Answer Sheet 1- Partnership Formation and Distribution of Profit or Losses PDF

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DRILL 1 What is the valuation if a partner contributes a noncash property to the partnership? a. Book value of the property c. Actual amount of the property b. Acquisition cost of the property d. Fair value of the property Temporary withdrawals made by the partner is posted in ledger as a. Partner’s...

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DRILL 1 1. What is the valuation if a partner contributes a noncash property to the partnership? a. Book value of the property c. Actual amount of the property b. Acquisition cost of the property d. Fair value of the property 2. Temporary withdrawals made by the partner is posted in ledger as c. Partner’s capital, debit a. Partner’s drawing, debit b. Partner’s drawing, credit d. Partner’s capital, credit 3. Partnership drawings are a. Always maintained in a separate account from the partner’s capital account b. Equal to partners’ salaries c. Usually maintained in a separate drawing account with any excess draws being deducted directly to the capital account d. Not discussed in the specific contract provisions of the partnership 4. Under the entity theory, a partnership is a. Viewed through the eyes of the partners b. Viewed as having its own existence apart from the partners c. A separate legal and tax entity d. Unable to enter into contracts in its own name 5. The Red and black partnership agreement provides for Red to receive a 20% bonus on profits before the bonus. Remaining profits and losses are divided between Red and black in the ratio of 2:3, respectively. Which partner has a greater advantage when the partnership has a profit or when it has a loss?

Profit

Loss

Profit

Loss

a. Red Black c. Black Red b. Red Red d. Black Black 6. WW and MM drafted a partnership agreement that lists the following assets contributed at the partnership’s formation: Contributions by: WW MM Cash P20,000 P30,000 Inventory P15,000 Building P40,000 Furniture & equipment 15,000 The building is subject to a mortgage of P10,000, which the partnership has assumed. The partnership agreement also specifies that profits and losses are to be distributed evenly. What amounts should be recorded as capital for WW and MM at the formation of the partnership

WW

MM

WW

MM

a. P35,000 P85,000 c. P55,000 P55,000 b. P35,000 P75,000 d. P60,000 P60,000 7. Anne, Iris and Alfred formed a partnership on April 30, with the following assets, measured at their fair market value, contributed by each partner: Particulars Anne Iris Alfred Cash P200,000 P240,000 P600,000 Automobile 170,000 Delivery Trucks 560,000 Computer and printer 102,000 Office furniture 70,000 50,000 Land and Building 3,000,000 Totals P3,370,000 P972,000 P650,000 Although Alfred has contributed the most cash to the partnership, he did not have the full amount of P600,000 available and was forced to borrow P400,000. The land and building contributed by Anne has a

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mortgage of P1,800,000 and the partnership is to assume responsibility of the loan. If the profit and loss sharing agreement is 40 percent, 40 percent, and 20 percent respectively, for Anne, Iris and Alfred, what is the total capital investment of all the partners at the opening of the business on April 30? a. P4,992,000 b. P3,192,000 c. P2,792,000 d. P3,328,000 8. Mahal admits Mora as a partner in the business. Balance sheet accounts of Mahal on September 30, just before admission of Mora show: Cash P31,200 Accounts payable P74,400 Accounts receivable 144,000 Mahal, capital 316,800 Merchandise inventory 216,000 It is agreed that for purpose of establishing Mahal’s interest, the following adjustments shall be made: • An allowance for doubtful accounts of 2% is to be established • Merchandise inventory is to be valued at P242,400 • Prepaid expense of P4,200 and accrued expenses of P4,800 are to be recognized Mora is to invest sufficient cash to obtain a 1/3 interest in the partnership. How much is Mora’s investment to the partnership? a. P169,860 b. P211,200 c. P171,660 d. P95,040 On March 1, 20x4, CC and FF formed a partnership with each contributing the following assets: Accounts CC FF Cash P30,000 P70,000 Machinery 25,000 75,000 Building -225,000 Furniture and Fixtures 10,000 -The building is subject to a mortgage loan of P90,000, which is to be assumed by the partnership. The agreement provides that CC and FF share profits and losses 30% and 70%, respectively 9. On March 1, 20x4 the capital account of FF would show a balance of a. P280,000 b. P305,000 c. P314,000 d. P370,000 10. Assuming that the partners agreed to bring their respective capital in proportion to their respective profit and loss ratio, and using FF’s capital as the base, how much cash is to be invested by CC? a. P19,000 b. P30,000 c. P40,000 d. P55,000 CC admits DD as a partner in business. Accounts in the ledger for CC on November 30, 20x4, just before the admission of DD, show the following balances: Cash P6,800 Accounts receivable 14,200 Merchandise inventory 20,000 Accounts payable 8,000 CC, capital 33,000 It is agreed that for purpose of establishing CC’s interest the following adjustments shall be made: An allowance for doubtful accounts of 3% of accounts receivable is to be established The merchandise inventory is to be valued at P23,000 Prepaid salary expense of P600 and accrued rent expense of P800 are to be recognized 11. DD is to invest sufficient cash to obtain a 1/3 interest in the partnership. CC’s adjusted capital before the admission of CC d. P36,374 a. P28,174 b. P35,347 c. P35,374 12. The amount of cash investment by DD d. P18,487 a. P11,971 b. P14,087 c. P17,687 13. In 2011, Jessie and Anne agreed to contribute equal amounts into a new partnership for a 50% interest in profit (loss) and in capital to each of them. Their respective contributions will come from old proprietorships they owned and will both be dissolved. Jessie contributed the following items and amounts: Cash P585,000

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Machineries (at book value per her proprietorship records) P400,000 Anne contributed the following items at their carrying amounts in the proprietorship records: Accounts receivable P75,000 Inventory 210,000 Furniture and fixtures 402,000 Intangibles 172,500 All non cash contributions are not property valued. The two partners have agreed that (a) P6,000 of the accounts receivable are uncollectible; (b) the inventories are overstated by P15,000; (c) the furniture and fixtures are understated by P9,000; and the intangibles includes a patent with a carrying value of P10,500, which must now be derecognized due to the result of unsuccessful litigation promulgated by the court just before the partnership formation. What is the fair value of the machineries invested by Jessie into the partnership? c. P390,000 d. P350,000 a. P336,000 b. P252,000 14. I and Q formed a partnership on January 2, 2016, and agreed to share income 90%, 10%, respectively. I contributed a capital of P12,500. Q contributed no capital but has a specialized expertise and manages the firm full-time. There were no withdrawals during the year. The partnership agreement provides for the following: a. Capital accounts are to be credited annually with interest at 5% of beginning capital b. Q is to be paid a salary of P500 a month c. Q is to receive a bonus of 20% of income calculated before deducting his bonus, his salary and interest on both capital accounts d. Bonus, interest, and Q’s salary are to be considered partnership expenses The partnership’s 2016 income statement follows: Revenues P48,225 Expenses 24,850 Net income P23,375 How much is the total share of Q on the 2016 partnership net income? a. P15,837.50 b. P14,325 c. P16,194 d. P14,169 15. R and J, partners, divide profits and losses on the basis of average capitals. Capital accounts for the year ended December 31, 2016, are shown below. The net profit for 2016 is P135,000. (Changes in capitals during the first half of the month are the regarded as effective as the beginning of the month; changes during the second half of a month are regarded as effective as of the beginning of the following month.)

Particulars

R, Capital Dr

J, Capital Cr P300,000

Dr

Cr P330,000

January 1 March 9 P50,000 April 14 150,000 July 1 100,000 Sept 4 P40,000 Sept 22 100,000 October 26 75,000 The share of R on the 2016 profit is: a. P57,250 b. P77,250 c. P57,750 d. P62,630 16. Efren and Frenz operate The Gourmet Restaurant as a partnership. Their partnership agreement has the following provisions for sharing profits and losses: A. Income is distributed only as far as it is available B. Available income is to be distributed in the following sequence: 1. Efren, who is the chef, gets a salary of P25,000 a year; Frenz, who is still learning, gets a salary of P10,000 2. Interest is imputed on the average capital balances at 15 percent

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3. Any remaining profits and losses are to be shared equally The average capital balances during the year were P270,000 for Efren and P50,000 for Frenz. If the partnership income for the year is P17,500, it should be distributed to the partners as follows: a. Efren P8,000; Frenz P9,500 c. Efren P12,500; Frenz P5,000 b. Efren P8,750; Frenz P8,750 d. Efren P14,000; Frenz P3,500 17. Partner Alta had a capital balance on January 1, 20x4 of P45,000 and made additional capital contributions during 20x4 totaling P50,000. During the year 20x4, Alta withdrew P8,000 per month. Alta’s post-closing trial balance on December 31, 20x4 is P30,000. Alta’s share of 20x4 partnership income is: a. P96,000 b. P50,000 c. P31,000 d. P8,000 18. Partners A and B have a profit and loss agreement with the following provisions: salaries of P20,000 and P25,000 for A and B respectively; a bonus to A of 10% of net income after bonus; and interest of 20% on average capital balances of P40,000 and P50,000 for A and B, respectively. Any remainder is to be split equally. If the partnership had net income of P88,000, how much should be allocated to Partner A a. P36,000 b. P44,500 c. P50,000 d. P43,500 X, Y and Z, a partnership formed on January 1, 20x4 had the following initial investment: X P100,000 Y P150,000 Z P225,000 The partnership agreement states that the profits and losses are to be shared equally by the partners after consideration is made for the following: • Salaries allowed to partners: P60,000 for X, P48,000 for Y, and P36,000 for Z • Average partners’ capital balances during the year shall be allowed10% • Additional information: • On June 30, 20x4, X invested an additional P60,000 • Z withdrew P70,000 from the partnership on September 30, 20x4 • Share the remaining partnership profit was P5,000 for each partner 19. Partnership net profit of December 31, 20x4 before salaries, interests and partner’s share on the remainder was a. P199,750 b. P207,750 c. P211,625 d. P222,750 A partnership begins its first year with the following capital balances: A, capital P60,000 B, capital P80,000 C, capital P100,000 The articles of partnership stipulate that profits and losses be assigned in the following manner • Each partner is allocated interest equal to 10 percent of the beginning capital balance • B is allocated compensation of P20,000 per year • Amy remaining profits and losses are allocated on a 3:3:4 basis, respectively • Each partner is allowed to withdraw up to P5,000 cash per year 20. Assuming that the net income is P50,000 and that each partner withdraws the maximum amount allowed. What is the balance in C’s capital account at the end of that year? a. P105,800 b. P106,200 c. P106,900 d. P107,400 21. The following balance sheet for the partnership of LuzVisMin was taken from the books on October 1, 2010 Cash P200,000 Accounts payable P400,000 Other assets 800,000 Luz, capital 240,000 Vis, capital 190,000 Min, capital 170,000 Total P1,000,000 Total P1,000,000 The profit and loss agreement among the partners follows: • Annual salaries to Luz and Vis of P10,000 each

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• •

22.

23.

24.

25.

26.

27.

28.

Annual interest of 5% on beginning capital Bonus of 15% to Luz based on income after salaries, interest and bonus. Remaining profit 25% to Luz, 35% to Vis, and 40% to Min. The partnership began its operations on October 1, 2010. Net income for the year ended December 31, 2010 is P139,000. Which of the following is true? a. The bonus to Luz is P11,608 b. Net income after salaries, interest and bonus is P77,392 c. Vis total share in net income is P43,375 d. Min’s share on the profit after salaries, interest and bonus is P27,086 The dissolution of a partnership occurs a. Only when the partnership sells its assets and permanently closes its books b. Only when a partner leaves the partnership c. Only when a new partner is admitted to the partnership d. When there is any change in the individuals who make up the partnership The process of terminating the business, selling the assets, paying the liabilities and disbursing the remaining cash to the partners is called a. Dissolution c. Liquidation b. Formation of a partnership d. Withdrawal The selling of noncash assets for cash in partnership liquidation, any difference between book value and the cash proceeds is called a. Net profit or loss on sale c. Capital gain or loss b. Gain or loss on realization d. Sales differential value The main characteristic of a lump sum liquidation done in one transaction is that all the a. Assets are sold in one transaction b. Liabilities are paid on one transaction c. Cash available to partners is distributed to them in one transaction d. Assets are sold in one transaction and all the available cash is distributed to creditors and partners in one transaction. The cash available for distribution to partners in an installment liquidation is equal to the a. Cash available after a sale of noncash assets is made b. Cash available after payment to creditors are made c. Cash available after payment to creditors are made and after reserve for future liquidation is set aside d. All of the above When advance cash distribution plan is prepared, a partner’s loan payable to partnership is a. Added to other liabilities b. Added to the credit balance in the partner’s capital account c. Subtracted from the credit balance in the partner’s capital account d. Omitted from the calculation Capital balance and profit and loss sharing ratios of the partners in the ABC partnership are as follows: A, capital (40%) P168,000 B, capital (40%) 192,000 C, capital (20%) 120,000 Total P480,000 A needs money and agrees to assign one-fourth of his interest in the partnership to D for P45,000 cash. D pays P45,000 directly to A. Compute the (1) capital balance of D, and (2) the total capital of the ABC Partnership immediately after the assignment of the interest to D? a. (1) P42,000; (2) P547,200 c. (1) P42,000; (2) P480,000 b. (1) P67,200; (2) P480,000 d. (1) P67,200; (2) P547,200

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29. A partnership has the following capital balances: Elgin (40% of gains and losses) P100,000 Jethro (30%) 200,000 Foy (30%) 300,000 Oscar is going to pay a total of P200,000 to these three partners to acquire a 25 percent ownership interest from each. Goodwill (or revaluation of asset) is to be recorded. What is Jethro’s capital balance after the transaction? a. P150,000 b. P175,000 c. P195,000 d. P200,000 30. Partners Allen, Baker and Coe share profits and losses 5:3:2, respectively. The balance sheet as of April 30, 2014 follows: Assets Liabilities and Capital Cash P40,000 Accounts payable P100,000 Other assets 360,000 Allen, Capital 74,000 Baker, Capital 130,000 Coe, Capital 96,000 The assets and liabilities are recorded and presented at their respective fair values. Jones is to be admitted as a new partner with a 20% capital interest and a 20% share in the profits and losses in exchange for a cash contribution. No goodwill or bonus is to be recorded. How much cash should Jones contribute? d. P80,000 a. P60,000 b. P72,000 c. P75,000 The partners in the Kim, Gerald and Maja partnership have capital balances as follows: Kim, capital P17,500 Gerald, capital P17,500 Maja, capital P20,000 Profits and losses are shared 30%, 30% and 40% respectively. On this date, Maja withdraws and the partners agree to pay him P22,500 out of partnership cash (Tangible assets are already stated at values approximating their fair market values). 31. Using bonus method, how much must be the ending capital of Kim immediately after Maja’s withdrawal? c. P16,750 d. P19,375 a. P17,500 b. P16,250 32. Using partial goodwill method, how much must be the ending capital of Kim immediately after Maja’s withdrawal? a. P17,500 b. P16,250 c. P16,750 d. P19,375 33. Using full goodwill method, how much must be the ending capital of Kim immediately after Maja’s withdrawal? b. P16,250 c. P16,750 d. P19,375 a. P17,500 34. Elton and Don are partners who share profits and losses in the ratio of 7:3, respectively. On November 5, 20x4, their respective capital accounts were as follows: Elton P70,000 Don 60,000 On that date they agreed to admit Kravitz as a partner with a one-third interest in the capital and profits and losses upon his investment of P50,000. The new partnership will began with a total capital of P180,000. Immediately after Kravitz’s admission, what are the capital balances of Elton, Don and Kravitz, respectively? a. P60,000; P60,000; P60,000 c. P63,333; P56,667; P60,000 d. P70,000; P60,000; P50,000 b. P63,000; P57,000; P60,000 35. Kris and Mark are partners who share profits and losses 70:30. They have capital account balances of P170,000 and P260,000, respectively at the date they admit Frank into the partnership. Frank invests P120,000 in the partnership for a 25 percent equity interest and the bonus method is applied. What is the peso amount of bonus recognized in Frank’s capital account at the date of admission? a. P70,000 b. P52,500 c. P23,333 d. P17,500 36. On December 31, 20x4, AN and DE are partners with capital balances of P80,000 and P40,000 and they share profits and losses in the ratio of 2:1, respectively. On this date, ST invests P36,000 cash for a one-fifth

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interest in the capital and profit of the new partnership. The partners agree that the implied partnership goodwill (total revaluation of assets) is to be recorded simultaneously with the admission of ST. The total implied goodwill of the firm is a. P4,800 b. P6,000 c. P24,000 d. P30,000 37. Bishop has a capital balance of P120,000 in a local partnership, and Cotton has a P90,000 balance. These two partners share profits and losses by a ratio of 60 percent to Bishop and 40 percent to Cotton. Lovett invests P60,000 in cash in the partnership for a 20 percent ownership. The goodwill (or revaluation of asset) method will be used. What is Cotton’s capital balance after this new investment? a. P99,600 b. P102,000 c. P112,000 d. P126,000 38. On June 30, 20x4, the balance sheet for the partnership of William, Brown and Lowe, together with their respective profit and loss ratios, is summarized as follows: Assets, at cost P300,000 Williams, loan P15,000 Williams, capital 70,000 Brown, capital 65,000 Lowe, capital 150,000 Williams has decided to retire from the partnership, and by mutual agreement the assets are to be adjusted to their fair value of P360,000 at June 30, 20x4. It is agreed that the partnership will pay Williams P102,000 cash for his partnership interest exclusive of his loan, which is to be repaid in full. Goodwill is to be recognized in this transaction, as implied (total) by the excess payment to Williams. After Williams’ retirement, what are the capital balances of Brown and Lowe, respectively? a. P65,000 and P150,000 c. P73,000 and P174,000 d. P77,000 and P186,000 b. P97,000 and P246,000 39. Prior to liquidation, the liabilities and partners’ capital account are reported with the following balances: Partner’s Capitals Profit ratio Alaska P160,000 1/3 Beermen P290,000 2/3 Totals P450,000 The total liabilities of the partnership amount to P150,000, and all assets available are non-cash assets which were realized at P540,000. The cash distribution to partners upon liquidation would be

Alaska

40.

41.

42.

43.

Beermen

Alaska

Beermen

a. P135,000 P270,000 c. P140,000 P250,000 b. P130,000 P260,000 d. P190,000 P350,000 X, Y, and Z have capital balances of P40,000, P50,000 and P18,000, respectively and a...