Chapter 5 Retirement exercises only with solutions PDF

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CHAPTER 5PARTNERSHIP DISSOLUTIONEXERCISES5 Maria, Leonora and Teresa are partners with adjusted capital balances of P165,000, P150, and P180,000 respectively and divide profit and loss equally. At the end of the year, Maria decides to withdraw from the partnership. Maria will receive cash settlement...

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CHAPTER 5 PARTNERSHIP DISSOLUTION EXERCISES 5.1

Maria, Leonora and Teresa are partners with adjusted capital balances of P165,000, P150,000 and P180,000 respectively and divide profit and loss equally. At the end of the year, Maria decides to withdraw from the partnership. Maria will receive cash settlement of P150,000 Instruction: Give the entry to record the withdrawal of Maria assuming – a. Bonus Method is used b. Revaluation of Asset method is used Maria

5.2

Mercedes, Melinda and Julieta are partners sharing profit and loss 40%, 30% and 30% respectively. Capital balances of the partners before the retirement of Mercedes were at P450,000, P425,000 and P400,000. The company sustained a net loss of P45,000 during the year. The partners were allowed to withdraw P10,000 each. Instruction: Give the entry to record the retirement of Mercedes, assuming no Bonus or Revaluation will be recorded

5.3

Santino is to withdraw from Mariposa Partnership, owned by partners Macario, Policarpio and Santino, with capital balances of P200,000, P250,000 and P100,000. Macario purchased 60% of Santino’s interest for P65,000 while Policarpio paid Santino P50,000 for the remainder. Instruction: Give the entry to record the withdrawal of Santino from the Partnership. *Macario 100,000 x 60% = 60,000; P = 100,000 – 60,000 = 40,000 Entry: DR CR S, Capital 100,000 M, Capital 60,000 P, Capital 40,000

5.4

After closing the books of the partnership of Mutya and Associates, Lakambini announced his retirement of from the partnership. Shown below are the partners’ capital balances and the profit and loss ratio: Capital Balance

LamAng, Capital Lakandula, Capital Lakambini, Capital LaLuna, Capital

P 50,000 65,000 40,000 45,000

P/L ratio

30% 25% 23% 22%

The partners agreed to the following before the cash settlement to Lakambini. a. The merchandise inventory will be increased by P4,500 b. Allowance for bad debts will be decreased by P2,100 c. Prepaid insurance worth P1,200 have expired.

Instruction: Give the entries to record the following: 1) Adjustments in the books of the partnership 2) Withdrawal of Lakambini from the Partnership assuming the remaining partners will give Lakambini a bonus of P10,000. 3) Withdrawal of Lakambini from the partnership assuming Lakambini receives P5,000 share in asset revaluation.

5.5

The partners Macopa, Sineguelas and Ashitaba have capital balances of P300,000, P450,000 and P200,000 respectively, while profit and loss was divided in the ratio 4:4:2. On December 1, 2017, Macopa announced his intention to leave the partnership at the end of the year. During the year the partnership gained a Net Income of P250,000 which was distributed as follows: 5% interest on their individual capital, salaries of P6,000 to Partners Sineguelas and Ashitaba, 4% Bonus on Net income after salaries and interest on capital was allowed to partner Macopa. Instruction: 1) Compute for the distribution of Net Income at the end of the year. M S A Total Interest M 5% x 300,000 15,000 S 5% x 450,000 22,500 A 5% x 200,000 10,000 47,500 Salaries 6,000 6,000 12,000 Bonus 7,620 7,620 Balance P 182,880 73,152 73,152 36,576 182,880 4:4:2 Total

95,772

101,652

52,576 250,000

B =4%(250,000-12,000-47,500) B = 4% (190,500) B = 7,620 2) Give the entry to record the withdrawal of Macopa at the end of the year assuming a) Macopa cash settlement was P20,000 less than her capital interest and the bonus method was used. M = 300,000 +NI share 95,772 = 395,772 RP +Capital (CR) P & L 4:2 Adjusted M, Capital = 395,772 S 20,000 x 4/6 = 13,333 CasH settlement (less 20,000) 375,772 A 20,000 x 2/6 = 6,667 Bonus to RP 20,000 Entry DR CR M, Capital 395,772 S, Capital 13,333 A, Capital 6,667 Cash 375,772

b) Macopa’s cash settlement was revaluation method was used Adjusted M, Capital Cash settlement (10,000 more) +AR share of M (4/10)

P10,000 more than her capital interest and the asset 395,772 405,772 10,000*

Total +AR (10,000/4/10) = 25,000 Other Assets M 25,000 x 4/10 = 10,000* S 25,000 x 4/10 = 10,000 A 25,000 x 2/10 = 5,000 Entry: DR CR M, Capital 395,772 Other Assets 25,000 S, Capital 10,000 A, Capital 5,000 Cash 405,772 c) Macopa’s cash settlement was equal to her capital interest. NO AR/NO BONUS Entry: DR CR M, Capital 395,772 Cash 395,772 5.6

The following information was taken from the books of SAMPALOC and SONS PARTNERSHIP. Capital Balance Profit & Loss Ratio Sampaloc, Capital X P5,000,000 35% Kamatchili, Capital Y 2,500,000 33% Kaimito, Capital Z 1,500,000 32% Kaimito is to withdrew from the partnership by selling 30% of his capital interest to Sampaloc at 2% more than his capital interest, and will sell 70% of his capital to Kamatchili at book value. After the withdrawal of Kaimito, the remaining partners will divide their profit and loss equally. X = 1,500,000 x 30% = 450,000; Y 70% x 1,500,000 = 1,050,000 Instruction: 1. Give the entry to record the retirement of Kaimito. Entry DR CR Z, Capital 1,500,000 X, Capital 450,000 Y, Capital 1,050,000 2. If the remaining partners were to have equal capital interest and share in profit and loss, how much additional cash should one of the partners invest? X Y Total

Original Capital From Z Adjusted Capital Equal interest (9,000,000/2) Add’l investment 5.7

5,000,000 +450,000 5,450,000 4,500,000 (950,000)

2,500,000 7,500,000 +1,050,000 1,500,000 3,550,000 9,000,000 4,500,000 950,000*

Nilupak, Biko and Maja Blanca are partners with capital balances of P324,300, P207,000 and P158,700. After being a partner for 30 years, Biko decided to withdraw from the partnership. Upon his withdrawal, assets were revaluated, and Biko’s share was debited for P27,000. ( Total Capital 324,300 + 207,000 + 158,700 = 690,000 Instruction: 1. Give the entry to record the revaluation of the other assets Total -AR (27,000 x 207/690) = (90,000) Other assets N = 90,000 x 3243/6900 = (42,300) B = 90,000 x 2070/6900 =( 27,000) M = 90,000 x 1587/6900 = ( 20,700) Entry: N, Capital B, Capital M, Capital Other Assets

DR 42,300 27,000 20,700

CR

90,000

2. Give the entry to record the withdrawal of Biko from the partnership. BIKO, Capital 207,000 -AR share (27,000) Adjusted B, Capital 180,000D Cash settlement 180,000C Entry B, Capital Cash

DR 180,000

CR 180,000

TRUE OR FALSE Write True if the statement is correct and False if incorrect. ___________

1.

Articles of Co-Partnership are the written contract of a partnership.

___________

2

To be a partner, a member has to contribute money, property or industry in the partnership.

___________

3

The percentage of ownership interest of the partners is always the same as their profit-sharing ratio.

___________

4

As industrial partner is exempt from the sharing in partnership losses.

___________

5

Peso month is computed by multiplying the capital investment and/or withdrawal during the period by the number of months unchanged.

___________

6

A silent partner is one who is not known by third parties to be a partner in the business but takes active part in the business

___________

7

All partnership are subject to 30% income tax.

___________

8

The transfer of capital from one partner to the other is called Bonus.

___________

9

In the absence of an agreement, the share of each partner in the profits and losses shall be divided equally.

___________

10

A limited partnership is one which all partners limited partners.

___________

11

Partnership existence depends on the contract but not to exceed 50 years.

___________

12

The admission of a new partner in a partnership need not be dissolved because it shall continue its existence.

___________

13

A change in the structure of partnership ownership liquidates the partnership.

___________

14

Any salary allowances specified in the partnership agreement are taken into consideration only if profit is enough to cover such allowances.

___________

15

Mutual agency signifies that each partner is assumed to be an agent for partnership undertakings with the authority to bind all other partners by his actions on behalf of the partnership

___________

16

A bonus is normally shared by the existing partners based on their existing profit and loss ratio.

___________

17

A partner who has no participation in the management of the partnership affairs is a nominal partner.

___________

18

Liquidation is the steps and procedure of winding up the affairs of the partnership and involves and affect the interest of third parties.

___________

19

The partnership should determine profit or loss for the portion of the year up to the withdrawal date of a partner and allocate profit and loss according to the existing ratio.

___________

20

Cash settlement to a retiring partner of an amount in excess of his capital balance may signify that some partnership assets are undervalued

___________

21

___________

22

A partnership has a juridical personality separate and distinct from each of the partner. The total assets of the partnership remain unchanged when a new partner purchases an interest directly from an existing partner.

___________

23

A stipulation in the partnership contract which excludes one or more partners from any share in the profit or losses is allowed provided the partners have agreed upon it.

___________

24

Capital credit is the amount of capital or equity of a partner.

___________

25

The admission of an individual in a partnership requires the consent of majority of the partners.

___________

26

The bonus account is credited when there is transfer of capital from the old to the new partner

___________

27

A partnership has unlimited life.

___________

28

If the capital credit of a new partner is greater than his actual investment there will be bonus to the new partner

___________

29

An ostensible partner is one who has active part and recognized by the public as partner in the business whether or not he has an actual interest in the business.

___________

30

Two or more persons that bind together to contribute money property or industry into a common fund with the intention of dividing the profit among themselves is a partnership

PARTNERSHIP DISSOLUTION

Another occurrence which may bring about the change in partnership ownership is the removal of an old partner which is caused by his voluntary withdrawal, retirement, his death, or incapacity of a partner. .

Death, Withdrawal, Retirement or Incapacity of a Partner This chapter focuses on the accounting for the withdrawal or retirement of a partner. The books of the partnership, at the date of the retirement or death of a partner should be adjusted to identify partnership profit or loss during the reporting period up until the date of death or the retirement of the partner. Similar to the previous chapter in Formation of a Partnership, when there is a change in the capital structure of a partnership, assets and liabilities are brought to their fair market value to arrive at the adjusted partner’s equity. The equity of the retiring or deceased partner should be settled. For a partner withdrawing or retiring from the partnership, he may, with the consent of the remaining partners sell his interest to an outsider (new partner), to the remaining partners or to the partnership. The purchase price or amount of settlement by the partnership to the retiring partner may be (a) at book value – equal to the interest of the retiring partner; (b) less than the book value; (c) more than the book value. Two methods are used to account for the settlement to the retiring partner when the payment is not equal with the book value or interest of the retiring partner, the (a) Bonus method, and the (b) Asset Revaluation Method. ILLUSTRATIVE PROBLEM HaKaSa Partnership Statement of Financial Position September 30, 2017 Assets Cash Other Assets

Total Assets a. b. c. d. e.

P 150,000 130,000

P 280,000

Liabilities & Capital Liabilities P 50,000 Halimuyak, Capital 100,000 Katarungan, Capital 90,000 Salimuot, Capital 40,000 Total Liabilities & Capital P 280,000

Profit and Loss are divided in the ratio 5: 4 : 1 Salimuot decided to withdraw from the partnership. Net Income for January – September 2017 amounted P50,000 Each partner withdrew P5,000 each as of September 30, 2017. After the retirement of Salimuot, the remaining partners will divide profit and loss equally.

The first step is to compute for the book value of the retiring partner’s (Salimuot) Capital. Halimuyak , Capital

Katarungan , Capital

Salimuot, Capital

Total Capital

Profit and Loss ratio

Capital Balance before retirement Share in Net Income Total

50%

P100,000 25,000 P125,000

40%

P 90,000 20,000 P110,000

10%

P 40,000 5,000 P 45,000

P 230,000 50,000 P 280,000

Case A –Salimuot withdraws from the partnership. The remaining partners did not take in any more partner/s. Salimuot is paid P45,000 equal to his capital interest. Salimuot, Capital Cash

45,000 45,000

Case B – Salimuot sells his interest to Balanay for P40,000. Salimuot, Capital Balanay, Capital

45,000 45,000

The loss of P5,000, which is a personal loss of Salimuot will not be recorded in the company books. After the retirement of Salimuot, the total capital would remain the same. Case C –Salimuot withdraws from the partnership and sells his interest to the partnership and is to be paid P50,000, which is P5,000 more than his capital interest. (BONUS TO RETIRING PARTNER) Salimuot, Capital Halimuyak, Capital Katarungan, Capital Cash P5,000 x 5/9 = P2,778 P5,000 x 4/9 = P2,222

45,000 2,778 2,222 50,000

Case D –Salimuot withdraws from the partnership and sells his interest to the partnership and is paid P50,000 which is P5,000 MORE than his capital interest. (ASSET REVALUATION METHOD) The entry to record the Revaluation of Assets Other Assets 50,000 Halimuyak, Capital 25,000 Katarungan, Capital 20,000 Salimuot, Capital 5,000 Revaluation P5,000 ÷ 10% = P50,000 P50,000 x 5/10 = P25,000 P50,000 x 4/10 = P20,000 P50,000 x 1/10 = P 5,000 The P5,000 difference between Salimuot’s Capital interest and the cash settlement is his share in the calculated Asset Revaluation, thus by dividing it with his profit and loss share of 1/5, we get the total Asset revaluation, which is P50,000.

The entry to record the Retirement of Salimuot Salimuot, Capital 50,000 Cash 50,000 Salimuot receives cash settlement of P50,000 which comprises his capital interest of P45,000 plus his P5,000 share in the revaluation. A compound journal entry can be used instead– Other Assets 50,000 Salimuot Capital 45,000 Halimuyak, Capital 25,000 Katarungan, Capital 20,000 Cash 50,000 Case E –Salimuot withdraws from the partnership and sells his interest to the partnership and is paid P43,000 which is P2,000 LESS than his capital interest. (BONUS TO REMAINING PARTNERS) Salimuot, Capital Halimuyak, Capital Katarungan, Capital Cash P2,000 x 5/9 = P1,111 P2,000 x 4/9 = P 889

45,000 1,111 889 43,000

Case F –Salimuot withdraws from the partnership and sells his interest to the partnership and is paid P43,000 which is P2,000 LESS than his capital interest. (NEGATIVE ASSET REVALUATION) The entry to record the Revaluation of Assets and settlement (compound entry) Salimuot, Capital 45,000 Halimuyak, Capital 10,000 Katarungan, Capital 8,000 Other Assets 20,000 Salimuot, Capital 43,000 Revaluation P2,000 ÷ 10% = P20,000 P20,000 x 5/10 = P10,000 P20,000 x 4/10 = P 8,000 P20,000 x 1/10 = P 2,000

EXERCISES

10.1

Maria, Leonora and Teresa are partners with adjusted capital balances of P165,000, P150,000 and P180,000 respectively and divide profit and loss equally. At the end of the year, Maria decides to withdraw from the partnership. Maria will receive cash settlement of P150,000 Instruction: Give the entry to record the withdrawal of Maria assuming – a. Bonus Method is used b. Revaluation of Asset method is used

10.2

Mercedes, Melinda and Julieta are partners sharing profit and loss 40%, 30% and 30% respectively. Capital balances of the partners before the retirement of Mercedes were at P450,000, P425,000 and P400,000. The company sustained a net loss of P45,000 during the year. The partners were allowed to withdraw P10,000 each. Instruction: Give the entry to record the retirement of Mercedes, assuming no Bonus or Revaluation will be recorded

10.3

Santino is to withdraw from Mariposa Partnership, owned by partners Macario, Policarpio and Santino, with capital balances of P200,000, P250,000 and P100,000. Macario purchased 60% of Santino’s interest for P65,000 while Policarpio paid Santino P50,000 for the remainder. Instruction: Give the entry to record the withdrawal of Santino from the Partnership.

10.4

After closing the books of the partnership of Mutya and Associates, Lakambini announced his retirement of from the partnership. Shown below are the partners’ capital balances and the profit and loss ratio: Capital Balance

LamAng, Capital Lakandula, Capital Lakambini, Capital LaLuna, Capital

P 50,000 65,000 40,000 45,000

P/L ratio

30% 25% 23% 22%

The partners agreed to the following before the cash settlement to Lakambini. d. The merchandise inventory will be increased by P4,500 e. Allowance for bad debts will be decreased by P2,100 f. Prepaid insurance worth P1,200 have expired. Instruction: Give the entries to record the following: 4) Adjustments in the books of the partnership 5) Withdrawal of Lakambini from the Partnership assuming the remaining partners will give Lakambini a bonus of P10,000. 6) Withdrawal of Lakambini from the partnership assuming Lakambini receives P5,000 share in asset revaluation.

10.5

The partners Macopa, Sineguelas and Ashitaba have capital balances of P300,000, P450,000 and P200,000 respectively, while profit and loss was divided in the ratio 4:4:2. On December 1, 2017, Macopa announced his intention to leave the partnership at the end of the year. During the year the partnership gained a Net Income of P250,000 which was

distributed as follows: 5% interest on their individual capital, salaries of P6,000 to Partners Sineguelas and Ashitaba, 4% Bonus on Net income after salaries and interest on capital was allowed to partner Macopa. Instruction: 1) Compute for the distribution of Net Income at the end of the year. 2) Give the entry to record the withdrawal of Macopa at the end of the year assuming d) Macopa cash settlement was P20,000 less than her capital interest and the bonus method was used. e) Ma...