Week 1 – Partnership Formation and Partnership Operation

Partnership Formation

Part 1: Theory of Accounts

1. This is the framework within which the partners are to operate or conduct partnership business.
a. Partnership agreement
b. Partnership virtue
c. PFRS
d. Mutual Agency

2. If the partnership assumes a liability of a partner, in recording in the new partnership books, it
involves a
a. Credit to the asset
b. Credit to the capital account of that partner
e. Debit to drawing account of that partner
d. Debit capital account of that partner

3. If a certain asset is contributed to the partnership, and in the absence of the agreed value, when
recording that certain asset in the partnership books, it is valued at
a. Fair market value
b. Assessed value
c. Original cost
d. Tax Base

4. If the partners decide to adjust their initial capital to conform to their profit/loss ratio, the total
capital balance of the partnership before and after adjustment is the same under:
a. Bonus Method
b. Goodwill Method

c. Additional Investment/Withdrawal Method

d. None of the above

Part II: Problem Solving

Problem 1. Kylie and AJ decided to combine their businesses and form a partnership. Below are their
statements of financial position before the formation:
Kylie AJ
Cash P2,048,400 P1,098,360
Accounts receivable 1,031,960 2,498,716
Inventories 528,160 1,144,448
Property and equipment - net 613,380 852.224
Other assets 8,800 15,840
Total assets P4,230,700 P5,609,588

Accounts payable P787,336 P1,072,060

Notes payable 1,000,000 -
Mortgage payable - 1,440,000
Kylie, capital 2,443,364 -
AJ, capital - 3,097,528
Total liabilities and equity P4,230,700 P5,609,588

The partners agreed that the property and equipment of Kylie is over-depreciated by P80,000 and that
of AJ is under-depreciated by P200,000. Accounts receivable of P140,000 in Kylie's book and P108,000 in
AJ's book are uncollectible. The partnership decided to assume the mortgage liability of AJ but not the
note payable of Kylie. The partnership agreement provides for a profit and loss ratio of 60% to Kylie and
40% to AJ.

1. How much is the initial capital balance of Kylie upon formation, based on actual
contributions?
a. 3,383,364
b. 2,383,364
c. 2,789,528
d. 4,229,528

Solution:

K A
 Unadjusted capital 2,443,364 3,097,528
Over-depreciation of K 80,000 -
Under Depreciation of A - (200,000)
Uncollectible AR (140,000) (108,000)
NP not assumed by partnership 1,000,000 -
Capital balances after
adjustments 3,383,364 2,789,528

2. How much is the total assets of the partnership upon formation?

a. 6,172,892
b. 9,472,536
c. 9,712,288
d. 9,472,288

Solution:

Total assets before formation 9,840,288

(4,230,700+5,609,588)
Over-depreciation of K 80,000
Under-depreciation of A (200,000)
Uncollectible AR (140,000+108,000) 248,000
Total assets after formation 9,472,288

3. Assume that Kylie and AJ decided to make their capital ratio conform to their profit/loss ratio. Under
the bonus method, which of the following statement is correct?
a. Total capital balance should decrease by 320,371.20
b. Total capital balance should increase by 320,371.20
c. The adjustment should include a debit to Kylie's capital of 320,371.20
d. AJ' capital balance should decrease by 320,371.20

Solution:

K A
Capital contributions 3,383,364 2,789,528 6,172,892 TCC
Bonus 320,371 (320,371)
Capital credit 3.703,735 2,469,157 6,172,892 TAC
 Capital credit of K: 3,703,735
6.172,892 x 60% =
Capital credit of A: 2,469,157
6.172.892x 40% =

4. Assume that Kylie and AJ decided to make their capital ratio conform to their profit/loss ratio, and
that AJ willing to invest/withdraw sufficient cash in the process, which of the following statements is
incorrect?
a. Kylie's capital balance is the same before and after adjustment
b. AJ's capital balance will decrease by $33,952
c. The total capital balance of the partnership neither increase nor decrease
d. The total capital balance of the partnership after adjustment is 5,638,940

Solution:

K A
Capital contributions 3,383,364 2,789,528 6,172,892 TCC
Withdrawal of A (533,952)
Capital credit 3,383,364 2,255,576 5,638,940 TAC

Total agreed capital: 5,638,940

3.383.364-60% =
Capital credit of A: 2,255.576
5.638.940x40%=

Problem 2. On January 1, 2023, Paolo and Yen, close friends, agreed to form a partnership to engage in
the buying and selling of gift products in Baguio City. Paolo, who owns an existing business, is to invest
the assets and transfer the liabilities of his business, and further agreed to contribute sufficient cash to
bring his capital balance to P420,000, which is 70% of the total capital of the partnership. Details
regarding the book values of Paolo's business assets and liabilities and their corresponding fair values
are:

Book Values Fair Values

Accounts receivable (net) P107,600 196,800
Inventory P106,000 214,000
Equipment 51,600 68,000
Notes Payable 112,000 112,000

Yen agrees to invest cash of P84,000 and an equipment that is to be measured at current market price.
1. What is the amount of cash to be invested by Paolo?
a. 420,000
b. 276,000
c. 144,000
d. 180,000

Solution:

AR, net 106,000 Capital credit of P 420,000

Inventory 214,000 Contributed capital of P (276,000)
Equipment 68,000 Additional cash 144,000
contribution
Note payable (112,000)
Contributed capital of P

2. What is the value of the equipment to be invested by Yen?

a. 96,000
b. 192,000
c. 48,000
d. 129,000

Solution:

Capital credit of Y 180,000

Cash (85,000)
Equipment 96,000

Total agreed capital: 420,000 / 70% = 600,000

Capital credit of Y: 600,000 * 30% = 180,000

Partnership Operation
Problem 1. On February 1, 2023, Senpai and Kohai formed a partnership. Senpai contributed P2,000,000
cash and his services to the partnership, while Kohai contributed her equipment and her services to the
partnership. The equipment was originally bought at the beginning of the previous year for P1,400,000
and had an estimated useful life of 10 years with no salvage value. The equipment has been
independently evaluated by an appraiser at P1,300,000. The equipment still has an attached loan of
P100,000, which will be assumed by the partnership. It is also agreed that Kohai will serve as a managing
partner who is responsible for handling the day-to-day operations of the partnership.
The following profit and loss sharing terms are agreed upon by the partners:
 Monthly salary for industrial partners amounting to P5,000 each.
 12% interest based on original capital balance of capitalist partners.
 20% bonus for the managing partner based on net income after interests, salaries and bonus.
 Remainder is to be shared in the ratio 60:40 for Senpai and Kohai, respectively.
During 2023, the partnership operations resulted to a net income of P1,110,000, and the partners
withdrew 10% of their original capital contributions.

1. How much is the share of Kohai in the net income of the partnership during
a. 523,960
b. 511,000
c. 446,200
d. 403,000

Solution:
B = 20% (NI -int-sal-B)
B 20% (1.110,000-$52,00 - 110.000 -B)
B = 20% (648,000 -13)
B . 129,600 -0.20B
1B +0.20B = 129,600
1.2 B- = 129,600
B = 129,600
1.2
B = 108,000

S + K =T
 Int 220,000 132,000 352,000
Sal 55,000 55,000 110,000
Bon - 108,000 108,000
rem 324,000 216,000 540,000
NI 599,000 + 511,000 = 1,110,000

2. How much is the capital balance of Senpai at the end of the calendar year 2023?
a 2,599.000
b. 2,399,000
c. 2,362,727
d. 2,339,100

Solution:
S, Cap K, Cap
2,000,000 1,200,000
Dr 200,000 599,000 NI dr 120,00 511,000 NI

2,399,000 1,591,000

Problem 2

During 2023, partners IC and RT had the following movements in their capital balances:

The partners withdrew their allowed P10,000 at the end of the year in anticipation of their share in the
net income of the partnership. The following are the partnership's profit and loss sharing agreement:

 10% interest based on average capital balances

  Quarterly salaries of P5,000 and P10,000 for IC and RT, respectively
 Bonus to IC amounting to 20% of net income after interests and salaries.
 Remainder is to be shared equally between the partners.

1. Assuming the partnership operations resulted to a net income of P200,000, how much is the share of
IC in the net income of the partnership?

a. 76,360

b. 87,700

c. 99,040

d. 108,112

Solutions:
2. Assuming the partnership operations resulted to a net loss of P120,000, how much is the share of RT
in the net loss of the partnership?

a. 72,300

b. 60,000

c. 47,700

d. 27,040

Solutions:

3. Assuming the partnership operations resulted to a net income of P50,000, how much is the capital
balance of RT at the end of the year?

a. 199,300

b. 192,960

c. 189,300

d. 183,200
Solution: