Partnership operation and formation PDF

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PARTNERSHIP ACCOUNTINGMULTIPLE CHOICE1. PARTNERSHIP FORMATIONOn June 1, 2010, AB, CD and EF decided to pool thier assets and form BDF Partnership. After formation the partners will participate in the profits and loss ratio of 40%, 25% and 35% for AB, CD and EF, respectively. The balance sheet on Jun...

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PARTNERSHIP ACCOUNTING MULTIPLE CHOICE 1. PARTNERSHIP FORMATION On June 1, 2010, AB, CD and EF decided to pool thier assets and form BDF Partnership. After formation the partners will participate in the profits and loss ratio of 40%, 25% and 35% for AB, CD and EF, respectively. The balance sheet on June 1 before the adjustments were as follows:

Cash Accounts receivable Allowance for doubtful accounts Notes receivable Merchandise inventory Prepaid rent Building Accumulated depreciation Equipment Accumulated depreciation Total assets Accounts payable Note payable Capital

AB P42,000 250,000 (18,000) 75,000 400,000 (60,000)

P689,000 P36,000 653,000 P689,000

CD P28,000 325,000 (24,000) 90,000 36,000

210,000 (25,000) P640,000 P41,000 240,000 359,000 P640,000

EF P34,000 280,000 120,000 60,000 20,000

P514,000 P34,000 480,000 P514,000

The firm is to take over business assets and aasume business liabilities. Capitals are to be based on net assets transferred after the folowwing adjustments: • 4% of the accounts receivable of AB may prove to be uncollectible, while the accounts receivable of CD is estimated to be 90% realizable and accounts receivable of EF amounting to P7,000 is deemed worthless. • Interest at 15% on notes receivable amounting to P90,000 dated April 1, 2010 should be accrued and interest at 12% on the balance of the notes dated February 1, 2010. (use 360 days) • The inventory of AB should be valued at P90,000, while P18,000 of the inventory of CD is considered worthless. • 2/3 of the prepaid rent of CD is unexpired, while 1/4 of the prepaid rent of EF has expired. • The building is under depreciated by P20,000. • The equipment is to be valued at P160,000. • Interest at 10% on notes payable dated May 1, 2010 should be accrued. (use 360 days) • AB has office supplies on hand which have been charged to expense amounting to P9,000. These are still to be used by the partnership. • Accrued expense of P2,450 is to be recognized in the books of EF. Required: Assume the use of new set of books, prepare: 1. Adjusting entries on the books of AB, CD and EF. 2. Closing entries on the books of AB, CD and EF. 3. Journal entries to record the investments of AB, CD and EF, under the: a. Net investment method b. The partners’ capital balances are to be made equal with their profit and loss ratio. (1) Either by withdrawing or investing additional cash

After formation, the new capital of the partnership is based on the adjusted balance of AB, so that CD and EF may either withdraw or invest additional cash to make the partners’ capital balance in proportionate to their profits and losses ratio.

(2) Bonus method a. aa b. bb ANS: A

c. cc d. dd PTS: 1

2. On June 30, 2010 GH, the sole proprietor of the GH Company, expands the company and establish a partnership with IJ and KL. The partners plan to share profits and losses as follows: GH, 50%; IJ, 25% and KL, 25%. They also agree that the beginning capital balances of the partnership will reflect this same relationship. GH asked IJ to join the partnership because his many business contacts are expected to be valuable during the exoansion. IJ is also contributing P70,000 cash and a building that has an original cost of P910,000, book value of P735,000, tax basis of P542,500 and a fair market value of P647,500. The building is subject to a P423,500 mortgage that the partnership will assume. KL is contributing P115,500 cash and maketable securities costing P441,000 to KL but are currently worth P603,750. GH’s investment in the partnership is the GH Company. he plans to pay off the notes with his personal assets. The other partners have agreed that partnership will assume the accounts payable. The balance sheet for the GH Company follows: GH Company Balance Sheet June 30, 2010 Assets Cash Accounts receivable, net Inventory Equipment * Total assets

P105,000 504,000 756,000 735,000 P2,100,000

Liabilities and Capital Accounts payable P 556,500 Notes payable 651,000 GH, capital 892,500 Total Liabilities and Capital

P1,200,000

* net of accumulated depreciation of P210,000 The partners agree that the inventory is worth P892,500, and the equipment is worth half its original cost, and the allowance established for doubtful accounts is correct. How much is the agreed capital of GH if the partners agree to use the bonus method to record the formation and if the partners agree to use the goodwill approach to record the formation? Bonus Goodwill a. P1,417,500 P1,438,500 c. P1,215,375 P1,417,500 b. P1,215,375 P1,438,500 d. P1,417,500 P1,215,375 ANS: B

PTS: 1

3. MN and OP decided to form a partnership on June 1, 2010. The partnership will atke over thier assets as well as assume their liabilities. As of June 1, 2010, the net assets of MN and OP are P220,000 and P309,375 respectively. Liabilities of MN are 55% less than the value of its nets assets while liabilities of OP are 40% more than the value of its net assets. The partners agreed on a 25:75 profit and loss ratio. Furthemore, the partners arrive on the following agreements: MN’s inventory is undervalued by P11,000. An allowance for doubtful account is to be set up in the books of MN and OP at 10% of the accounts receivable balances (MN, P27,500; OP, P41,250). Accrued salary of P20,250 was not recognized in OP’s books.

How much cash should MN invest/(withdraw) so that their capital interest would be equal to their profit and loss ratio? a. P95,000 b. P(133,250) ANS: B

c. P133,250 d. P(95,000) PTS: 1

4. QR and ST decided to combine thier businesses and form a partnership. Below are their balance sheets before any adjustments: Cash Accounts receivable Inventories Property, Plant & Equipment (net) Other assets Total Asstes Accounts Payable Notes Payable Mortgage Payable QR, Capital ST, Capital Total Liabilities & Equity

QR P48,400 1,031,960 528,160 2,613,380 8,800 _________ P4,230,700

ST P98,360 2,498,716 1,144,448 1,852,224 15,840 __________ P5,609,588

P787,3361 1,000,000 2,443,364 ____________ P4,230,700

P1,072,060 1,440,000 3,097,528 _________ P5,609,588

The partners agreed that the property, plant and equipment of QR is under depreciated by P80,000 and thta of ST is over depreciated by P200,000. Accounts receivable of P108,000 in QR’s book and P140,000 in ST’s book are uncollectible. The partnership decided to assume the mortgage liability of St. The partnership agreement provides for a profit and loss ratio and capital interest of 60% to QR and 40% to ST. St is willing to invest or withdraw cash from the partnership top comply with the agreement. Compute for the capital balances of QR and ST right after the formation. a. P6,896,292 ; P4,597,528 b. P6,896,292 ; P3,157,528 ANS: C

c. P2,255,364 ; P1,503,576 d. P2,255,364 ; P3,157,528

PTS: 1

5. Compute for the total assets after formation. a. P5,618,336 b. P8,058,336 ANS: B

c. P6,618,336 d. P9,840,288 PTS: 1

6. PARTNERSHIP OPERATION AND STATEMENT OF PARTNERS’CAPITAL AB, QR and XY are manufacturers’’ repersentative in the wholesale business. Thier capital accounts in the AQX Partnership for 2010 were as follows:

January 1, Balances March 1, withdrawal April 1, investment May 1, investment June 1, investment August 1, withdrawal October 1, withdrawal December 1, investment

AB P135,000

QR P180,000 36,000

XY P75,000 30,000

72,000 27,000 9,000 54,000 18,000

Required: For each of the following independent incomes-sharing agreements, prepare an income distribution schedule. a. Monthly salaries are P30,000 to AB, P50,000 to QR and P45,000 to XY. AB receives a bonus of 5% of net income after deducting his bonus. Interest is 12% of ending capital balances. Any remainder is divided by AB, QR and XY in a 25:40:35 ratio. The income Summary account has a credit balance of P2,835,000 before closing. b.

Interest is 10% of weighted average capital balances. Annual salaries are P480,000 to AB, P630,000 to QR and P510,000 to XY. QR receives a bonus of 25% of net income after deducting the bonus and his salary. Any remainder is to be divided equally and the net income is P1,050,000 before any allocations.

c.

XY receives a bonus of 20% of net income fter deducting the bonus and the salaries. Annual salaries are P600,000 to AB, P540,000 to QR and P750,000 to XY. Interest is 15% of the ending capital in excess of P140,000. Any remainder is to be divided by AB, QR and XY in the ratio of thier beginning capital balances. Net income was P1,740,000 before any allocations.

d. Monthly salaries are P32,000 to AB, P40,000 to QR and P42,000 to XY. QR receives a bonus of 10% of net income after deducting his bonus. Interest is 25% on the excess of the ending capital balances over the beginning capital balances. Any remainder is to be divided by AB, QR and XY in a 3:2:1 ratio. The Income Summary account has a debit balance of P750,000 before closing. e. Annual salaries of P450,000 to AB, P540,000 to QR and P810,000 to XY are allowed to the extent of the earnings only. Any remainder is to be divided equally among the partners. net income before collection is P960,000. a. aa c. cc b. bb d. dd ANS: A

PTS: 1...