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University of San Carlos School of Business and Economics Department of AccountancyAdvance Financial Accounting and Reporting Midterm Mock Departmental Exam By: Kimberly Lim25TPartnership Formation – 7 Which of the following statements are correct? a) A partnership is an artificial being created by ...

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University of San Carlos School of Business and Economics Department of Accountancy Advance Financial Accounting and Reporting Midterm Mock Departmental Exam By: Kimberly Lim

25T Partnership Formation – 7 1. Which of the following statements are correct? a) A partnership is an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incidental to its existence. b) By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to separate funds, with the intention of dividing the profits among themselves. c) Two or more persons may form a partnership for the exercise of a profession d) A partnership is that which have capital stock divided into shares and are authorized to distribute to the holders of such shares, dividends, or allotments of the surplus profits on the basis of the shares held Suggested answer: C A – definition of a corporation B – a combined fund, not separate funds D – definition of a stock corporation 2. Which of the following is not a characteristic of most partnerships? a) Limited life b) Mutual Agency c) Ease of Formation d) Limited Liability Suggested answer: D The characteristics of a Partnership are: Separate legal personality, ease of formation, co-ownership of partnership property and profits, limited life, mutual agency, unlimited liability (Guerrero) 3. What theory is applicable for partnerships? a) Proprietary theory b) Entity theory c) A mix of proprietary and entity theory d) Partnership theory Suggested answer: C See Chapter 1, page 3 Entity vs Proprietary Theories, Advanced Accounting by Guerrero

4. Which of the following statements concerning the formulation of a partnership business is correct? a) PFRS allows the recognition of goodwill arising from the formation of a partnership b) The juridical personality of the partnership arises from the meeting of the minds of the partners and not from the issuance of the certificate of registration c) Parties may become partners only upon contribution of money or property but not of industry or service d) The capital to be credited to each partner upon formation is always the amount actually contributed by each partner Suggested answer: B A – does not allow C – industrial partner is allowed to contribute service D – Through the use of bonus and goodwill method, amounts may be different 5. At what amount should the partnership record noncash investments contributed upon formation of a partnership? a) Carrying amount b) Net realizable value c) Fair value d) Cost Suggested Answer: C When property is invested in a partnership, the noncash property is recorded at the current fair value of the property at the time of the investment. 6. Which of the following statements is most correct with regard to the creation of initial capital account balances on a partnership’s financial records? a) The capital accounts may be created for any peso amount agreed by all partners b) The market value of noncash assets must be considered when creating the initial capital balances c) Each partner’s capital account must have a non-zero value assigned to it d) All of the above statements are correct Suggested answer: a A – Theoretically, independent appraisals should be made to determine the fair value of the noncash property contributed. However in reality, the “fair value” of the noncash assets is determined by agreement of the partners (page 7) B – see A C – industrial partner may have a zero value 7. The capital account of a partner is debited for all of the following, except: a) Partnership obligations assumed by the partner b) Permanent withdrawal of capital c) Debit balance of the drawing account at the end of the period d) Partner’s share in the losses for the period Suggested answer: A (self-explanatory)

8. Partnership profit and losses are to be divided a) According to their contribution ratio b) Equally among partners c) According to the articles of incorporation d) None of the above Suggested answer: D Partnership profit and losses are to be divided in accordance with the agreement of the partners. If no such agreement is made, then according to the initial contribution while the industrial partner shall receive a just and equitable share. 9. Which of the following statements is false? a) In the absence of stipulation, the share of each partner in the losses shall be in proportion to what he may have contributed, but the industrial partner shall not be liable for the losses. b) In the case of a partnership loss, the loss shall be distributed in accordance with the profit/ loss ratio agreed upon by the partners, including the industrial partner. c) The industrial partner shall receive such share as may be just and equitable under the circumstances d) In the absence of stipulation, the share of each partner in the profits shall be in proportion to what he may have contributed Suggested answer: B In the absence of stipulation, the share of each partner in the profits and losses shall be in proportion to what he may have contributed, but the industrial partner shall not be liable for the losses. (Art 1797, Partnership Code) 10. Which of the following is not considered a legitimate expense of the partnership? a) Interest on notes to partner b) Depreciation on assets contributed to the partnership by partners c) Salaries for management hired to run the business d) Interest paid to partners based on the amount of invested capital Suggested answer: D Interest paid to partners based on the amount of invested capital is a method of dividing income or loss among partners and not a legitimate expense of the partnership. 11. Which of the following statements are false when the partnership experiences a loss during the year a) Salaries may be given to the partners b) Bonus may be given to the managing partner c) Interest to capital accounts may be given to partners d) A partner may still have a credit to his capital account Suggested answer: B The bonus agreement is not applicable if the operation of the partnership result to a net loss. (page 63 – Advanced Accounting by Guerrero)

12. In the statement of cash flows, partners’ withdrawals shall fall under which of the following: a) Cash flows from operating activities b) Cash flows from investing activities c) Cash flows from financing activities d) Cash flows from partners’ activities Suggested answer: C (page 66 – Advanced Accounting by Guerrero) 13. Partners A and B share profits in a 2:1 ratio, respectively. Each partner receives an annual salary allowance of P10,000. If the salaries are recorded in the accounts as a partnership expense rather than treated as a division of net income, the total amount allocated to each partner for salaries and net income would be: a) Less for both A and B b) Unchanged for both A and B c) More for A than B d) Less for A than B Suggested answer: B E.g. Correct net income is P50,000 If treated as expense rather than division of net income, net income would be P30,000. Total amount allocated for salary and net income would be: A = 30,000 (2/3) + 10,000 salary = 30,000 B = 30,000 (1/3) + 10,000 salary = 20,000 If treated normally A = 10,000 + (50,000-20,000) (2/3) = 30,000 B = 10,000 + (50,000-20,000) (1/3) = 20,000 Thus, the two methods would yield the same results. 14. Which of the following will not result to the dissolution of a partnership? a) Incorporation of the partnership b) Admission of a new partner in an existing partnership c) Assignment of an existing partner’s interest to a third person d) Retirement of a partner Suggested answer: C Partnership dissolution due to changes in ownership interest occurs for a variety of reasons. These can be summarized as follows: -

Admission of a partner Retirement of a partner Death of a partner Incorporation of a partnership

(page 109 – Advanced Accounting by Guerrero)

15. If a new partner acquires a partnership interest directly from the partners rather than from the partnership itself a) No entry is required b) The partnership assets must be revalued c) The existing partners’ capital accounts should be reduced ant the new partner’s account increased d) The partnership must be liquidated Suggested answer: C Journal entry would be New partner, capital Old partner, capital

xx xx

(page 111 – Advanced Accounting by Guerrero) 16. Which of the following best characterizes the bonus method of recording a new partner’s investment in a partnership? a) Net assets of the previous partnership are not revalued b) The new partner’s initial capital balance is equal to his or her investment c) Assuming that recorded assets are properly valued, the book value of the new partnership is equal to the book value of the previous partnership and the investment of the new partner d) The bonus always results in an increase to the previous partners’ capital balances Suggested answer: C 17. When the new partner’s investment equals his proportion of the partnership’s book value (agreed capital credit), which of the following statements are false? a) The new partner’s capital credit equals his investment b) No goodwill or bonus is recorded c) All of the above d) None of the above Suggested answer: D 18. When the new partner’s investment is more than his proportion of the partnership’s book value (agreed capital credit), which of the following statements are true? a) A revaluation of an asset shall decrease the partnership’s total resulting capital b) Under the bonus method, the partnership’s total resulting capital shall be the sum of the old partnership’s capital plus the investment of the new partner c) No goodwill or bonus is recorded d) The bonus method results in a transfer of capital from the older partners to the new partner Suggested answer: B A – increase the partnership’s total capital C – goodwill or bonus is recorded D – transfer of capital from new to old partners

19. When the settlement of a withdrawing partner is less than his or her interest, which of the following are true? a) The remaining partners shall receive a bonus in their capital accounts b) The difference shall be recorded as income to the partnership c) The difference shall be recorded as a loss to the partnership d) The remaining partners’ capital accounts shall be deducted in accordance to the profit/ loss ratio for the difference Suggested answer: A (page 129 – Advanced Accounting by Guerrero) 20. In a partnership liquidation, the final cash payment to the partners should be made in accordance with the a) Partner’s profit and loss sharing ratio b) Balances of partners’ capital accounts c) Ratio of capital contributions by partners d) Safe payment computations Suggested answer: B The four basic steps to partnership liquidation are: 1 – net income or loss up to date of liquidation should be allocated to the partner’s capital accounts 2 – gain or loss realized from sale noncash assets should be allocated to partners based on their P/L ratio 3 – creditor’s claims, including liquidation expenses or anticipated future claims should be paid 4 – remaining cash is distributed to partners in accordance with the balance in their capital accounts and not the P/L ratio 21. It refers to the process of converting the non-cash assets of the partnership and distributing the total cash to the creditors and the remainder to the partners a) Dissolution b) Termination c) Liquidation d) Operation Suggested answer: C 22. In the liquidation of a partnership it is necessary to (1) Distribute cash to the partners (2) Sell noncash assets (3) Allocate any gain or loss on realization to the partners (4) Pay liabilities The steps shall be performed in the following order: a) 2,3,4,1 c) 4,2,3,1 b) 2,3,1,4 d) 2,4,3,1

Suggested answer: A (see explanation in number 20)

23. When an individual partner uses personal assets to pay partnership creditors, this payment is recorded as: a) An investment of capital in the partnership b) A liability to the partnership c) A receivable owing to the partnership d) A reduction in a partnership asset Suggested answer: A Journal entry would be – Liability Partner, Capital

xx xx

24. Which of the following describes a partnership lump-sum liquidation? a) Keeping the partnership assets and liabilities separate from the partners’ personal assets and liabilities b) The sale of all noncash assets and payment of liabilities before a single distribution to the partners c) A series of distributions to the partners while the sale of noncash assets and payment of liabilities are still ongoing d) The combining of a partner’s capital account with loans to/from the partnership Suggested answer: B (page 173, Advanced Accounting by Guerrero) 25. Why might a particular partner have a deficit in his/her capital account during a partnership liquidation? a) The partner with the deficit may have the greatest profit and loss residual ratio b) The partner with the deficit may have made the greatest withdrawals from the partnership c) The partner with the deficit may have the smallest profit and loss residual ratio d) Both a and b are correct Suggested answer: D Problem Solving 45P Formation – 11 26. A and B – two sole proprietors decided to form AB Partnership. A contributed machinery with the following value. Books of A Machinery and Equipment Accumulated Depreciation Carrying Amount

50,000 (10,000) 40,000

Net Realizable Value

35,000

Fair Value

40,000

What is the correct journal entry to record the investment of A? a) Machinery 50,000

A, Capital b) Machinery Accumulated Depreciation A, Capital

50,000 50,000 10,000 40,000

c) Machinery A, Capital

40,000

d) Machinery Accumulated Depreciation A, Capital

50,000

40,000

15,000 35,000

27. A and B – two sole proprietors decided to form AB Partnership. B contributed accounts receivable with the following value. Books of A Accounts Receivable 50,000 Allowance for Doubtful Accounts (10,000) Carrying Amount 40,000 Net Realizable Value

35,000

Agreed Amount Accounts Receivable Allowance for Doubtful Accounts Total

50,000 (15,000) 35,000

What is the correct journal entry to record the investment of B? a) Accounts Receivable B, Capital

50,000 50,000

b) Accounts Receivable 50,000 Allowance for Doubtful Accounts 10,000 A, Capital 40,000 c) Accounts Receivable A, Capital

35,000 35,000

d) Accounts Receivable 50,000 Allowance for Doubtful Accounts 15,000 A, Capital 35,000 28. On October 1, 2020, Mark, Ron and Mel formed a partnership by combining their separate business proprietorships. Mark contributed cash of P50,000. Ron contributed property with a P36,000 carrying amount, a P40,000 original cost and P80,000 fair value. The partnership accepted responsibility for the P35,000 mortgage attached to the property. Mel contributed equipment with a P30,000 carrying amount, a P75,000 original cost, and P55,000 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 capital balance at October 1, 2020?

a) Mark b) Ron

c) Mel d) All capital balances are equal

For problems 29-30 Iane and Ave are combining their separate businesses to form a partnership. Cash and non-cash assets are to be contributed for a total capital of P600,000. The contributed liabilities are to be assumed by the partnership. They further agreed that their capital balances after the formation must be equal. The following are the assets and liabilities to be contributed by each entity: Iane Book Value

Ave Fair Value

Book Value

Fair Value

Accounts Receivable

40,000

40,000

-

-

Inventories

60,000

80,000

40,000

50,000

Equipment

120,000

90,000

80,000

100,000

30,000

30,000

20,000

20,000

Accounts Payable

29. What is the amount of the additional cash to be contributed by Ave in accordance with their agreement a) 300,000 c) 470,000 b) 120,000 d) 170,000 30. What is the amount of the capital credit to Iane after formation? a) 130,000 c) 300,000 b) 100,000 d) 150,000 For problems 31-33 Francis and Rinna decided to form a partnership during 2020. The following are their statement of financial position on the date of formation Francis

Rinna

131,250

328,125

Accounts Receivable

2,975,000

1,793,750

Inventories

1,750,000

1,771,875

Equipment

1,312,500

2,537,500

Total

6,168,750

6,431,250

918,750

2,318,750

Cash

Accounts Payable Francis, Capital

5,250,000

Rinna, Capital Total

4,112,500 6,168,750

6,431,250

The following are based on their agreement • Equipment of Francis is under-depreciation by P175,000 and the equipment of Rinna is over-depreciated by P262,500 • Allowance for doubtful accounts is to be set up amounting to P595,000 for Francis and P393,750 for Rinna • Inventories in the amount of P43,750 and P30,625 are worthless in the books of Francis and Rinna, respectively • The partnership agreement provides a profit and loss ratio and capital interest ratio of 70% and 30% for Francis and Rinna, respectively • Francis will invest or withdraw sufficient amount of cash to be in accordance to their capital interest ratio 31. What is the amount to be credited to Rinna’s capital account in the partnership? a) 3,425,625 c) 3,950,620 b) 4,436,250 d) 3,950,625 32. What is the agreed combined partnership capital? a) 11,418,750 b) 14,787,500

c) 13,168,750 d) 5,643,750

33. What is the amount of cash to be additionally invested or withdrawn by Francis in accordance with their agreement? c) P4,781,875 withdraw a) P4,781,875 invest d) P3,556,875 withdraw b) P3,556,875 invest 34. Dayag and Guerrero formed a partnership and agreed to divide initial capital equally even though Dayag only contributed P100,000 and Guererro contributed P84,000 in identifiable assets. Under the bonus approach to adjust the capital accounts, Guerrero’s unidentifiable asset should be debited for: c) 8,000 a) 46,000 d) 0 b) 16,000 35. On October 1, 2020, Af and Ar formed a partnership, agreeing to share profits and losses in the ratio of 4:6, respectively. Af contribute a parcel of land that cost him P25,000. Ar contributed 50,000 cash. The land was sold for P50,000 on October 1, 2020 four hours after the formation of the partnership. How much should be recorded in Af’s capital account on formation of the partnership? c) 33,333 a) 35,000 d) 50,000 b) 20,000 36. Brian, Bryan and Bran formed a partnership on October 2, 2020. They agreed that Brian will contribute office equipment with a total fair value of P40,000; Bryan will contribute delivery equipment with a fair value of P80,000 and Bran will contribute cash. If Bran wants a 1/3 interest in the capital and profits, he should contribute cash of a) 40,000 c) 60,000 b) 120,000 d) 180,000

Operations – 10 A and B entered into a partnership on March 1, 2020 by investing P125,000 and P75,000 respectively. They agreed that A, as the managing partner, was to receive a salary of P30,000 per year and a bonus computed at 10% of the net profit after adjustment for the

salary. The balance was to be distributed in the ratio of their original capital balances. On December 31, 2020, account balances were as follows: Cash P 70,000 Accounts Payable P 60,000 A/R 67,000 A, capital 125,000 Furniture and Fixture 45,000 B, capital 75,000 Sales returns 5,000 A, drawing (20,000) Pu...