Unit I – Partnership Formation and Operation

Lesson 2 – Partnership Formation

Activity 1 –

1. On October 1, 2020, JC Construction and GB builders decided to form a partnership to be known as JCGB Construction Company. Their Statement
of financial Position on this date were:

JC Construction GB Builders
Cash P 250,000 P 260,000
Accounts Receivable 400,000 390,000
Allowance for bad debts (15,000) (13,000)
Inventory 600,000 700,000
Equipment , net 800,000 1,000,000
Total 2,035,000 2,337,000

Accounts Payable 335,000 550,000

Amanda Capital 1,700,000
Diana, Capital _________ 1,787,000
Total 2,035,000 2,337,000

They agreed the following adjustments shall be made:

1. Equipment of JC Construction is under depreciated by P 10,000 and that GB Builders is over depreciated by P 15,000.
2. Allowance for bad debts shall be equal to 10% of Accounts Receivable.
3. The value of Inventories of JC is to be increased by P 8,000 and for GB Builders, P 5,000 are worthless.
4. The assets and liabilities at their adjusted values shall be assumed by the partnership.

REQUIRED:

1. Prepare the necessary journal entries in the books of JC Construction and GB Builders.
2. Prepare the journal entries in the books of JCGB Construction Company
3. Prepare the statement of financial position of the partnership

2. Using the same data in problem 1: except that the partnership provides that JC and GB share profits and
losses 40:60, respectively. The agreement further provides that the partners’ capital must be in conformity
with their profit and loss ratio upon formation.

Q1. Assuming the use of transfer of capital method, how much is the agreed capital of JC to bring the
capital balances proportionate to their profit and loss ratio? _______________________________

Q2. The total assets of the Partnership after the formation is ___________________________________

Q3. Prepare journal entries to record the formation of the partnership.

(Note: Please use this General Journal format. Do not copy the problem.)

3. AB and CD decided to form a partnership on August 1, 2020. Their balance sheets on this date are:

AB CD
Cash P 15,000 P 37,500
Accounts Receivable 340,000 205,000
Merchandise Inventory 200,000 202,500
Equipment 200,000 350,000
Accumulated depreciation ( 50,000) ( 60,000)
Total P 705,000 P 735,000
Accounts Payable P 105,000 P 265,000
Capital 600,000 470,000
Total P 705,000 P 735,000

They agreed to have the following adjustments :

1. Equipment of AB is underdepreciated by P 20,000 and that of CD is overdepreciated by P 10,000.

2. Allowance for doubtful accounts is to be set up amounting to P 68,000 for AB and P 45,000 for CD.
3. Inventories of P 5,000 and P 15,000 are worthless in AB’s and CD’s books, respectively.
4. The partnership agreement provides for a profit and loss ratio and capital interest of 70% to AB and 30% to CD.

1. How much cash must AB invests to bring the capital balances proportionate to their profit and loss ratio?

______________________
2. Prepare journal entries in the books of the sole proprietors and partnership books.

Activity 2 – Multiple Choice Problems: Answers must be supported with computations. .

On January 1, 2020, Anne, and Betty decided to form a partnership. The firm is to take over the assets and assume liabilities and capital are to be
based on net assets transferred after the following adjustments:

a. Anne and Betty’s inventory is to be valued at P 31,000 and P 22,000, respectively.

b. Accounts receivable of P 2,000 in Anne’s books and P 1,000 in Betty’s books are uncollectible.
c. Accrued salaries of P 4,000 to Anne and P 5,000 to Betty are still to be recognized in the books.
d. Unused office supplies of Anne amounted to P 5,000 while that of Betty amounted to P 1,500.
e. Unrecorded patent of P 7,000 and prepaid rent of P 4,500 are to be recognized in the books of Anne and Betty, respectively.
f. Anne is to invest or withdraw cash necessary to have a 40% interest in the firm.

Balance sheets for Anne and Betty on January 1, 2020, before adjustments are given below:
Anne Betty
Cash P 31,000 P 50,000
Accounts receivable 26,000 20,000
Inventory 32,000 24,000
Office supplies --- 5,000
Equipment 20,000 24,000
Accumulated depreciation – equipment (9,000) (3,000)
Total assets P 100,000 P 120,000

Accounts payable P 28,000 P 20,000

Capitals 72,000 100,000
Total assets P 100,000 P 120,000

1. The net adjustments – capital in the books of Anne and Betty:

a) Anne, P 7,000 net debit, and Betty, P 2,000 net credit
b) Anne, P 5,000 net debit, and Betty, P 7,000 net credit
c) Anne, P 7,000 net credit, and Betty, P 2,000 net debit
d) Anne, P 5,000 net credit, and Betty, P 7,000 net debit

2. The adjusted capital of Anne and Betty in their respective books:

a) Anne, P 65,000; Betty, P 102,000 c) Anne, P 77,000; Betty, P 98,000
b) Anne, P 63,000; Betty, P 107,000 d) Anne, P 77,000; Betty, P 93,000

3. The additional investment (withdrawal) made by Anne:

a) P ( 6,666.50) b) P (15,000) c) P 3,000 d) P 8,377.50

4. The total assets of the partnership after formation:

a) P 212,000 b) P 220,333.50 c) P 230,000 d) P 235,333.50
5. The total Liabilities of the partnership after formation:
a) P 48,000 b) P 51,000 c) P 54,000 d) P 57,000

6. The total capital of the partnership after formation:

a) P 155,000 b) P 163,333.50 c) P 178,333.50 d) P 180,000

7. The capital balances of Anne and Betty in the partnership balance sheet:
a) Anne, P 81,250; Betty, P 72,000 c) Anne, P 100,000; Betty, P 75,000
b) Anne, P 81,250; Betty, P 75,000 d) Anne, P 62,000; Betty, P 93,000

8. On January 1, 2020 PS and RT agreed to form a partnership. The following are their assets and
liabilities:
Accounts PS RT
Cash P 136,000 P 76,000
Accounts Receivable 88,000 48,000
Inventories 304,000 364,000
Machinery 480,000 440,000
Accounts Payable 216,000 144,000
Notes Payable 140,000 60,000

PS decided to pay-off his notes payable from his personal assets. It was also agreed that RT inventories
were overstated by P 24,000 and PS machinery was overdepreciatedi by P 20,000. RT is to invest/withdraw
cash in order to receive a capital credit that is 20% more than PS’ total net investment in the partnership.

How much cash will be presented in the partnership’s statement of financial position?
a) P 274,400 b) P 410,400 c) P 450,400 d) P 486,400

9. On December 1, 2019, DJ and BF agreed to invest equal amounts and share profits equally to form a
partnership. DJ invested P 3,120,000 cash and a piece of equipment. BF invested some assets which are
 shown below: Book value
Accounts Receivable P 400,000
Inventory 1,120,000
Machineries, net 2,240,000
Intangibles, net 920,000

The assets invested by BF are not properly valued . P 32,000 of the accounts receivable are proven
uncollectible. Inventories are to be written down to P 1,040,000. Included in the machineries is an obsolete
apparatus acquired for P 384,000 with an accumulated depreciation balance of P 336,000. Part of the
intangibles is a patent with a carrying value of P 56,000 which was sued upon by a competitor . BF
unsuccessfully defended the case and the final decision of the court was released on November 29, 2019.

What is the fair value of the equipment invested by DJ?

a) P 968,000 b) P 1,344,000 c) P 1,400,000 d) P 1,560,000

10. On September 3, 2020, MM admits VV for an interest in his business. On this date MM’s capital account shows
a balance of P 452,000. The following were agreed upon before the formation of the partnership:

1. Prepaid expenses of P 25,750 and accrued expenses of P 17,500 are to be recognized.

2. 8% of the outstanding accounts receivable of MM amounting to P375,000 is to be recognized as uncollectible.
3. VV invested P 260,000 worth of merchandise and is to be credited with a one-third interest in the partnership.
4. MM is to invest or withdraw cash to earn his interest.

Which of the following is not true regarding the partnership formation?

a) The total agreed capital upon formation is P 780,000

b) The total contributed capital of the partnership is P 690,250.
c) MM invest additional cash of P89,750 to earn his interest in the partnership.
d) A net debit adjustment of P 21,750 affected the capital balance of MM upon formation.

11. A and B have just formed a partnership. A contributed cash of P 882,000 and office equipment that cost
P 378,000. the equipment had been used in his sole proprietorship and had been 70% depreciated, the
current market value of the equipment is P 252,000. A also contributed a note payable of P 84,000 to be
assumed by the partnership. A is to have 60% interest in the partnership. B contributed only P 630,000
merchandise inventory at fair market value. The partner’s .capital must be in conformity with their profit and
loss ratio upon formation. Which of the following is true?

a) The agreed capital of A upon formation is P 1,008,000.

b) The capital of B will decrease by P 42,000 as a result of the transfer of capital.
c) The total agreed capital of the partnership is P 1,750,000.
d) There is an investment or withdrawal of asset under the bonus method.

12. On June 1, 2020, AJ the sole proprietor of AJ Company, expands the company and establish a partnership
with DJ and PJ. The partners plan to share profits and losses as follows: AJ, 40%, DJ, 35% and PJ 25%.AJ asked DJ to join the partnership
because his image and reputation are expected to be valuable during the formation. DJ is also contributing P 420,000 cash and a building that
was acquired for P 4,040,000, with carrying amount of P 3,480,000 and a fair market value of P 1,960,000. The building is subject to a P
792,000 mortgage that the partnership did not assume. PJ is contributing P 848,000 cash and marketable securities costing P 1,344,000 to PJ
but are currently worth P 1,900,000 AJ’s investment in the partnership is the AJ Company. The Statement of Financial Position for the AJ
Company follows:

Cash P 1,560,000 Accounts Payable P 1,748,000

Accounts Receivable 1,824,000 Notes Payable 2,368,000
Merchandise Inventory 1,576,000 AJ, Capital 3,316,000
Equipment, net 2,472,000 __________
P 7,432,000 P 7,432,000

The partners 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. AJ 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 statements is false?

a) Assuming the partners will either invest or withdraw cash, using AJ as the base, DJ will invest cash of P 788,200and PJ will withdraw
cash of P 485,000. .
b) Assuming the partners will either invest or withdraw cash , using DJ as the base, AJ and PJ will both withdraw cash with a total amount
of P 1,948,800.
c) Assuming the partners will either invest or withdraw cash, using PJ as the base, AJ and DJ will both invest cash with a total amount of P
2,243,200.
d) If the transfer of capital method is used, the capital accounts of AJ and PJ will be debited in the amount of P 560,800 and P 121,280,
respectively.

13. On June 1, 2020, AD invited MP to join him in his business. Mp agreed provided that AD will adjust the
 accumulated depreciation of his Equipment account to a certain amount and will recognize additional
accrued expenses of P 40,000. After that, MP is to invest additional pieces of equipment to make her interest
equal to 45%. If the capital balances od AD before and after adjustments were P 556,000 and P 484,000,
respectively, what is the effect in the carrying value of the equipment as a result of the admission of MP?

a) P 364,000 b) P 32,000 c) P 396,000 d) (P 324,000)

14. Net assets of DD, EE and CC before formation are P 135,000, P 165,000 and P 251,000, respectively. The
partners agreed that certain assets and liabilities had to be adjusted. DD’s note payable of P 15,000 bearing
an interest of 12% should be included in the partnership books and other assets undervalued by P 24,000.
The interest is personally paid by DD. EE’s prepaid expenses should be P 5,000 less than what is stated in
the financial statements. CC’s liabilities were understated by P 14,500.

How much is the capital of DD after the formation?

a) P 174,000 b) P 144,000 c) P 142,200 d) P 127,800

15. On June 1, 2020, MM and AA are combining their separate businesses to form a partnership. Cash and non-
cash assets are to be contributed. The noncash to be contributed and the liabilities to be assumed are :

MM AA
Book value Fair Value Book Value Fair value
Accounts Receivable P 25,000 P 26,250 P 20,000 P 19,000
Inventory 40,000 45,000 20,000 20,750
Property, Plant and Equipment 100,000 90,700 86,250 82,250
Accounts Payable 15,000 15,000 11,250 11,250

MM and AA are to invest equal amounts of cash such that the contribution of MM would be 10% more than the
investment of AA. What is the amount of cash presented on the partnership’s Statement of Financial Position on June 1, 2020?
a) P 251,250 b) P 276,250 c) P 502,500 d) P 552,500
Lesson 3 – Partnership Operation

Activity 1
Problem 1:

The partnership of Dino and Dante are engaged in trading. Dino’s original capital was P 40,000 and
Dante was P 600,000. They agree to share profits and losses as follows:
Dino Dante
Annual salaries P 68,000 P 80,000
As interest on original capital 10% 10%
Bonus on net income after salaries, interest but
before deducting bonus 25%
Remaining profits and losses 30% 70%

Prepare the schedule of profit distribution and journal entry to close Income Summary account for the year ended December 31, 2020, assuming:

1. The Income Summary account shows a credit balance of P 280,000.

2. The Income Summary account shows a credit balance of P 125,000.
3. The Income Summary account shows a debit balance of P 120,000.

(Note: for journal entries, please use the general journal format below. )

Problem 2:

The following balance sheet for MTJ Partnership is dated September 30, 2020:

Cash P 40,000 Liabilities P 100,000

Other Assets 360,000 M, Capital 74,000
T, Capital 130,000
________ J, Capital __96,000
P 400,000 P 400,000

The partners agreed to distribute the profits as follows:

1. Allow annual salaries to M and T of P 48,000 each.
2. Allow interest of 6% on beginning capital of all partners.
3. Allow bonus to T of 10% of net income after salaries, interest and bonus
4. Remaining: 40% to M, 40% to T and 20% to J.

If the net income of the partnership was P 61,500 during the three-month period ending December 31, 2020,
determine the share of each partner on the net income.

Problem 3:

SS and GG are partners in SG Partnership begins its first year of operations on June 1, 2019 with the following capital balances:
SS, Capital P 1,440,000
GG, Capital 720,000
 According to the partnership agreement, all profits and losses will be distributed as follows:

● SS will be allowed an annual salary of P 960,000 will GG will be allowed a monthly salary of P 112,000.
● The partners will be allowed with an interest equal to 15% of the capital balance as of the first day of the year.
● GG will be allowed a bonus of 12% of the net income after bonus.
● The remainder will be divided equally.
● Each partner is allowed to withdraw up to P 72,000 on the first year and up to P 96,000 the following year and for the next three years.
Assume that the results of operations in 2019 from the date of formation is P 560,000 net income and
P 280,000 net loss the following year. Assume further that each partner withdraws the maximum amount from
the business each period.

Q1. The share of SS in 2019 net income: ______________________________

Q2. The capital balance of SS at the end of 2019 ________________________

Q3. The share of GG in 2020 net loss _________________________________

Q4. Which of the following statements is wrong?

a) The capital balance of SS at the end of 2019 is P 1,242,925

b) The share of GG in the net loss in 2019 is a credit to capital account of P 14,575.
c) There is a net increase of P 97,500 in the capital account of SSS from the beginning to end of 2020.
d) The capital balance of GG at the end of year 2019 is P 1,038,500.

Problem 4.

Ace, Beni Dani and are partners whose capital accounts with the ABC Partnership as of January 1, 2020 and the subsequent changes therein are as follows:

Jan. 1, 2020 Additional Investment Withdrawals

Ace P 300,000 P 210,000 P 90,000

Beni 200,000 120,000 160,000
Dani 150,000 100,000 50,000

Net income for 2020 amounts to P 323,000 and per agreement, this is to be distributed as follows: Salary allowance of P10,000 per month to Ace and
P 7,000 per month to Beni, 10% interest on beginning capital balances, 20% bonus to Ace on net income before interest but after salaries and bonus,
remainder to be divided in the ratio of 2:2:1 between Ace. Beni and Dan, respectively. The temporary withdrawals of Ace, Beni and Dani were P
75,000, P 50,000 and P 35,000, respectively.

REQ: Prepare the statement of Partners’ Capital.

Activity 2 – Multiple Choice Problems. Answers must be supported with computation.

1. C, D and E share in the partnership’s profit and losses in the ratio of 3:4:5. During the year, the partnership’s
distributive income is P 1,500,000. What is the amount of E’s share from the partnership’s income?

a) P 750,000 b) P 625,000 c) P 500,000 d) P 125,000

2. A and B share in the partnership’s profit in the ratio of 2:1, respectively. A received P 245,000 as his share.
How much di B receive as his share?

a) P 367,000 b) P 245,000 c) P 122,500 d) P 122,000

3 After closing the nominal accounts on December 31, 2015, the Income Summary account shows a debit
balance of P200,000. If partners D, E and F have income ratios of 50%, 30% and 20%, respectively, how
much is the share of F from the net income (loss) of the partnership?

a) 60,000 b) P 40,000 c) P (40,000) d) (P 100,000)

for 4 – 5:
X, Y and Z, a partnership formed on January 1, 2020 had the following initial investment:
X P 100,000

Y 150,000

Z 225,000

The partnership agreement states that the profits and losses are to be shared equally by the partners after

Consideration is made for the following:

⮚ Salaries allowed to partners: P 60,000 for X, P 48,000 for Y and P 36,000 for Z.
⮚ Average partners’ capital balances during the year shall be allowed 10%.
Additional information:

⮚ On June 30, 2020, X invested an additional P 60,000.

 ⮚ ZZ withdrew P 70,000 from the partnership on September 30, 2020
⮚ Share on the remaining partnership profit was P 5,000 for each partner.
4. Interest on average capital balances of the partners totaled:

a) P 53,750 b) P 48,750 c) P 60,625 d) P 57,625

5. Partnership net profit at December 31, 2020 before salaries, interests and partners’ share on the remainder
was:
a) P 207,750 b) P 199,750 c) P 211,625 d) P 222,750

6. Total assets before partnership formation are P 800,000 and MM’s assets are P 450,000. Total liabilities before
partnership formation are P 400,000 and NN’s liabilities are P 175,000. They decided to become partners on
January 1, 2020. They agreed on the following adjustments: NN’s assets are understated by P 15,000 and
there is a note payable that he wants to settle outside of the partnership agreement which is still included in
his books amounting to P 13,000. On the other hand, MM has and accounts receivable with an overvalued
allowance for bad debts for P 12,000.During the year NN withdrew P 17,000 on March 21 and made investment
of P 35,000 on August 8, while MM made an investment of P 55,000 on April 8 and made another investment
of P 12,500 on November 14. For the year, the partnership had a credit balance in the income summary account
of P 450,000. The tax rate during the year is 32%. They also agreed that the net income or loss should be
distributed as follows: 8% interest on the beginning capital and the remainder will be shared in the ratio 2:3 for
MM and NN respectively. The net income is earned or net loss is incurred evenly during the year.
How much is the ending capital of MM on December 31, 20120:
a) P 504,760 b) P 489,380 c) P 486,120 d) P 463,460
7. On January 2, 2020, BB and EE formed a partnership. BB contributed capital of P 175,000 and EE, P 25,000.
They agreed to share profits and losses 80% and 20%, respectively. EE is the general manager and works
in the partnership full time and is given a salary of P 5,000 a month; an interest of 5% of the beginning
capital (of both partners) and a bonus of 15% of net income before the salary, interest and bonus. The profit
and loss statement of the partnership for the year ended December 31, 2020 is as follows:

Net Sales P 875,000

Cost of good sold 700,000
Gross Profit P 175,000
Expenses ( including salary, interest and bonus) 143,000
Net income P 32,000

The amount of bonus to EE amounted to:

a) P 13,304 b) P 16,456 c) P 18,000 d) P 20,700
8. Helen and Fenny are partners operating grocery store. Their partnership agreement requires that profits and
losses be divided as follows:
Helen Fenny
Salaries P 20,000 None
Commission on gross sales None 2%
Interest on average capital balances 8% 8%
Bonus 20% of net income before None
commission and interest but
after salaries and bonus
Remainder 60% 40%

Gross Sales for 2020 were P 1,250,000. Income before deducting amounts for salary, commission, interest and bonus were P200,000. Average capital
balances of Helen and Fenny are P 400,000 and P420,000 respectively. What are the profit share of Helen and Fenny respectively?

a) P 117,640 and P 82,360 c) P 110,640 and P 89,360

b) P 35,460 and P 23,760 d) P 117,460 and P 82,540

9. Dan, Jerry and Fred form a partnership and agree to maintain average investments of P 2,500,000,
P1,250,000 and P 1,250,000, respectively. The partners agree to divide profits and losses as follows:
● Interest of 6% on the excess or deficiency in the capital investments
● Remainder to shared in the ratio of 5:3:2 to Dan, Jerry and Fred, respectively.
Average investments made during the first six months were as follows: Dan, P 3,000,000; Jerry, P1,375,000;
Fred, P 1,000,000. A loss from operations of P 62,500 was incurred for the first six months. How is this loss
distributed among the partners?

Dan Jerry Fred Dan Jerry Fred

a) P 21,875 P 18,375 P 22,250 c) P 31,250 P 18,750 P 12,500
b) 12,500 10,000 48,500 d) 18,375 21,875 22,250

10. On December 31, 2020, the total partnership capital for GDK partnership is P 422,000. Selected information
related to the pre-closing capital balance is as follows:
Gee Dee Kay Total
Balance, January 1 P 140,000 P 100,000 P 160,000 P 400,000
Investment, 2020 20,000 20,000 40,000
Withdrawals, 2020 (30,000) (30,000) (60,000)
Drawings, 2020 (10,000) (10,000) (10,000) (30,000)
P 100,000 P 110,000 P 140,000 P 350,000

How much is the partnership net income during the year?

a)P 72,000 b) P 102,000 c) P 42,000 d) P 22,000