Accounting for Partnership: Partnership Operation Exercises PDF

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ACT130: ACCOUNTING FOR SPECIAL TRANSACTIONSS 2020-On January 1, 2018, A, B, and C formed ABC Partnership with original capital contribution of P300,000. P500,000, and P200,000, respectively. A is appointed as managing partner.During 2018, A, B, and C made additional investment of P500,000, P200,000 ...

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ACT130: ACCOUNTING FOR SPECIAL TRANSACTIONS S.Y 2020-2021 On January 1, 2018, A, B, and C formed ABC Partnership with original capital contribution of P300,000. P500,000, and P200,000, respectively. A is appointed as managing partner. During 2018, A, B, and C made additional investment of P500,000, P200,000 and P300,000, respectively. At the end of 2018, A, B, and C made drawings of P200,000, P100,000, and P400,000, respectively. At the end of 2018, the capital balance of C is reported at P320,000. The profit or loss agreement of the partners are as follows:  10% interest on original capital contribution of the partners  Quarterly salary of P40,000 and P10,000 for A and B, respectively.  Bonus to A equivalent to 20% of Net Income after interest and salary to all partners  Remainder is to be distributed equally among the partners. 1. What is the profit or loss of the partnership for the year ended December 31, 2018? Answer: 1,050,000 Solution: December 31, 2018 C’s Capital Balance 320,000 Add: C’s drawings at the end of 2018 400,000 Less: C’s additional investment during 2018 (300,000) Less: C’s Capital balance on January 1, 2018 (200,000) C’s share in the partnership profit for the year ended December 31, 2018 220,000 Less: Interest on original capital contribution of C (200,000 x 10%) (20,000) C’s share in the remaining profit after interest, salary and bonus 200,000 Multiply by number of partners x3 Remaining profit after interest, salary and bonus 600,000 Divided by 80% / 80% Net profit after salary and interest but before bonus to managing partner 750,000 Add: Total interest and salary (100,000 + 200,000) 300,000 Partnership profit for the year ended December 31, 2018 1,050,000 2. What is the share of A in the partnership profit or loss for 2018? Answer: 540,000 Solution: Interest on Capital (10% x 300,000) Salary (40,000 x 4) Bonus to A Equal Share in Remaining Profit (600,000/ 3) Total Share of A in Partnership Profit

3. What is the share of B in the partnership profit or loss for 2018? Answer: 290,000

30,000 160,000 150,000 200,000 540,000

Solution: Interest on Capital (10% x 500,000) Salary (10,000 x 4) Equal Share in Remaining Profit (600,000/ 3) Total Share of B in Partnership Profit

50,000 40,000 200,000 290,000

4. On January 1, 2020, K and J formed KJ Partnership and the articles of co-partnership provides the profit or loss shall be distributed accordingly:  10% interest on average capital balance  P50,000 and P100,000 quarterly salary for K and J, respectively.  The remainder shall be distributed in the ratio of 3:2 for K and J, respectively. The following transactions regarding the capital balances of the partners for year 2020 are provided: Year 2020 K, Capital J, Capital Jan. 1 investment P1,000,000 P500,000 Mar. 31 investment 100,000 July 1 withdrawal 200,000 Sept. 30 withdrawal 200,000 Oct. 1 investment 700,000 The chief accountant of the partnership reported net income of P1,000,000 for year 2020. What is the capital balance of K on December 31, 2020? Answer: 1,951,500 Solution: Weighted Average capital of K Months Weighted Weighted Average capital of J Date Balances Date Jan 1 July 1 Oct 1 Total 1,075,000

Months outstanding 1,000,000 12/12 (200,000) 6/12 700,000 3/12 weighted average

Balances

K Amount being Allocated Allocation: a. Salaries 200,000 (50k*4 ; 100k*4) b. Interest (10%*1.075M; 107,500 10%*525K) c. Remaining 144,000 profits (3:2) As allocated 451,500

Weighted average 1,000,000 (100,000) 175,000 capital

J

outstanding Jan 1 500,000 12/12 Mar 31 100,000 9/12 Sept 30 (200,000) 3/12 Total weighted average capital

Total

average 500,000 75,000 (50,000) 525,000

Beginning balance

1,000,000

Withdrawals

(200,000)

1,000,000

400,000

600,000

52,500

Additional investment

700,000

160,000

Share in profit

451,500

96,000

240,000

K’s Capital Balance

548,500

1,000,000

1,951,500

5. On July 1, 2020, K and J formed a partnership with initial investment of P1M and P2M, respectively. K is appointed as the managing partner. The articles of co-partnership provide that profit and loss shall be distributed accordingly:  30% interest on the original capital contribution.  Monthly salary of P20,000 and P10,000, respectively for K and J.  K shall be entitled to bonus equivalent to 20% of net income after salary, interest and bonus.  The remainder shall be distributed in the ratio of 3:2, respectively.  The partnership reported a P750,000 net income What is the share in net income of K for the year ended December 31, 2020? 6. K and J have just formed a partnership. K contributed cash of P920,000 and office equipment that costs P422,000. The equipment had been used in her sole proprietorship and had been 70% depreciated. The current value of the equipment is P295,000. K also contributed a note payable of P87,000 to be assumed by the partnership. The partners agreed on a profit and loss ratio of 50% each. K is to have a 70% interest in the partnership. J contributed only the merchandise inventory from his sole proprietorship carried at P550,000 of a FIFO basis. The current fair value of the merchandise is P525,000. To consummate the formation of the partnership, K should make additional investment of? Answer: 97,000 Solution: K J Total Cash 920,000 920,000 Equipment 295,000 295,000 Inventory 525,000 525,000 Notes Payable (87,000) (87,000) Capital Balance 1,128,000 525,000 1,653,000 J’s Share in Contribution Divided by Partnership Capital Less: K’s contribution J’s contribution Additional contribution of K

525,000 30% 1,175,000 (1,128,000) (525,000) 97,000

7. On March 1, 2018, K and J formed a partnership with each contributing the following assets: K J Cash 300,000 700,000 Machinery & Equipment 250,000 750,000 Building 2,250,000 Furnitures & Fixtures 100,000 The building is subject to a mortgage loan of P800,000, which is to be assumed by the partnership. Agreement provides that K and J share profits and losses 30% and 70%, respectively. On March 1, 2018, the balance in J’s capital account should be?

Answer: 2,900,000 Solution: K Cash 300,000 Machinery & Equipment 250,000 Building Furniture & Fixtures 100,000 Less: Mortgage Assumed by the partnership Capital balance 650,000 The balance in J’s capital account should be 2,900,000.

J 700,000 750,000 2,250,000 (800,000) 2,900,000

8. On April 30, 2008, JJ, KK, and LL formed a partnership by combining their separate business proprietorship. JJ contributed cash of P75,000. KK contributed property with a P54,000 carrying amount, a P60,000 original cost, and P120,000 fair value. The partnership accepted the responsibility for the P52,500 mortgage attached to the property. LL contributed equipment with a P45,000 carrying amount, P112,500 original cost, and P82,500 fair value. The partnership agreement specifies that profits and losses are to be shared equally but is silent regarding capital contributions. Which part has the largest April 30, 2008 capital balance? Answer: LL has the largest capital balance Solution: JJ KK LL Total 77,000 Cash 77,000 120,000 120,000 Property 82,500 Equipment 82,500 Less: Mortgage (52,500) (52,500) attached to property 67,500 227,000 Capital balance 77,000 82,500

A summary balance sheet for the J, K, and L partnership appears below. The partners share profits and losses in a ratio of 2:3:5, respectively. Assets Cash 50,000 Inventory 62,500 Marketable securities 100,000 Land 50,000 Building-net 250,000 Total assets 512,500 Equities J, capital K, capital L, capital

212,500 200,000 100,000

Total equities

512,500

9. The partners agree to admit M for a one-fifth interest. The fair market value of partnership land is appraised at $100,000 and the fair market value of inventory is $87,500. The assets are to be revalued prior to the admission of M. How much cash must M invest to acquire a one-fifth interest? Answer: 146,875 Solution; Total Capital of the old partnership (212.5K + 200K + 100K) 512,500 Revaluation of land (100,000 – 50,000) 50,000 Inventory (87,500- 62,500) 25,000 Adjusted capital balance 587,500 Divide by profit and loss (old partnership) 4/5 Total capital of the new partnership 734,375 Multiplied by profit and loss of M 1/5 Required contribution of M 146,875 10. What will the profit and loss sharing ratio (in percentage) of K after M’s investment? Answer: 24% Solution: K’s profit and loss percentage 30% Less: K’s P&L ratio * M’s interest ( 30% x 20%) 6% New Profit and loss sharing ratio of K 24% J has decided to retire from the partnership of J, K, and L. The partnership will pay J $200,000. Bonus is to be recorded in the transaction as implied by the excess payment to J. A summary balance sheet for the partnership appears below. The partners share profits and losses in a ratio of 1:1:3, respectively. Assets Cash Inventory Marketable securities Land Building-net Total assets

75,000 82,000 38,000 150,000 255,000 600,000

Equities J, capital K, capital L, capital Total equities

160,000 140,000 300,000 600,000

11. What partnership capital will K have after J retires? Answer: 130,000

Journal entry to record retirement J, Capital 160,000 K, Capital (40k*1/4) 10,000 L, Capital (40k*3/4) 30,000 Cash 200,000

K, Capital 140,000 10,000 130,000

12. What partnership capital will L have after J retires? Answer: 270,000 Journal entry to record retirement J, Capital 160,000 K, Capital (40k*1/4) 10,000 L, Capital (40k*3/4) 30,000 Cash 200,000

L, Capital 300,000 30,000 270,000

The partnership of J, K, and L was dissolved, and by July 1, 2006, all assets had been converted into cash and all partnership liabilities were paid. The partnership balance sheet on July 1, 2006 (with partner residual profit and loss sharing percentages) was as follows: Cash J, capital (30%) K, capital (40%) L, capital (30%)

10,000 40,000 (20,000) (10,000)

The value of partners' personal assets and liabilities on July 1, 2006 were as follows:

Personal assets Personal liabilities

K 45,000 30,000

L 30,000 20,000

13. How much will L receive after the liquidation? Answer: 0 Solution: K Personal assets 45,000 Personal liabilities (30,000) Personal Capital 15,000 J (30%) Capital balances Add: Additional investment by K Balance Allocation of loss (5k*3/6 ; 5k*3/6)

40,000

J 25,000 10,000

L 30,000 (20,000) 10,000

J 25,000 (10,000) 15,000

K (40%)

L (30%) (10,000)

40,000

(20,000) 15,000 (5,000)

(2,500)

5,000

(2,500)

37,500

0

(12,500)

(10,000)

Add: Additional investment by L Balance Allocation of loss to J Adjusted capital balance

14. How much will J receive after liquidation? Answer: 35,000 Solution: K Personal assets 45,000 Personal liabilities Personal Capital

5k*3/6)

Add: Additional investment by L Balance Allocation of loss to J Adjusted capital balance

(30,000)

(20,000)

(10,000)

15,000

10,000

15,000

5k*3/6)

Add: Additional investment by L

K (40%)

40,000

L (30%) (10,000)

40,000

(20,000) 15,000 (5,000)

(2,500)

5,000

(2,500)

37,500

0

(12,500) 10,000 (2,500) 2,500 0

37,500 (2,500) 35,000

15,000 J (30%)

Capital balances Add: Additional investment by K Balance Allocation of loss (5k*3/6 ;

J 25,000

15. How much will K receive after liquidation? Answer: 0 Solution: K Personal assets 45,000 Personal liabilities (30,000) Personal Capital

L 30,000

J (30%) Capital balances Add: Additional investment by K Balance Allocation of loss (5k*3/6 ;

10,000 (2,500) 2,500 0

37,500 (2,500) 35,000

40,000

L

(10,000)

J 30,000

25,000

(20,000)

(10,000)

10,000

15,000

K (40%)

L (30%) (10,000)

40,000

(20,000) 15,000 (5,000)

(2,500)

5,000

(2,500)

37,500

0

(12,500) 10,000

(10,000)

Balance Allocation of loss to J Adjusted capital balance

37,500 (2,500) 35,000

(2,500) 2,500 0

The balance sheet of the Omar, Paolo, and Quek partnership on November 1, 2006 (before commencement of partnership liquidation) was as follows:

Cash Inventory Loan to Omar Loan to Quek Plant assets-net Total assets

$58,000 60,000 8,000 14,000 70,000 $210,000

Accounts payable Notes payable Omar, capital(40%) Paolo, capital(25%) Quek, capital (35%) Total liab./equity

$34,000 62,000 24,000 26,000 64,000 $210,000

Liquidation events in November were as follows:  The inventory was sold for $10,000 above book value;  Plant assets with a book value of $60,000 were sold for $34,000. 16. How much will Omar receive after the liquidation? Answer: 5,600 Solution: Computation for gain /loss on sale a) Sale of inventory (60,000 + 10,000) b) Sale of plant assets Net Cash proceeds Less: Carrying amount of Non cash asset (60,000 + 70,000) Loss on sale Omar (40%) 24,000 (8,000) 16,000 (10,400)

Paolo (25%) 26,000

Capital Balances 17. Loan to Omar Total 26,000 Allocation of loss (6,500) Amounts received 5,600 19,500 by partners How much will Paolo receive after liquidation? Answer: 19,500

70,000 34,000 104,000 (130,000) (26,000)

Quek (35%) 64,000 (14,000) 50,000 (9,100)

Total 114,000 (22,000) 92,000 (26,000)

40,900

66,000

Solution: Computation for gain /loss on sale a) Sale of inventory b) Sale of plant assets Net Cash proceeds Less: Carrying amount of Non cash asset Loss on sale Omar (40%) 24,000 (8,000) 16,000 (10,400)

(60,000 + 70,000)

Paolo (25%) 26,000

Capital Balances 18. Loan to Omar Total Allocation of loss Amounts received 5,600 by partners How much will Quek receive after liquidation? Answer: 40,900 Solution: Computation for gain /loss on sale a) Sale of inventory b) Sale of plant assets Net Cash proceeds Less: Carrying amount of Non cash asset Loss on sale

Capital Balances Loan to Omar Total Allocation of loss Amounts received by partners

(60,000 + 10,000)

70,000 34,000 104,000 (130,000) (26,000)

26,000 (6,500)

Quek (35%) 64,000 (14,000) 50,000 (9,100)

Total 114,000 (22,000) 92,000 (26,000)

19,500

40,900

66,000

(60,000 + 10,000)

(60,000 + 70,000)

Omar (40%) 24,000 (8,000) 16,000 (10,400)

Paolo (25%) 26,000

5,600

70,000 34,000 104,000 (130,000) (26,000)

26,000 (6,500)

Quek (35%) 64,000 (14,000) 50,000 (9,100)

Total 114,000 (22,000) 92,000 (26,000)

19,500

40,900

66,000

Partners Roger, Sergio, and Tito, who share profit and loss in the ratio of 3:5:2, respectively have decided to liquidate their partnership. The statement of Financial Position of the partnership at the time of liquidation is shown below: Cash Other Assets

120,000 360,000

Accounts payable Loan from Sergio Roger, Capital Sergio, Capital Tito, Capital

93,000 30,000 108,000 120,000 129,000

19. The partners desire to prepare an installment distribution schedule showing how cash would be distributed to partners as assets are realized. In the schedule of maximum absorbable loss, the maximum absorbable loss of Sergio is? Answer: 300,000 Solution:

20.

Adjusted capital of Sergio Divide by: Profit and loss ratio Maximum absorbable loss

(120,000 + 30,000)

150,000 50% 300,000

The schedule of possible losses on capital balances would indicate the cash distribution. After the payment to outside creditors, what amount would be distributed to Tito? Answer: 57,000 Solution:

Maximum loss absorption capacity Roger (30%) Capital Balances Payable to Sergio Total interest Divide by: Profit and loss ratio Maximum loss absorption capacity Rank of payment

108,000 108,000 30% 360,000 2nd Roger (30%)

Rank of payment Maximum loss absorption capacity Difference between 1st and 2nd Balance Difference between 1st, 2nd, and 3rd Equal balance

Sergio, (50%) 120,000 30,000 150,000 50% 300,000 3rd Sergio, (50%)

2nd 360,000

3rd 300,000

360,000 60,000 300,000

300,000 300,000 300,000

Tito (20%) 129,000 129,000 20% 645,000 1st Tito (20%) 1st 645,000 285,000 360,000 60,000 300,000

Tito: 1st priority (285,000 x 20%) Tito will receive 57,000 on the first cash distribution after the settlement to outside creditors. 21. Assuming the first sale of other assets having book value of P150,000, realized P45,000 and all available cash is distributed. Roger would receive what amount of cash? Answer:9,000

Solution:

Cash Balance

120,000

Realization Balance after realization Payment to Payables Balance after payment Allocation of Sergio’s deficiency (7,500 x 30 %/50% ; 20%/50%) Payment to Partners

45,000 165,000 63,000

Other Asset 360,000 (360,000) 0

Accounts Payable 93,000

Loan from Sergio 30,000

93,000 (93,000)

30,000 (30,000)

102,000

Roger (30%) 108,000

Sergio, (50%) 120,000

Tito (20%) 129,000

(94,500) 13,500

(157,500) (37,500) 30,000

(63,000) 66,000

13,500

(7,500)

66,000

(4,500)

7,500

(3,000) 63,000

9,000

22. Killua Corporation is undergoing liquidation since August 1, 2011. Five months later, on December 31, 2011, its condensed realization and liquidation statement shows the following: ASSETS: To be realized P1,375,000 Acquired 750,000 Realized 1,200,000 Not Realized 1,375,000 LIABILITIES: Liquidated Not Liquidated To be Liquidated Assumed

1,875,000 1,700,000 2,250,000 1,625,000

Supplementary: Charges 3,125,000 Credits 2,800,000 The net gain/loss for the five-month period is? Answer: 425,000 Solution: Assets to be realized P1,375,000 Assets Realized Assets Acquired 750,000 Assets Not Realized Liabilities Liquidated 1,875,000 Liabilities to be Liquidated Liabilities not Liquidated 1,700,000 Liabilities Assumed Supplementary Charges 3,125,000 Supplementary Credits Total 8,825,000 Total Net Income (9.25M-8.825M)

425,000

The following date were taken from the statement of affairs of Gon Corporation:

1,200,000 1,375,000 2,250,000 1,625,000 2,800,000 9,250,000

Assets pledged for fully secured liabilities (ERNV: P 75,000) Assets pledged for partially secured liabilities (ERNV: P52,000) Free Assets (current fair value, P40,000) Unsecured liabilities with priority Fully secured liabilities Partially secured liability Unsecured liabilities without priority

P90,000 74,000 70,000 7,000 30,000 60,000 112,000

23. T...