ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 44  October 2022 CPA Licensure Examination

AFAR-01A
ADVANCED FINANCIAL ACCOUNTING & REPORTING (AFAR) A. DAYAG  G. CAIGA  M. NGINA  J. A. CRUZ

II - A
CC and DD are joining their separate business to form a partnership. Cash and non-cash assets are to be contributed
for a total capital of P150,000. The non-cash assets to be contributed and liabilities to be assumed are:
CC DD
Book Value Fair Value Book Value Fair Value
Accounts Receivable….. P11,250.00 P11,250.00
Inventories……………….. 11,250.00 16,875.00 P30,000.00 P33,750.00
Equipment……………….. 18,750.00 15,000.00 33,750.00 35,625.00
Accounts Payable……… 5,637.50 5,625.00 3,750.00 3,750.00
The partner’s capital accounts are to be equal after all contributions of assets and assumptions of
liabilities.
Determine:
1. The total assets of the partnership.
a. P159,375.00 b. P150,000.00 c. P140,625.00 d. P112,500.00
2. The amount of cash that each partner must contribute:
a. CC – P37,500; DD – P9,375 c. CC – P80,625; DD – P78,750
b. CC – P37,500; DD – P5,625 d. CC – P63,750; DD – P5,625
III – Solution
Answers/Solutions:
1. (d)
Total capital of the new partnership (refer to No. 2) P 296,875
Multiply by RR’s interest 20%
Cash to be invested by RR P 59,375
2. (a) OO PP Total
(60%) (40%)
Unadjusted capital balances P133,000 P108,000 P241,000
Adjustments:
Allowance for bad debts ( 2,700) ( 1,800) ( 4,500)
Inventories 3,000 2,000 5,000
Accrued expenses ( 2,400) ( 1,600) ( 4,000)
Adjusted capital balances P130,900 P106,600 P237,500
Total capital before the formation of the new partnership (see above) P 237,500
Divide by the total percentage share of OO and PP (50% + 30%) 80%
Total capital of the partnership after the admission of RR P 296,875
3. (a)
Contributed Capital Contributed Capital Settlement
OO P 130,900 P148,437.50 (50% x P296,875) P 17,537.50
PP 106,600 89,062.50 (30% x P296,875) (17,537.50)
Therefore, OO will pay PP P17,537.50
Partnership Operations V-A
Hunt, Rob, Turman and Kelly own a publishing company that they operate as a partnership. The
partnership agreement includes the following:
• Hunt receives a salary of P10,000 and a bonus of 3% of income after all bonuses.
• Rob receives a salary of P5,000 and a bonus of 2% of income after all bonuses.
• All partners are to receive 10% interest on their average capital balances.
The average capital balances are Hunt, P25,000; Rob, P22,500; Turman, P10,000 and Kelly, P23,500. Any
remaining profits and losses are to be allocated equally among the partners. Determine how a profit of
P52,500 would be allocated among the partners.
a. Hunt, P20,725; Rob, P14,975; Turman, P7,725; Kelly, P9,075
b. Hunt, P14,000; Rob, P8,250; Turman, P1,000; Kelly, P2,350
c. Hunt, P19,850; Rob, P14,600; Turman, P8,350; Kelly, P9,700
d. Cannot be determined.
VI – A: Bonus as a distribution of profit
XX and YY formed a partnership on January 2, 2019 and agreed to share profits and loss in the ratio of
90% and 10%, respectively. XX contributed capital of P6,250. YY contributed no capital but has a
specialized expertise and manages the firm full time. There were no withdrawals during the year. The
partnership agreement provides for the following:
• Capital accounts are to be credited annually with interest at 5% of the beginning capital
• YY is to be paid a salary of P250 a month
• YY is to receive a bonus of 20% of net income calculated before deducting his salary and
interest on both capital accounts.
• Bonus, interest, and YY’s salary are to be considered as partnership expenses
The partnership’s income statement for 2019 follows:
Revenues………………………………………………………. P24,112.50
Less: Expenses (including salary, interest, and bonus)… 12,425.00
Net income……………………………………………………. P11,687.50
1. What is YY’s 2019 bonus?
a. P2,922.00 b. P3,000.00 c. P3,750.00 d. P3,934.50
2. How much is the total share of Y on the 2019 partnership net income?
a. P7,084.50 b. P7,162.50 c. P7,918.75 d. P8,097.00
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AFAR-01A
PARTNERSHIP FORMATION & OPERATIONS

Solution to Problem IV: Allocation of Net Income

1. It should be noted that the order of priority is of no significance when it comes to allocation
of net income. Unless in cases, when there is a resulting residual loss, wherein the residual
loss should be allocated based on their agreement. In this case, there is no such
agreement, so the allocation would still be to satisfy completely all provisions of the profit
and loss agreement and use the profit and loss ratios to absorb any deficiency or
additional loss cause by such action.
Olsen Katch Total
Interest P 2,000 P 2,400 P 4,400
Bonus 10,000 10,000
Salaries 48,000 36,000 84,000
Remainder (6:4) __8,040 __5,360 _13,400
P58,040 P26,960 P85,000

Weighted Average Calculation:

Olsen:
Capital Gross
Balance # of Months Capital
1/1 to 4/1 20,000 3 60,000
4/1 to 10/1 25,000 6 150,000
10/1 to 12/31 30,000 3 90,000
Total 300,000
Average 25,000

Katch:
Capital Gross
Balance # of Months Capital
1/1 to 3/1 40,000 2 80,000
3/1 to 9/1 30,000 6 180,000
9/1 to 11/1 20,000 2 40,000
11/1 to 12/31 30,000 2 60,000
Total 360,000
Average 30,000

2. Olsen Katch Total

Salaries P48,000 P36,000 P 84,000
Bonus 10,000 10,000
Interest* 2,000 2,400 4,400
Remainder 39,960 26,640 66,600
Final Profit: P89,960 P75,040 P165,000
*see part '1' solution for weighted average capital calculation

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