Accounting for Special Transactions

AC 8
Quiz 1

1. 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 formation?
a. P25,000 c. P60,000
b. 30,000 d. 50,000

2. On March 1, 20x5, YOU and AY formed a partnership with each contributing the following assets:

YOU AY
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 of 800,000, which is to be assumed by the partnership agreement provides
that YOU and AY share profits and losses 30% and 70%, respectively. On March 1, 20x5 the balance in AY's capital
account should be:
a. P3,700,000 c. P3,050,000
b. 3,140,000 d. 2,900,000

AY
Cash P 700,000
Machinery and Equipment 750,000
Building 2,250,000
Mortgage Loan (800,000)
Capital Balance of AY on March 1, 20x5 P 2,900,000

3. 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:
a. P3,700,000 c. P3,050,000
b.3,140,000 d. 2,900.000

AY
Cash P 700,000
Machinery and Equipment 750,000
Building 2,250,000
Capital Balance of AY on March 1, 20x5 P 3,700,000

4. As of July 1, 20x5, DING and DONG decided to form a partnership. Their balance sheets on this date are:
DING DONG
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 P705,000 P735,000
Accounts Payable P135,000 P240,000
DING, capital 570,000 -
DONG, capital - 495,000
Total P705,000 P735,000

The partners agreed that the machinery and equipment of DING is under depreciated by P15,000 and that of
DONG by P45,000. Allowance for doubtful accounts is to be set up amounting to P 120,000 for DING and P45,000
for DONG. The partnership agreement provides for a profit and loss ratio and capital interest of 60% to DING and
40% to DONG. How much cash must DING invest to bring the partners' capital balances proportionate to their
profit and loss ratio?
a. P52,560 c.142,560
b.102,500 d. 172,500

DING DONG
Unadjusted Capital P 570,000 P 475,000
Adjustments:
Accumulated Depreciation (15,000) (45,000)
Allowance for Doubtful Accounts (120,000) (45,000)
Adjusted Contributed Capital P 435,000 P 405,000

DONG Adjusted Capital P 435,000

Divided by: DONG P/L % 40%
Total Agreed Capital 1,012,500
Multiplied by: DING P/L % 60%
DING’s Agreed Capital 607,500
Less: DING’s adjusted capital 405,000
Additional Cash to be Invested by DING 172,500

5. JJ and KK are partners who share profits and losses in the ratio of 60%: 40%, respectively: Ju's, salary is 60,000
and P30,000 for KK. The partners are also paid interest on their average capital balances. In 20x5, Ju received
P30,000 of interest and KK, P12,000. The profit and loss allocation is determined after deductions for the salary
and interest payments. If KK's share in the residual income (income after deducting salaries and interest) was
60,000 in 20x5, what was the total partnership income?
a. P192,000 c. P282,000
b.345,000 d. 387,000

JJ KK TOTAL
Salary P 60,000 P 30,000 P 90,000
Interest 30,000 12,000 42,000
Balance on Residual Profit 60,000 *150,000
P 282,000

*P 60,000 / 40% = P 150,000

6. James has a bonus as part of his partner profit allocation. The bonus is based on the partnerships net income.
James receives a bonus equal to 5 percent that the net income exceeds P150,000. If the net income in the current
year is P 180,000, how much bonus does James receive?
a. P30,000 c. P 7,500
b. P 9,000 d. P 1,500

Bonus = .05 (180,000 – 150,000)

Bonus = 1,500

7. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40 to 45/55. At the date
of the change, the partners choose to revalue assets with market value different from book value. One asset
revalued is land with a book value of P50,000 and a market value of P120,000. Two years after the profit and loss
ratio is changed, the land is sold for P200,000. What is the amount of change to Robert's capital account at the
date the land is sold?
a. P32,000 c. P60,000
b. P44,000 d. P82,500

(200,000 – 120,000) (.55)

= 44,000
8. Cheryl is the manager of a local store. She is also a partner in the company and she receives a bonus as part of
the profit and loss allocation. Cheryl's bonus is based on the increase in revenues recorded during the period.
The bonus arrangement is that Cheryl receives 1 percent of net income for every full percentage point growth for
revenues in excess of a 5 percent revenue growth. During the most recent period, revenues grew from P500,000
to P540,000 and net income grew from P98,000 to P120,000. How much bonus does Cheryl receive for this
period?
a. P2,000 c. P3,600
b. P1,100 d. P6,000

Bonus = (((540,000 – 500,000)/500,000) – 0.05) 120,000

Bonus = 3,600

9. The partnership agreement of XX, YY & ZZ provides for the year-end allocation of net income in the following
order:
• First, XX is to receive 10% of net income up to P200,000 and 20% over P200,000.
• Second, YY and ZZ each are to receive 5% of the remaining income over P300,000.
• The balance of income is to be allocated equally among the three partners.
The partnership's 20x5 net income was P500,000 before any allocations to partners. What amount should be
allocated to XX?
a. P 202,000 c. 206,000
b. P216,000 d. 220,000

XX YY ZZ TOTAL
XX: First P 200,000 x 10% P 20,000 P 20,000
Over 200,000: (500,000 – 200,000) x 20% 60,000 60,000
YY and ZZ: 5% of the remaining income
Over 300,000: (500,000 – 20,000 – 60,000 – P 6,000 P 6,000 12,000
300,000) x 5%
Balance allocated equally 136,000 136,000 136,000 408,000
P 216,000 P 142,000 P 142,000 P 500,000

10. AA and DD created a partnership to own and operate a health-food store. The partnership agreement provided
that AA receive a salary of P10,000 and DD a salary of P5,000 to recognize their relative time spent in operating
the store. Remaining profits and losses were divided 60:40 to AA and DD, respectively. Income for 20x5, the first
year of operations, of P 13,000 was allocated P8,800 to AA and P4,200 to DD.
On January 1, 20x6, the partnership agreement was changed to reflect the fact that DD could no longer devote any
time to the store's operations.
The new agreement allows AA a salary of P 18,000, and the remaining profits and losses are divided equally. In
20x6 an error was discovered such that the 20x5 reported income was understated by P4,000. The partnership
income of P25,000 for 20x6 included the P4,000 related to year 20x5.
In the reported net income of P25,000 for the year 20x6, AA and DD would have:

AA DD AA DD
a. P 21,900 P 3,100 c. P0 P0
b. 17,100 17,100 d. 12,500 12,500

AA DD TOTAL
Salary P 18,000 P 18,000
Balance: Equally 1,500 1,500 1,500
Income for year 20x6 19,500 1,500 21,000
Income for year 20x5 (60:40) 2,400 1,600 4,000
Reported Income for Year 20x6 21,900 3,100 25,000

11. Using the same information in No. 58, assuming that implied goodwill for revaluation of asset) is to be
recorded prior to the acquisition by NN. The capitals of KK, LL, and MM, respectively after admission of NN are:
a.P198,000; P 99,000; P33,000 c. P216,000; P108,000; P36,000
b. P201,600; P100,800; P33,600 d. P255,600; P127,800; P42,600
12. MM and OO are partners with capital balances of P50,000 and P70,000. respectively, and they share profits
and losses equally. The partners agree to take PP into the partnership for a 40% interest in capital and profits,
while MM and OO each retain a 30% interest. PP pays P60,000 cash directly to MM and OO for his 40% interest,
and goodwill implied by PP's payment is recognized on the partnership books. If MM and OO transfer equal
amounts of capital to PP, the capital balances after PP's admittance will be:
a. MM, P35,000; OO, P55,000; PP, P60,000
b. MM. P45,000; OO, P45,000; PP, P60,000
c. MM, P36,000; OO, P36,000; PP, P48,000
d. MM, P26,000; OO, P46,000; PP, P 48,000

Amount paid P 60,000 Amount paid P60,000

Book value of interest acquired 48,000 Divided by: 40%
Excess 12,000 OR Grossed up value of partnership assets 150,000
Divided by: 40% Original Contributed Capital 120,000
Goodwill P 30,000 Goodwill P30,000

MM OO PP TOTAL
Capital balances before admission P 50,000 P 70,000 - P 120,000
Goodwill (equally) 15,000 15,000 - 30,000
65,000 85,000 - 150,000
Admission by purchase 30,000 30,000 P 60,000 -
Capital balances after admission P 35,000 P 55,000 P 60,000 P 150,000

13. AA, BB, and CC are partners sharing profits in a 5:3:2 ratio, and with capital balances of P95,000, P80,000,
and P60,000, respectively, on December 31, 20x5. The partners decided to admit DD as a new partner on January
1, 20x6. DD will contribute cash of P80,000 to the partnership and also pay P10,000 for 15% of BB's share. DD is
to have a 20% share in profits. After the admission of DD, the total capital will be P330,000 and DD's capital will
be P70,000. After the admission of DD, BB's capital balance would be:
a. P72,600 c. P79,100
b.74,600 d. 81,100

AA BB CC DD TOTAL
Capital balances before admission of DD P 95,000 P 80,000 P 60,000 P- P235,000
Admission by purchase: Book Value (80,000x15%) (12,000) 12,000 -
Admission by investment 80,000 80,000
Total Contributed capital P 95,000 P 68,000 P 60,000 P 92,000 P315,000
Bonus to old partners (5:3:2) 11,000 6,600 4,400 (22,000)**
Goodwill to old partners: (5:3:2) 7,500 4,500 3,000 - 15,000***
Total agreed capital P113,500 P79,100 67,400 P70,000* P330,000*

*Given
**Transfer of capital, DD’s capital should only be 70,000, the difference will be bonus to old partners
*** Goodwill will be recognized to arrive to 330,000. Also, Total contributed capital is different from total agreed capital

14. Sandra and Joshua are partners. They have capital account balances of P250,000 and P200,000, respectively,
and they share profits and losses 70/30. The partners are considering admitting Judy as a new partner with a 25
percent equity interest for an investment in the partnership of 180,000. Before admission, Sandra and Joshua will
revalue the partnership's assets. If the net increase in the partnership's assets is P125,000, what will be the
balance in Sandra's capital account immediately before Judy's admission?
a. P262,500 c. P528,500
b. P337,500 d. P575,000

P 250,000 + (125,000 x 70%)

= P 337,500

15. Smith, a partner in an accounting firm, decided to withdraw from the partnership, Smith's share of the
partnership profits and losses was 20%. Upon withdrawing from the partnership he was paid P88,800 in final
settlement for his interest. The total of the partners' capital accounts before recognition of partnership goodwill
prior to Smith's withdrawal was 212 P252,000. After his withdrawal the remaining partners' capital accounts,
(192) excluding their share of goodwill, totaled P192,000. The total goodwill of the firm was:
a. P144,000 c. P192,000
b.168,000 d. 300,000

Amount paid P 88,800

Less: Book value of interest of Smith
Total partners’ capital before withdrawal P 252,000
Less: Total partners’ capital after withdrawal 192,000 60,000
Excess/Partial goodwill P 28,800
Divided by: 20%
Total Goodwill P 144,000

16. Partners Art and Tony, who share equally in profits and losses, have the following balance sheet as of
December 31, 20x5:
Cash P 120,000 Accounts Payable 172,000
Accounts Receivable 100,000 Accumulated Depreciation 8,000
Inventory 140,000 Art, Capital 140,000
Equipment 80,000 Tony, Capital 120,000
Total P 440,000 Total P 440,000

They agreed to incorporate their partnership, with the new corporation absorbing the net assets after the following
adjustments: provision of allowance for bad debts of P10,000; restatement of the inventory at its current fair value
of P160,000; and recognition of further depreciation on the equipment of P3,000. The corporation's capital stock
is to have a par value of P100, and the partners are to be issued corresponding total shares equivalent to their
adjusted capital balances. The total par value of the shares of capital stock that were issued to partners Art and
Tony was:
a. P 260,000 c. P273,000
b. 267,000 d. 280,000

Unadjusted capital balances (140,000 + 120,000) P 260,000

Add / Deduct: Adjustments
Allowance for doubtful accounts (10,000)
Revaluation of Inventory 20,000
Additional Depreciation (3,000)
Adjusted Capital Balances equivalent to the total shares issued P 267,000

17. Which of the following is not a similarity that exists between proprietorships and partnerships? a.
a. Neither requires approval by a state to form
b. Both can use an accounting method that does not conform to GAAP
c. Owners put the company's income on the owner's individual tax return
d. All of the above are similarities of proprietorships and partnerships

18. Which of the following is not an area where there are differences when comparing partnerships and
corporations?
a. The ease of formation
b. The level of owner legal liability
c. The ease of ownership transferability
d. All of the above are areas where partnerships and corporations differ

19. Which of the following statements is correct with regard to drawing accounts that may be used by a
partnership?
a. Drawing accounts are closed to the partners' capital accounts af the end of the accounting period
b. Drawing accounts establish the amount that may be taken from the partnership by a partner in a given time
period
c. Drawing accounts are similar to Retained Earnings in a corporation
d. Drawing accounts appear on the balance sheet as a contra-equity account
20. Which component of the partnership profit and loss allocation compensates partners for the routine time and
effort expended in the business?
a. Interest on capital balance c. Salary
b. Bonus d. Residual interest

21. Which of the following occurs every time a new partner is admitted to a partnership or dn existing partner
leaves the partnership?
a. Dissolution c. Dissolution and termination
b. Termination d. None of the above occurs