Problems:

Partnership Formation

On December 1, 20x5, EE and FF formed a partnership, agreeing to share for profits and losses in the ratio of
2:3, respectively. EE invested a parcel of land that cost him P25,000. FF invested P30,000 cash. The land was
sold for P50,000 on the same date, three hours after formation of the partnership. How much should be the
capital balance of EE right after the formation?

Answer: D. 50,000

On March 1, 20x5, II and JJ formed a partnership with each contributing the following assets:

____II ____ ____ JJ_____

Cash ……………………………………………………….. P300,000 P 700,000

Machinery and Equipment ………………………………... 250,000 750,000

Building ……………………………………………………  2,250,000

Furniture and fixtures …………………………………....... 100,000 

The building is subject to mortgage loan of P800,000, which is to be assumed by the partnership agreement
provides that II and JJ share profits and losses 30% and 70% respectively. On March 1, 20x5 the balance in JJ’s
capital account should be:

Answer: D. 2,900,000

The same information in Number 2, except that the mortgage loan is not assumed by the partnership. On March 1,
20x5 the balance in JJ’s capital account should be:

Answer: A. P 3,700,000

As of July 1, 20x5, FF and GG decided to form a partnership. Their balance sheets on this date are:

____FF ____ ____ GG_____

Cash ……………………………………………………….. P 15,000 P 37,500

Accounts Receivable ……………………………………… 540,000 225,000

Merchandise Inventory ……………………………………  202,500

 Machinery and Equipment ………………………………... _150,000 __270,000

Total P 705,000 P 735,000

Accounts Payable… ……………………………………… P 135,000 P 240,000

FF, Capital …………………………………………….. 570,000

GG, Capital ………………………………...................... _____ __495,000

Total P 705,000 P 735,000

The partners agreed that the machinery and equipment of FF is underdepreciated by P15,000 and that of GG
by P 45,000. Allowance for doubtful accounts is to be set up amounting to P120,000 For FF and P 45,000 for
GG. The partnership agreement provides for a profit and loss ratio and capital interest of 60% to FF and 40% to
GG. How much cash must FF invest to bring the partners’ capital balances proportionate to their profit and loss
ratio?

Answer: D. 172,500

On August 1, AA and BB pooled their assets to form a partnership, with the frim to take over their business assets and
assume the liabilities. Partners capitals are to be based on net assets transferred after the following adjustments.
(Profit and loss are allocated equally.)

BB’s inventory is to be increased by P 4,000; an allowance for doubtful accounts of P 1,000 and P 1,500 are to be set
up in the books of AA and BB, respectively; and accounts payable of P 4,000 is to be recognized in AA’s books. The
individual balances on August 1, before adjustments, follow:

____AA ___ ___ BB____

Assets ……………………………………………………… P 75,000 P 113,000

Liabilities ………………………………………………….. 5,000 34,500

What is the capital of AA and BB after the above adjustments?

Answer: D. AA, P65,000; BB, P81,000

CC admits DD as a partner in business. Accounts in the ledger for CC on November 30, 20x5, just before the admission of
DD, show the following balances:

Cash …………………………………………………………………………….. P 6,800

Accounts Receivable …………………………………………………………… 14,200

 Merchandise Inventory ………………………………………………………… 20,000

Accounts Payable………………………………................................................. 8,000

CC, Capital …………………………………………………………………….. 33,000

It is agreed that for purposes of establishing CC’s interest, the following adjustments shall be made:
An allowance for doubtful accounts of 3% of accounts receivable is to be established.
The merchandise inventory is to be valued at P23,000.
Prepaid salary expenses of P600 and accrued rent expense of P800 are to be recognized.
DD is to invest sufficient cash to obtain a 1/3 interest in the partnership.

Compute for: (1) CC’s adjusted capital before the admission of DD; and (2) the amount of cash investment
by DD:

Answer: C. (1) P 35,374; (2) P17,687

MM, NN, and OO are partners with capital balances on December 31, 20x5 of P300,000, P300,000 and
P200,000, respectively. Profits are shared equally. OO wishes to withdraw and it is agreed that OO is to take
certain equipment with second-hand value of P50,000 and a note for the balance of OO’s interest. The
equipment are carried on the books at P65,000. Brand new equipment may cost P80,000. Compute for: (1)
OO’s acquisition of the second-hand equipment will result to reduction in capital; (2) the value of the note
that will OO get from the partnership liquidation.

Answer: B. (1) P 5,000 each for MM, NN and OO, (2) P145,000.

Jones and Smith formed a partnership with each partner contributing the following items:

Jones Smith
Cash …………………………………………………. P 80,000 P 40,000
Building – cost to Jones ……………………………… 300,000

fair value …………………………………... 400,000

Inventory – cost to Smith ……………………………. 200,000

fair value …………………………………... 280,000

Mortgage payable ……………………………………. 120,000
Accounts Payable ……………………………………. 60,000

Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed by the Jones
and Smith partnership. What is the balance in each partner’s capital account for financial accounting
purposes?

Jones Smith

Answer: C. P360,000 P260,000

The business assets of LL and MM appear below:

____LL ____ ____ MM_____
 Cash …………………………………………………… P 11,000 P 22,354

Accounts Receivable ………………………………….. 234,536 567,890

Inventories …………………………………………….. 120,035 260,102

Land …………………………………………………… 603,000 

Building ………………………………………………..  428,267
Furniture and fixture ………………………………….. 50,345 34,789
Other Assets …………………………………………... __2,000 __3,600

Total P 1,020,916 P 1,317,002

Accounts Payable… ………………………………….. P 178.940 P 243,650

Notes Payable ………………………………………… 200,000 345,000

LL, Capital …………………………………………… 641,976 

MM, Capital ………………………………................... ____ _728,352

Total P 1,020,916 P 1,317,002

LL and MM agreed to form a partnership by contributing their respective assets and equities subject to the
following adjustments:
Accounts receivable of P20,000 in LL’S books and P35,000 in MM’s are uncollectible.
Inventories of P5,500 and P6,700 are worthless in LL’s nd MM’s respective books.
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:

Answer: D. LL, P614,476; MM, P683,052

The same information in Number 9, how much total assets does the partnership have after formation?

Answer: C. P 2,265, 118

On March 1, 20x5, PP and QQ decide to combine their businesses and form a partnership. Their balance sheets on March 1,
before adjustments showed the following:

___PP____ ___ QQ____

Cash …………………………………………………… P 9,000 P 3,750

Accounts Receivable ………………………………….. 18,500 13,500

Inventories …………………………………………….. 30,000 19,500

Furniture and fixture (net)…………………………….. 30,000 9,000

 Office Equipment (net) ………………………………. 11,500 2,750
Prepaid Expenses ……………………………………... __6,375 __3,000

Total P 105,375 P 51,500

Accounts Payable… …………………………………. P 45,750 P 18,000

Capital ……………………………….................. ___59,625 _33,500

Total P 105,375 P 51,500

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

Provide 2% allowance for doubtful accounts
PP’s furniture and fixtures should be P31,000, while QQ’s office equipment is under-depreciated by P250.
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.
The fair market value of inventory amounted to:
For PP ……………………………………………… P29,500
For QQ …………………………………………….. P21,000

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

____PP ___ ____QQ____

Answer: C. P (870) P 180

The same information in number 11, compute the total liabilities after formation:

Answer: C. P 65,550

The same information in number 11, compute the total assets after formation:

Answer: A. P 157,985

On April 30, 20x5, XX, YY and ZZ formed a partnership by combining their separate business proprietorships. XX
contributed cash of P75,000. YY contributed property with P54,000 carrying amount, a P60,000 original cost, and a
P120,000 fair value. The partnership accepted responsibility for the P52,500 mortgage attached to the property. ZZ
contributed equipment with a P45,000 carrying amount, a P112,500 original cost, and P82,500 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, 2015 capital balance?

Answer: C. ZZ

Items 15 to 17 are based on the following data:

On January 1, 20x4, Jackson and Kendall formed a partnership. Jackson, who has many years of experience
in this line of business, contributed P100,000 in cash. Kendall contributed assets having the following book
values and fair market values:

Book Value Market Value

Merchandise P 15,000 P 25,000
Building 40,000 150,000
Equipment 60,000 85,000
 The partnership assumed a mortgage of P40,000 on the building. Capital accounts are set equal to net assets
invested.

15. The increase in capital of Kendall:

Answer: B. by P100,000

16. The partners have an equal interest in the initial total partnership capital, and the bonus method is used, the
increase in capital of Jackson:

Answer: C by P160,000

17. The partners have an equal interest in the initial total partnership capital, and the goodwill method is used, the
increase in capital of Jackson:

Answer: D. by P220,000