Partnership Formation Activity PDF

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Chapter 1: Partnership FormationOn January 1, 2015, Ernie and Bert both sole proprietors decided to form a partnership to expand both of their businesses. According to their agreement, they will split profits and losses 75:25 and their initial capital will also reflect that ratio.The following are E...

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Chapter 1: Partnership Formation On January 1, 2015, Ernie and Bert both sole proprietors decided to form a partnership to expand both of their businesses. According to their agreement, they will split profits and losses 75:25 and their initial capital will also reflect that ratio.

2. How much is the capital credit to Ernie upon formation? A. 80,000 B. 273,750 C. 292,000 D. 255,500 Answer: ( B )

The following are Ernie and Bert’s Statement of Financial Position:

ASSETS

Ernie Proprietor Statement of Financial Position December 31, 2014 LIABILITIES AND EQUITY

Cash Accounts Receivable Inventories Equipment Accumulated depreciation- Equipment TOTAL ASSETS

50,000 100,000 75,000 250,000 (185,000) 290,000

Accounts payable Accrued expenses Notes payable Ernie, capital

65,000 55,000 80,000 90,000

TOTAL LIABILITIES&EQUITY

290,000

Bert Proprietor Statement of Financial Position December 31, 2014 ASSETS LIABILITIES AND EQUITY Cash 30,000 Accounts Payable Accounts receivable 110,000 Accrued expenses Inventories 85,000 Notes Payable Equipment 300,000 Bert, Capital Accumulated Depreciation- Equipment (100,000) TOTAL ASSETS 425,000 TOTAL LIABILITIES&EQUITY

Bonnie and Clyde enters into a partnership agreement in which Bonnie is to have 55% interest in the partnership and 35% in the profits and losses, while Clyde will have 45% interest in the partnership and 65% in the profits and losses. Bonnie contributed the following:

Building Equipment Land 75,000 90,000 100,000 160,000 425,000

The values reflected in the Statement of Financial Position are already at fair values except fo the following accounts: Ernie’s Accounts Receivable is now 20,000 less than what is stated in his Statement of Financial Position. Both inventories of Ernie and Bert are now 90,000 and 70,000 respectively. Equipment for Bert has an assessed value of 275,000, appraised value of 250,000 and book value of 200,000. Additional accrued expenses are to be established in the amount of 10,000 for Bert only while additional accounts payable in the amount of 5,000 for Ernie. It is also agreed that all liabilities will be assumed by the partnership, except for the notes payable of Bert which will be personally paid by him. 1. How much is the adjusted capital balance of Bert upon formation? A. 91,250 B. 185,000 C. 285,000 D. 310,000 Answer: ( C )

3. How much should Ernie invest as additional cash to be in conformity with their initial capital agreement? A. 193,750 B. 212,000 C. 175,500 D. 205,000 Answer: ( A )

Cost 235,000 168,000 500,000

Fair value 255,000 156,000 525,000

The building and the equipment has a mortgage of 50,000 and 35,000 respectively. Clyde is to contribute 150,000 cash and equipment. The partners agreed that only the building mortgage will be assumed by the partnership. 1. How much is the fair market value of the equipment which Clyde contributed? A. 615,818 B. 989,143 C. 546,273 D. 574,909 Answer: ( D ) 2. How much is the total asset of the partnership upon formation? A. 1,892,143 B. 1,701,818 C. 1,660,909 D. 1,632,273 Answer: ( C )

Theories (letter of answer is underlined) 1 The partnership agreement is an express contract among the partners (the owners of the business). Such an agreement generally does not include a. A limitation on a partner’s liability to creditors. b. The rights and duties of the partners. c. The allocation of income between the partners. d. The rights and duties of the partners in the event of partnership dissolution. 2. A partnership records a partner’s investment of assets in the business at a. The market value of the assets invested. b. A special value set by the partners. c. The partner’s book value of the assets invested. d. Any of the above, depending upon the partnership agreement. ?3. When property other than cash is invested in a partnership, at what amount should the noncash property be credited to the contributing partner’s capital account? a. Fair value at the date of recognition. b. Contributing partner’s original cost. c. Assessed valuation for property tax purposes. d. Contributing partner’s tax basis. ?4. When property other than cash is invested in a partnership, at what amount should the noncash property be credited to the contributing partner’s capital account? a. Fair value at the date of contribution. b. Contributing partner’s original cost. c. Assessed valuation for property tax purposes. d. Contributing partner’s tax basis. 5. Four individuals who were previously sole proprietors form a partnership. Each partner contributes inventory and equipment for use by the partnership. What basis should the partnership use to record the contributed assets? a. Inventory at the lower of FIFO cost or market. b. Inventory at the lower of weighted-average cost or market. c. Equipment at each proprietor’s carrying amount. d. Equipment at fair value.

1. A contract where two or more persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves. a. Voluntary Association b. Corporation c. Partnership d. Sole Proprietorship Answer: (c) 2. A partnership formed for the exercise of a profession which is duly registered is an example of:

a. Universal partnership of profits b. Universal partnership of all present property c. Particular partnership d. Partnership by estoppel Answer: (c) 3. One of the following is not a characteristic of contract of partnership. a. Real, in that the partners must deliver their contributions in order for the partnership contract to be perfected b. Principal, because it can stand by itself c. Preparatory, because it is a means by which other contracts will be entered into d. Onerous, because the parties contribute money, property, or industry to the common fund Answer: (a) 4. One of the following is not a requisite of a contract of partnership. Which is it? a. There must be a valid contract b. There must be a mutual contribution of money, property, or industry to a common fund c. It is established for the common benefit of the partners which is to obtain profits and divide the same among themselves d. The articles are kept secret among members Answer: (d) 5. The minimum capital in money or property except when immovable property or real rights thereto are contributed, that will require the contract of partnership to be in a public instrument and be registered with the Securities and Exchange Commission (SEC). a. P5, 000.00 b. P10, 000.00 c. P3, 000.00 d. P30, 000.00 Answer: (c) 6. Roberts and Smith drafted a partnership agreement that lists the following assets contributed at the partnership’s formation: Contributed by Roberts Smith Cash P 20,000 P 30,000 Inventory 15,000 Building 40,000 Furniture & Equipment 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. What amounts should be recorded as capital for Roberts and Smith at the formation of the partnership? Roberts Smith

a. b. c. d.

35,000 35,000 55,000 60,000

The partnership agreement provides for equal initial capital. Thus under the bonus method, the capital credit for Redd should be the same as the contribution for Grey, resulting to P20,000 bonus from Grey to Redd.

85,000 75,000 55,000 60,000

9. On May 1, 2010, the business assets of John and Paul appear below:

Suggested Answer: (b) 35,000 & 75,000 Roberts: 20,000 + 15,000 = P35, 000 Smith: 30,000 + 15,000 + 40,000 – 10,000 = P75,000. The partner’s capital credit is based upon the net assets contributed by the particular partner, thus the liabilities assumed reduced the fair market value of the building invested. 7. 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 Under the goodwill method, what is Redd’s initial capital balance in the partnership? a. 20,000 b. 25,000 c. 40,000 d. 60,000 Suggested Answer: (d) 60,000 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 The partnership agreement provides for equal initial capital. Thus under the goodwill method , the capital credit for Redd should be the same as the contribution of Grey, thereby increasing the total agreed capital to P120,000, which is P40,000 more than the total contributed capital (goodwill). 8. Using the information in No. 2, under the bonus method, what is the amount of bonus? a. 20,000 bonus to Grey b. 20,000 bonus to Redd c. 40,000 bonus to Grey d. 40,000 bonus to Redd Suggested Answer: (b) 20,000 bonus to Redd Grey Redd Total

Contributed Capital 60,000 20,000 80,000

Agreed Capital 40,000 40,000 80,000

Increase (Decrease) (20,000) 20,000

Cash Accounts Receivable Inventories Land Building Furniture & Fixture Other Assets Total Accounts Payable Notes Payable John, Capital Paul, Capital\ Total

P

John 11,000 234,536 120,035 603,000

P

Paul 22,354 567,890 260,102

50,345 2,000 P 1, 020, 916

428,267 34,789 3,600 P 1, 317, 002

P

P

178,940 200,000 641, 976

P 1, 020, 916

243,650 345,000

728,352 P1, 317, 002

John and Paul agreed to form a partnership contributing their respective assets and equities subject to the following adjustments: a. Accounts receivable of P20, 000 in John’s books and P35, 000 in Paul’s are uncollectible. b. Inventories of P5, 500 n P6, 700 are worthless in John’s and Pail’s respective books. c. Other assets of P2, 000 and P3, 600 in John’s and Paul’s respective books are to be written off. The capital accounts of John and Paul, respectively, after the adjustments will be: a. 614, 476 683, 052 c. 640, 876 712, 345 b. 615, 942 717, 894 d. 613,576 683, 350 Suggested Answer: (a) 614, 476 683, 052 John: 641, 976 – 20, 000 – 5, 500 – 2, 000 = P 614, 476 Smith: 728, 352 – 35, 000 – 6, 700 – 3, 600 = P 683, 052 10. Based on No. 4, how much assets does the partnership have? a. 2, 317, 918 b. 2, 237, 918 c. 2, 265, 118 d. 2, 365, 218 Suggested Answer: (c) 2, 265, 118 John: 1, 020, 916 – 20, 000 – 5, 500 – 2, 000 = P 993, 416 Smith: 1, 317, 002 – 35, 000 – 6, 700 – 3, 600 = P 1, 271, 702 Total: 2, 337, 918 – 55, 000 – 12, 200 – 5, 600 = P 2, 265, 118 Problems 1. LF, EZ, and GT are partners with capital balances of P67,200, P108,000 and P38,000 respectively, sharing profits and losses in the ratio of 2:5:1. SG is admitted as a new partner bringing with him

expertise and is to invest cash for a 15% interest in the partnership considering the transfer of capital from him of P18,000 upon his admission. Upon admission of SG, which of the following statements is false? A. The capital account of GT will be credited in the amount of P2,250 B. The total agreed capital of the old partners is P18,000 greater than their contributed capital C. The capital balance of EZ amount to P119,250 D.Cash will be debited in the amount of P40,800. 2. On June 1, 2013, AZ invited MG to join him in his business. MG agreed provided that AZ will adjust the accumulated depreciation of his equipment account to a certain amount, and will recognize additional accrued expenses of P40,000. After that, MG is to invest additional pieces of equipment make her interest equal to 45%. If the capital balances of AZ before and after adjustment were 556,00 and 484,000 respectively, what is the effect in the carrying value of the equipment as a result of the admission of MG? A. 364,000 B. (32,000) C. 396,000 D. (324,000) 3. TM and SJ, having capital balances of P980,000 and P525,000 respectively, decided to admit GD into the partnership. If TM and SJ share profit in proportion of 3;1 respectively, and SJ's capital balance after GD's investment is P589,750, how much was invested by GD? A. P848,750 B. P1,174,250 C. P588,000 D. P847,000 4. RD formed a partnership on February 10, 2009. R contributed cash of P150,000, while D contributed inventory with a fair value of P120,000. Due to R's expertise in selling, D agreed that R should have 60% of the total capital of the partnership. R and D agreed to recognize goodwill. what is the total capital of the RD partnership after the goodwill is recognized? A.P450,000 B.P330,000 C.P300,000 D.P270,000 5. In AD partnership, Allen's capital is P140,000 and Daniel's capital is P40,000 and they share a net income ratio of 3:1 respectively. They decided to admit David in the partnership. What amount will David invest to give him 1/5 interest in the partnership if no bonus/goodwill is recorded? A.P60,000 B.P36,000 C.P50,000 D.P45,000

Theories 1. ZEE acquired the assets (net of liabilities) of partner BEE in exchange for cash. The acquisition price exceeds the fair value of the net assets acquired. How should ZEE determines the amount to be reported for the plant and equipment, and for long-term debt of the acquired debt of partner BEE? A. Plant and equipment: Fair value ; Long-term debt: BEE's carrying amount B. Plant and equipment: Fair value ; Long-term debt: Fair value C. Plant and equipment: BEE's carrying amount; Long-term debt: Fair Value D. Plant and equipment: BEE's carrying amount; Long-term debt: BEE's carrying amount 2. Goodwill represents the excess cost of an acquisition over the: A. Sum of the fair values assigned to an intangible assets less liabilities assumed B. Sum of the fair values assigned to tangible and intangible assets acquired less liabilities assumed C. Sum of the fair values assigned to intangibles acquired less liabilities assumed D. Book value of an acquired company 3. When a partnership is formed, noncash assets contributed by partners should be recorded: I.At their respective book values for income tax purposes II.At their respective fair values for financial accounting purposes A. I only B. II only C. Both I and II D. Neither I nor II 4. A limited liability company (LLC): I.Is governed by the laws of the states in which it is formed II.provides liability protection to its investors III.does not offer pass-through taxation benefits of partnership A. Both I and III B. III C. Both I and II D. I, II, III 5. Transferable interest of a partner includes all of the following except: A.the partner's share in profits and losses B.the right to receive distributions C.the right to receive any liquidating distribution D.the authority to transact any of the partnership’s business operation

Answers Problem 1. D 2. A 3. D 4. C 5. D Theories 1. B 2. B 3. B 4. C 5. D

1. A partnership is a(n): I. accounting entity. II. taxable entity. a. I only b. II only c. Neither I nor II d. Both I and II 2. Which of the following is NOT a feature of a general partnership? a. mutual agency b. limited life c. limited liability d. none of these 3. A partner's tax basis in a partnership is comprised of which of the following items? I. The partner's tax basis of assets contributed to the partnership. II. The amount of the partner's liabilities assumed by the other partners. III. The partner's share of other partners' liabilities assumed by the partnership. a. I plus II minus III b. I plus II plus III c. I minus II plus III d. I minus II minus III 4. Which of the following accounts could be found in the general ledger of a partnership?

a. Option A b. Option B c. Option C d. Option D 5. Which of the following accounts could be found in the PQ partnership's general ledger? I. Due from P II. P, Drawing III. Loan Payable to Q a. I, II b. I, III c. II, III d. I, II, and III

6. Anton and Bauzon formed a partnership and agreed to divide initial capital equally, even though Anton contributed P100,000 and Bauzon contributed P84,000 in identifiable assets. Under the bonus method, to adjust capital accounts, Bauzon's intangible assets should be debited for: a. 0 b. 16,000 c. 8,000 d. 46,000 7. Roy, Sam and Tim decided to engage in a real estate venture as a partnership. Roy invested P140,000 cash and Sam provided an office and furnishings valued at P220,000. (There is a 60,000 note payable remaining on the furnishings to be assumed by the partnership). Although Tim has no tangible assets to invest, both Roy and Sam believe that Tim's expert salesmanship provides an adequate investment. The partners agree to receive an equal capital interest in the partnership. Using the bonus method, what is the capital balance of Tim? a. 0 b. 50,000 c. 100,000 d. 140,000 8. Lara and Mitra formed a partnership on July 1, 2011 and invested the following assets: P130,00 cash by Lara, and P200,000 cash and P50000 computer equipment by

Mitra. The computer equipment has a note payable amounting to P10,000, which was assumed by the partnership. The partnership agreement provides that Lara and Mitra will have an equal capital credit. Using the goodwill method, the amount of goodwill to be recorded upon formation of partnership is: a. 100,000 b. 110,000 c. 120,000 d. 140,000 9. Ana and Elsa form a new partnership. Ana invests P300,000 in cash for her 60% interest in the capital and profits of the business. Elsa contributes land that has an original cost of P40,000 and a fair market value of P70,000, and a building that has a tax basis of P50,000 and a fair market value of P90,000. The building is subject to a P40,000 mortgage that the partnership will assume. What amount of cash should Elsa contribute? a. 40,000 b. 80,000 c. 110,000 d. 150,000

ANSWERS & SOLUTIONS (Chapter 1) 1. a 2. c 3. c 4. d 5. d 6. a Zero, because under the bonus method, a transfer of capital is only required. 7. c Roy Cash

Sam

Tim

P140,000

–

–

–

P220,000

–

Office Equipment Note payable

________

_( 60,000)

______

Net asset invested

P140,000

P160,000

P

–

10. Jones and Smith formed a partnership with each partner contributing the following items: Agreed capitals, equally (P300,000/3) = P100,000

8. b Lara Cash Computer equipment

Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed by the Jones and Smith partnership.

Mitra

P130,000

P200,000

–

50,000

Note payable

________

_( 10,000)

Net asset invested

P130,000

P240,000

Goodwill (P240,000 - P130,000) =

P110,000

What is each partner's tax basis in the Jones and Smith partnership?

9. b

a. Option A b. Option B c. Option C d. Option D

Total Capital (P300,000/60%) Elsa's interest Elsa's capital Less: Non-cash asset contributed at market value Land Building Mortgage Payable Cash contribution

P500,000 ______40% P200,000 P 70,000 90,000 ( 40,000)

_120,000 P 80,000

10. a Jones: (80000+300000) - 120000 + (180000/2) = 350000 Smith: (40000+200000) - 60000 + (180000/2) = 270000

1.1 THEORIES. 1. A partnership is a(n): I. accounting entity. II. taxable entity. A. I only B. II only C. Neither I nor II D. Both I and II 2. Anton and Garcia formed a partnership, each contributing assets to the business. Anton contributed inventory with a current market value in excess of its carrying amount. Garcia contributed real estate with a carrying amount in excess of its current market value. A...