AFAR Partnership Formation PDF

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1 Partnership FormationProblem 1 (ReSA)On July 1, 2019, XX and YY decided to form a partnership. The firm is to take over business assets and assume liabilities, and capitals are to be based on net assets transferred after the following adjustments:a) XX and YY’s inventory is to be valid at P31,000 ...

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1.1 Partnership Formation Problem 1 (ReSA) On July 1, 2019, XX and YY decided to form a partnership. The firm is to take over business assets and assume liabilities, and capitals are to be based on net assets transferred after the following adjustments: a) XX and YY’s inventory is to be valid at P31,000 and P22,000, respectively. b) Accounts receivable of P2,000 in XX’s book and P1,000 in YY’s books are uncollectible. c) Accrued salaries of P4,000 for XX and P5,000 for YY are still to be recognized in the books. d) Unused office supplies of XX amounted to P5,000, while that of YY amounted to P1,500. e) Unrecorded patent of P7,000 and prepaid rent of P4,500 are to be recognized in the books of XX and YY, respectively. f) XX is to invest or withdrew cash necessary to have a 40% interest in the firm. Balance sheets for XX and YY on July 1 before adjustments are given below:

XX Cash

Accounts Receivable Inventory Office Supplies Equipment Accumulated Depreciation - Equipment Total Assets Accounts Payable Capitals Total Liabilities and Capital

Php

Php Php Php

YY 31,000 Php 26,000 32,000 20,000 (9,000) 100,000 Php

50,000 20,000 24,000 5,000 24,000 (3,000) 120,000

28,000.00 Php 72,000 100,000 Php

20,000.00 100,000 120,000

Determine: 1. The net adjustments – capital in the books of XX and YY: a. XX, P7,000 net debit; YY, P2,000 net credit b. XX, P5,000 net debit; YY, P7,000 net credit c. XX, P7,000 net credit; YY, P2,000 net debit d. XX, P5,000 net credit; YY, P7,000 net debit 2. The adjusted capital of XX and YY in their respective books. a. XX – P65,000; YY – P102,000 c. XX – P77,000; YY – P98,000 b. XX – P63,000; YY – P107,000 d. XX – P77,000; YY – P93,000 3. The additional investment (withdrawal) made by XX: a. P(15,000.00) c. P3,000.00 b. P( 6,666.50) d. P8,377.50

4. The total assets of the partnership after formation: a. P235,333.50 c. P220,333.50 b. P230,000.00 d. P212,000.00

5. The total liabilities of the partnership after formation: a. P57,000.00 c. P54,000.00 b. P48,000.00 d. P51,000.00 6. The total capital of the partnership after formation: a. P180,000.00 c. P163,333.50 b. P178,333.50 d. P155,000.00 7. The capital balances of XX and YY in the combined balance sheet: a. XX, P81,250; YY, P72,000 c. XX, P100,000; YY, P75,000 b. XX, P81,250; YY, P75,000 d. XX, P 62,000; YY, P93,000

Solution XX Capital

1. D a

YY Capital

(1,000.00)

a

b

(2,000.00)

b

(1,000.00)

c

(4,000.00)

c

(5,000.00)

d

5,000.00

d

(3,500.00)

e

7,000.00

Net Credit

5,000.00

(2,000.00)

e

4,500.00

Net Debit

(7,000.00)

2. D XX Capital- Unadjusted Net adjustment

72,000.00 5,000.00

Adjusted Capital

77,000.00

3. A

XX YY

CC 77,000.00 93,000.00 150,000.00

AC 62,000.00 93,000.00 155,000.00

YY Capital- Unadjusted Net adjustment Adjusted Capital

Addtl Investment (Withdrawal) (15,000.00) (15,000.00)

100,000.00 (7,000.00) 93,000.00

4. D 5. A 6. D

From the accounting equation Asset = Liability + Capital

Total Asset

212,000.00 7. D

Liability 28,000.00 20,000.00 4,000.00 5,000.00 57,000.00

XX (155,000x40%) YY (155,000x60%)

Capital 77,000.00 93,000.00 (15,000.00) 155,000.00

62,000 93,000

Problem 2 (ReSA) On December 1, 2019, AA and BB formed a partnership with contributing the following assets at fair market values: AA Cash ……………………………………… Machinery and equipment ….. Land ……………………………………… Building ………………………………… Office Furniture …………………….

P 9,000 13,500 13,500

BB P 18,000 90,000 27,000 -

The land and building are subject to a mortgage loan of P54,000 that the partnership will assume. The partnership agreement provides that AA and BB share profits and losses, 40% and 60%, respectively and partners agreed to bring their capital balances in proportion to the profit and loss ratio and using the capital balance of BB as the basis. The additional cash investment made by AA should be:

a. P18,000.00 b. P85,500.00

c. P134,000.00 d. P166,250.00

Solutions:

AA Cash

BB

9,000.00

Machinery & Eqmpt

18,000.00

13,500.00

Land

90,000.00

Building

27,000.00

Office Furniture

13,500.00

Mortgage Loan

(54,000.00)

Capital

36,000.00

CC

81,000.00 Addtl Investment (Withdrawal)

AC

AA 40%

36,000.00

54,000.00

BB 60%

81,000.00

81,000.00

117,000.00

135,000.00

18,000.00 18,000.00

Problem 3 (ReSA)

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 Book Value

Fair Value

Book Value

P11,250.00 11,250.00

P11,250.00 16,875.00

P30,000.00

18,750.00

15,000.00

33,750.00

5,637.50

5,625.00

3,750.00

DD Fair

Value Accounts Receivable … Inventories ……………….. P33,750.00 Equipment ………………… 35,625.00 Accounts Payable …..... 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 c. P140,625.00 b. P150,000.00 d. P112,500.00 2. The amount of cash that each partner must contribute:

a. CC – P37,500; DD – P9,375 b. CC – P37,500; DD – P5,625

c. CC – P80,625; DD – P78,750 d. CC – P63,750; DD – P5,625

Solution 1. A

Asset

159,375.00

Liability 5,625.00 3,750.00 9,375.00

Capital 150,000.00 150,000.00

CC

2. A Cash

37,500.00

DD 9,375.00

Accounts Receivable

11,250.00

0.00

Inventories

16,875.00

33,750.00

Equipment

15,000.00

35,625.00

Total Assets

80,625.00

78,750.00

Accounts Payable

5,625.00

3,750.00

Capital

75,000.00

75,000.00

Total Liabilities and Capital

80,625.00

78,750.00

Problem 4 (ReSA) On December 1, 2018, EE and FF formed a partnership agreeing to share for profits and losses in the ration of 2:3 respectively. EE invested a parcel of land that cost him 25,000. FF invested 30,000 cash. The land was sold for 50,000 on the same date, three hours after formation of the partnership. How much should be the capital balance of EE right after formation? a. 25,000 b. 30,000

c. 60,000 d. 50,000

Solution: The contribution of noncash assets to a partnership should be recorded based on their fair value. In this case, the fair value of the land would be measured by its sales price on the date of sale, P50,000

Problem 5 (ReSA) On March 1, 2018, Coco and Martin formed a partnership with each contributing the following assets:

Cash Machinery and Equipment Building Furniture and Fixtures

Coco 300,000 250,000 100,000

Martin 700,000 750,000 2,250,000 -

The building is subject to mortgage loan of 800,000 which is to be assumed by the partnership agreement provides that Coco and Martin share profits and losses 30% and 70% respectively. On March 1, 2018 the balance in Mar tin’s capital account should be: a. 3,700,000 b. 3,140,000

c. 3,050,000 d. 2,900,000

Solution: Cash Machinery and Equipment

700,000.00 750,000.00

Building

2,250,000.00

Total assets invested

3,700,000.00

Mortgage assumed

(800,000.00)

Capital Balance of Martin

2,900,000.00

Problem 6 (PRTC) Baser and Michelle have just formed a partnership. Baser contributed cash of P920,000 and office equipment that costs P422,000. The equipment had been used in his sole proprietorship and had been 70% depreciated. The current value of the equipment is P295,000. Baser 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. Baser is to have a 70% interest in the partnership. Michelle contributed only a merchandise inventory from her sole proprietorship carried at P550,000 on a first-in- first-out basis. The current fair value of the merchandise is P525,000. To consummate the formation of the partnership Baser should make additional investment or (withdrawal) of:

A. P224,000 B. P(30,000)

C. P97,000 D. P(80,000)

Solution: Michelle’s total contribution Interest Ratio Total Capital Baser’s Ratio Required capital of Baser Total contribution of Baser (920,000+295,000-87,000)

P 525,000 30% P 1,750,000 70% P 1,225,000 (1,128,000) 97,000

Problem 7 (PRTC) In 2018, Norma and Celso agreed to form a new partnership under the following general agreements: Partners’ contributions will be on a %:4 ratio; (2) Profit and loss, 5:5, and (3) Capital credits 57:43 ratio, respectively to Norma and Celso. Their respective contributions will come from old proprietorships they owned. Norma contributed the following items and amounts: Cash

P 748,800 512,000

Equipment (at book value per her proprietorship records) Celso contributed the following items at their carrying amounts in the proprietorship records: Accounts receivable

96,000

Inventory

268,800

Furniture and fixtures

514,560 220,800

Intangibles All the non-cash contributions are not properly valued. The two partners have agreed that (a) P7,680 of the accounts receivable are uncollectible; (b) the inventories are overstated by P19,200; (c) the furniture and fixtures are understated by P11,520; and the intangibles include a patent with a carrying value of P13,440, which must now be derecognized upon a court order. The rest of the intangible items are fairly valued. 1. How much is the total depreciable fixed asset recorded by the partnership? a. P1,060,080 c. P1,116,480 b. P403,200 d. P1,041,480

2. What is the capital balance of Celso after the formation of the partnership? a. 1,036,541 b. 1,339, 225

c. 1,325,808 d. 1,071,360

Solution: 1. D P 1,100,160 (28,800) P 1,071,360 5/4 P 1,339,200 (748,800) 590,400 526,080 P 1,116,480

Celso’s Contribution @ BV Net decrease to FV Celso’s Contribution @ FV Contribution Ratio FV of Norma’s Contribution Cash of Norma FV equipment investment FV of Furniture and Fixture Total Fixed Assets 2. A Partner N C Total

CC P 1,374,019

CNA P 1,339,200

P 34,819

1,071,360

1,036,541 P 2,410,560

Difference

(34,819)

P 2,410,560

-0-

Problem 8 (PRTC) A, B and C formed the ABC Partnership on July 1, 2018, with the following assets, measured at book values in their respective records, contributed by each partner:

Cash

A

B

C

P 200,000

P 150,000

P 150,000

Accounts receivable

38,500

68,900

Inventory

135,000

118,000

67,000

Plant, Property and Equipment (PPE)

950,000

460,000

380,000

A part of A’s contribution, P25,000, comes from his personal borrowings. Also, the PPE of A and B are mortgaged with the bank for P160,000 and P16,500, respectively. The partnership is to assume responsibility for these PPE mortgages. The fair value of the accounts receivable contributed by C is P43,000 and her PPE at this date has a fair value P365,000. All the other assets contributed are fairly valued. The partners have agreed to share profits and losses on a 5:3:2 ratio, to A, B and C, respectively. How much is the contribution of each partner? Calculate their contribution ratio.

Solution:

Cash

A

B

C

Total

200,000

150,000

150,000

500,000

38,500

43,000

81,500

Accounts Receivable Inventory

135,000

118,000

67,000

320,000

PPE

950,000

460,000

365,000

1,775,000

Total Assets

1,285,000

766,500

625,000

2,676,500

Liabilities

-160,000

-16,500

Net Asset

1,125,000

750,000

A

1,125,000

Contribution Ratio 45%

B

750,000

30%

C

625,000

25%

Total

2,500,000

100%

Net Assets

-176,500 625,000

2,500,000

What is the capital balance for each partner at July 1, instead, if the interest ratio is agreed at 4:3:3 to A, B and C, respectively? Answer: A

1,000,000

(2,500,000 x 40%)

B

750,000

(2,500,000 x 30%)

C

750,000 2,500,000

(2,500,000 x 30%)

Total

Problem 9 (PRTC) Roberts and Smith drafted a partnership agreement that lists the following assets contributed at the partnership’s formation: Contributed by Cash

Roberts

Smith

20,000

30,000

Inventory

15,000

Building Furniture & Equipment

40,000 15,000

The building is subject to a mortgage of P 10,000, which the partnership has assumed. The partnership agreement also specifies that profits and losses are to be distributed evenly. 1. What amounts should be recorded as capital for Roberts and Smith at the formation of the partnership?

Roberts

Smith

A. B.

35,000 35,000

85,000 75,000

C.

55,000

55,000

D.

60,000

60,000

Solution: Roberts: 20,000 + 15,000 = P35, 000 Smith: 30,000 + 15,000 + 40,000 – 10,000 = P75,000

Problem 10 (PRTC) The Grey and Redd Partnership was formed on January 2, 2010. Under the partnership agreement, each partner has an equal initial capital balance. Partnership net income or loss is allocated 60% to Grey and 40% to Redd. To form the partnership, Grey originally contributed assets costing P30,000 with a fair value of P60,000 on January 2, 2010, and Redd contributed P20,000 cash. Drawings by the partners during 2010 totaled P3, 000 by Grey an P9,000 by Redd. The partnership net income in 2010 was P25,000 1. Under the goodwill method, what is Redd’s initial capital balance in the partnership? A. 20,000 C. 40,000 B. 25,000 D. 60,000 Solution: Contributed Capital

Agreed Capital

Increase (Decrease)

Grey

60,000

60,000

Redd

20,000

60,000

40,000

Total

80,000

120,000

40,000

Problem 11 (CRC-ACE)

On May 1, 2018, the business assets and liabilities of Nathan and Janice were as follows: Nathan Cash

Janice

8,000.00

62,000.00

Receivables

200,000.00

600,000.00

Inventories

120,000.00 650,000.00

200,000.00

Land, Building and Equipment Other Assets Accounts Payable

2,000.00

535,000.00 3,000.00

(180,000.00)

(250,000.00)

Nathan and Janice agreed to from a partnership by contributing their net assets, subject to the following adjustments:   

Receivables of P20,000 in Nathan’s books and P40,000 in Janice’s books are uncollectible. Inventories of P6,000 and P7,000 in the respective books of Nathan and Janice are worthless Other assets in both books are written off

Upon the partnerships formation: 1. The respective capital of partners Nathan and Janice would be_____________; 2. The total assets of the partnership would be_____________________.

Solution: Nathan Cash

Janice

Receivables

8,000.00 200,000.00

62,000.00 600,000.00

Inventories

120,000.00

200,000.00

Land Building and Equipment

650,000.00

535,000.00 3,000.00

Other Assets

2,000.00 (180,000.00)

Accounts Payable

(250,000.00)

800,000.00 (20,000.00)

1,150,000.00

Inventories

(6,000.00)

(7,000.00)

Written off

(2,000.00)

(3,000.00) 1,100,000.00

Uncollectible

Total Capital

772,000.00

(40,000.00)

Problem 12 (CRC-ACE) James admits Dani as a partner in business. Accounts in the ledger of James on June 1, 2018, just before the admission of Dani, show the following balances: Cash P26,000 Accounts Receivable 120,000 Merchandise Inventory 180,000

Accounts Payable James, Capital

P264,000 62,000

It is agreed that for purposes of establishing James’s interest, the following adjustments should be made: 

An allowance for doubtful accounts of 2% of accounts receivable is to be established

 

The merchandise inventory is to be valued at P202,000. Prepaid expenses of P6,500 and accrued expenses of P4,000 are to be established

Dani is to invest sufficient funds in order to receive a 1/3 interest in the partnership. 1. How much is the adjusted capital of James? 2. How much cash should Dani invest? 3. How much is the total assets of the partnership.

Solution: Cash

26,000.00

A/R

120,000.00

Merchandise Inventory

180,000.00

A/P

(264,000.00) 62,000.00

2% Allow. For doubtful acc.

(2,400.00)

Merch. Inventory

22,000.00

Prepaid Exp.

6,500.00

Accrued Exp.

(4,000.00)

James adjusted cap. 2/3

84,100.00 42,050.00

Dani 1/3

126,150.00

James Capital

84,100.00

Dani Capital

42,050.00

Accounts Payable

264,000.00

Accrued Expense

4,000.00

Total Assets

394,150.00

Problem 13 (CRC-ACE) The balance sheet as of July 31, 2018, for the business owned by Ethan, shows the following assets and liabilities: Cash P100,000 Accounts Receivable 268,...