 120,000
Account 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?
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
9. C.
10. D.
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.

Chapter 1 c. Proprietors’ book values of the property at the date of the investment.
1. B.
2. A. d. Fair value of the property at the date of the investment.
3. D. 1.2. When property other than cash is invested in a partnership, at what amount should
4. A. the non-cash property be credited to the contributing partner’s capital account?
5. C.
6. C. a. Contributing partner’s tax basis.
7. A. b. Contributing partner’s original cost.
8. B.
c. Assessed valuation for property tax purposes.

d. Fair value at the date of contribution.

contributed P50,000 cash. The land was sold for P50,000 on July 1, four hours after
1.3. An advantage of the partnership as a form of business organization would be
formation of the partnership. How much should be recorded in ML’s capital account on a. Partners do not pay income taxes on their share in partnership income.
the partnership formation? b. A partnership is bound by the act of the partners
a. P10,000 c. A partnership is created by mere agreements of the partners
b. P20,000 d. A partnership may be terminated by the death or withdrawal of a partner.
c. P25,000 1.4. When property other than cash i invested in a partnership, at what amount should
d. P50,000 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

1.5. Partnership capital and drawings 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
PROBLEMS Equipment 40,000 30,000

1.6. Abena and Buendia establish a partnership to operate a used-furniture business There is a P60,000 mortgage on the building that the partnership agrees to assume.
under the name of A and B Furniture. Abena contributes furniture that cost P60,000 and Nepomuceno contributes P100,000 cash to the partnership. Molina and Nepomuceno
has a fair value of P90,000. Buendia contributes P30,000 cash and delivery equipment agree that Nepomuceno’s capital account should equal Nepomuceno’s P100,000 cash
that cost P40,000 and has a fair value of P30,000. The partners agree to share profits contribution and that goodwill should be recorded.
and losses 60% to Abena and 40% to Buendia.
Goodwill should be recorded in the amount of
The peso amount of gain (loss) that will result if the initial noncash contributions of the a. P20,000 c. P33,333
partners are recorded at cost rather than fair market value will be
a. P30,000 and (P10,000) to Abena and Buendia, respectively b. P30,000 d. P40,000
b. P12,000 and P8,000 to Abena and Buendia, respectively
c. (P18,000) and P18,000 to Abena and Buendia, respectively 1.10. On March 1, 2003, Z Roxas and B. Poe decided to combine their business and
d. P 18,000 and (P18,000) to Abena and Buendia, respectively form a partnership. The balance sheet of Roxas and Poe on March 1, before adjustment
is presented below.
1.7. On April 30, 2003, Bautista, Jimenez and Laxamana formed a partnership by
combining their separate business proprietorships. Bautista contributed cash of Roxas Poe
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 Cash P 9,000 P 3,750
for the P70,000 mortgage attached to the property. Laxamana contributed equipment
Accounts Receivable 18,500 13,500
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 Inventories 30,000 19,500
is silent regarding capital contributions.
Furniture and fixtures (net) 30,000 9,000
Which partner has the largest capital account balance as of April 30, 2003?
a. Bautista c. Laxamana Office Equipment (net) 11,500 2,750
b. Jimenez d. All capital account balances are equal
Prepaid Expenses 6,375 3,000
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 P105,375 P51,500
identifiable assets.

Under the bonus approach to adjust capital accounts, Nolasco’s unidentifiable assets
should be debited for Accounts Payable P 45,750 P 18,000

a . P8,000 c. P-0- Z. Roxas, Capital 59,625

b . P16,000 d . P46,000 B. Poe, Capital 33,500

1.9. L. Molina and R. Nepomuceno enter into a partnership agreement in which Molina P105,375 P 51,500
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: They agreed to provide 3% for doubtful accounts on their accounts receivable and
found Poe’s furniture to be under depreciated by P900.
Cost Fair Value
If each partner’s share in equity is to be equal to the net assets invested, the capital
Land P 20,000 P 40,000 accounts of Roxas and Poe would be:
a. P58,170 and P33,095 respectively
Building 200,000 120,000
 b. P58,320 and P32,945 respectively
c. P59,070 and P32,195 respectively DD EE
d. P104,820 and P50,195 respectively Cash 9,000 18,000
Machinery and Equipment 13,500
Land 90,000
1. Which of the following is not a characteristic of a partnership?
Building 27,000
a. The partnership itself pays no income taxes
Office Furniture 13,500
b. It is easy to form a partnership
The land and building are subject to a mortgage loan of P54,000 that the partnership will
c. Any partner can be held personally liable for all debts of the business
assume. The partnership agreement provides that DD and EE share profits and losses, 40% and
d. A partnership requires written Article of Partnership
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
2. The partnership form of business is:
made by DD should be:
a. An economic entity
a. 18,000
b. A taxable entity b. 85,500
c. A fiscal entity c. 134,100
d. A separate legal entity, just as a corporation is a legal entity d. 166, 250
DD, Capital= 9+13.5+13.5=36
3. Which of the following is not an advantage of partnership over a corporation? EE, Capital= 18+90+27-54=81
a. Ease of formation 81/.60=135
b. Unlimited liability 135*.40=56-36=18 A
c. The elimination of taxes at the entity level
d. All of the above 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
4. A partner’s withdrawal of assets from a limited liability partnership that is considered a liabilities to be assumed are:
permanent reduction of in that partner’s equity is debited to the partner’s: JJ KK
a. Drawing account Book Value Fair Value Book Value Fair Value
b. Retained earnings account Accounts Receivable 22,500 22,500
c. Capital account Inventories 22,500 33,750 60,000 67,500
d. Loan receivable account Equipment 37,500 30,000 67,500 71,250
Accounts Payable 11,250 11,250 7,500 7,500
5. For financial accounting purposes, assets of an individual partner contributed to partnership
The partner’s capital are to be equal after all contributions of assets and assumptions of
are recorded by the partnership at: liabilities. The total assets of the partnership.
a. Historical cost a. 318,750
b. Book value b. 300,000
c. Fair market value c. 281,250
d. Lower of cost or market d. 225,000
Equity=Assets-Liabilities
6. On December 1, 2009, DD and EE formed a partnership with each contributing the following
300,000=X-(11,250+7,500)
asset at fair market values:
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 10. MM, NN, and OO are partners with capital balances on December 31, 2012 of P300,000,
For JJ; 150,000=Cash to be contrubuted+22,500+33,750+30,000+(-11250) P300,000 and P200,000, respectively. Profits are shared equally. OO wishes to withdraw and it is
Cash to be contributed=75,000 agreed that OO is taken certain equipment with second-hand value of P50,000 and a note for
For KK; 150,000=Cash to be contributed+67,500+71,250+(-7500) the balance of OO’s interest. The equipment are carried on the books at P65,000. Brand new
Cash to be contributed=18,750 A 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
9. Jones and Smith formed a partnership with each partner contributing the following items: partnership’s 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

B
1. Reduction in Capital:
Equipment at carrying value 65,000
Equipment at secondhand value (fair value) 50,000

Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed Decrease in equipment 15,000
by the Jones and Smith partnership. Refer to the above information. What is the balance in each Multiply by: Profit & Loss Ratio of MM, NN,and OO 1/3
partner’s capital account for financial accounting purposes? Reduction in capital 5,000

2. Notes Payable to OO
Unadjusted Capital of OO 200,000
Less: Share in the decrease of equipment 5,000
Adjusted capital of OO 195,000
C
Less: Equipment receive at secondhand value 50,000
Jones Smith
Value of notes payable 145,000
Assets at fair value
Jones: 80,000+400,000 480,000
Incidentally, the juournal entry would be:
Smith: 40,000+280,000 320,000
OO, Capital 200,000
Less: Liabilities assumed 120,000 60,000
NN, Capital 5,000
Capital 360,000 260,000
MM, Capital 5,000
Eqipment, carrying value 65,000
Notes Payable 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?

Inventory Real estate

a. Market value Market value
b. Market value Carrying amount
c. Carrying amount Market value
 d. Carrying amount Carrying amount partnership. How much should be recorded in Manny’s capital account on the partnership
formation?
a. P10,000 b. P20,000 c. P25,000 d. P50,000
2. Recording of Cash Investment 3. Bill and Ken enter into a partnership agreement in which Bill is to have a 60% interest in capital
a. Face Value b. Agreed value c. memorandum entry d. none of these and profits and Ken is to have a 40% interest in capital and profits. Bill contributes the ff:
Cost Fair Value
3. Recording of Property Investment Land P10,000 P20,000
Building P100,000 P60,000
a. Face Value b. Agreed value c. memorandum entry d. none of these
Equipment P20,000 P15,000
4. Recording of the investment(industry)
There is a P30,000 mortgage on the building that the partnership agrees to assume. Ken
a. Face Value b. Agreed value c. memorandum entry d. none of these contributes P50,000 cash to the partnership. Bill and Ken agree that Ken’s capital account should
equal Ken’s P50,000 cash contribution and that goodwill should be recorded. Goodwill should be
5. Which of the following statements are true when comparing corporations and partnerships? recorded in the amount of:

a. Partnership entities provide for taxes at the same rates used by corporations a. P10,000 b. P15,000 c. P16,667 d. P20,000
b. In theory, partnerships are more able to attract capital Solution:
c. Like corporations, partnerships have an infinite life Cash contribution of Ken P50,000
d. Unlike shareholders, general partners may have liability beyond their capital balances Divided by Ken capital interest ÷ 40%
Total agreed capital P125,000
Less: Bill’s Contribution 65,000
Ken’s agreed capital P 60,000
Less: Ken’s 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
Problems Merchandise Inventory P20,000
Accounts Payable P8,000
1. On May 1, 2015, Cat and Meow formed a partnership and agreed to share profits and losses in
Cat, capital P33,000
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 It is agreed that or the purposes of establishing Cat’s interest the following adjustments shall be made:
land should be P18,000. The partners agreed to value the land at P18,000. What amount should a. An allowance for doubtful accounts of 3% of accounts receivable is to be established
be recorded in Cat’s capital account on formation of the new partnership? b. The merchandise inventory is to be valued at P23,000
a. P18,000 b. P17,400 c. P15,000 d. P10,000 c. Prepaid salary expenses of P600 and accrued rent expense of P800 are to be recognized.
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 4. Dog is to invest sufficient cash to obtain a 1/3 interest in the partnership. Cat’s adjusted capital
P50,000 cash. The land was sold for P50,000 on July 1, for hours after formation of the 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 Cat’s capital contribution P35,347
Less: Allowance for Divided by Cat’s capital interest ÷ 2/3
doubtful accounts 426 Total agreed capital P53,061
Accrued rent Multiply by Dog’s capital interest x 1/3
expense 800 Dog’s cash contribution P17,687
Total P 31,774
Add: Inventory 3,000
Prepaid rent 600
Cat’s adjusted capital P 35,374