RESA AFAR-01 Partnership Formation & Operation PDF

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ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY CPA Review Batch 41 ! May 2021 CPA Licensure Examination ! Weeks 1-2

ADVANCED FINANCIAL ACCOUNTING & REPORTING

A. Dayag ! G. Caiga ! M. Ngina

AFAR-01: PARTNERSHIP FORMATION & OPERATIONS I On July 1, 2019, AA and BB decided to form a partnership. The firm is to take over business assets and assume liabilities and assume liabilities, and capitals are to be based on net assets transferred after the following adjustments: a. AA and BB’s inventory is to be valued at P31,000 and P22,000, respectively. b. Accounts receivable of P2,000 in AA’s books and P1,000 in BB’s books are uncollectible. c. Accrued salaries of P4,000 for AA and P5,000 for BB are still to be recognized in the books. d. Unused office supplies of AA amounted to P5,000, while that of BB amounted to P1,500. e. Unrecorded patent of P7,000 and prepaid rent of P4,500 are to be recognized in the books AA and BB, respectively. f. AA is to invest or withdrew cash necessary to have a 40% interest in the firm. Balance sheets for AA and BB on July 1 before adjustments are given below: AA BB Cash P 31,000 P 50,000 Accounts Receivable 26,000 20,000 Inventory 32,000 24,000 Office Supplies 5,000 Equipment 20,000 24,000 Accumulated depreciation – equipment (9,000) (3,000) Total Assets P100,000 P120,000 Accounts Payable Capitals Total Liabilities and Capital

P 28,000 72,000 P100,000

P 20,000 100,000 P120,000

Determine: 1. The net adjustments – capital in the books of: a. AA, P7,000 net debit; BB, P2,000 net credit b. AA, P5,000 net debit; BB, P7,000 net credit c. AA, P7,000 net credit; BB, P2,000 net debit d. AA, P5,000 net credit; BB, P7,000 net debit 2. The adjusted capital of AA and BB in their respective books. a. AA – P65,000; BB – P102,000 c. AA – P77,000; BB – P98,000 b. AA – P63,000; BB – P107,000 d. AA – P77,000; BB – P93,000 3. The additional investment (withdrawal) made by AA: 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, P62,000; YY, P93,000 II On December 1, 2019, AA and BB formed a partnership with contributing the following assets at fair market values: AA BB Cash ………………………………… P 9,000 P18,000 Machinery and equipment…….. 13,500 Land ………………………………... 90,000 Building …………………………….. 27,000 Office Furniture ………………….... 13,500 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 Page 1 of 6 0915-2303213 ! www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY

AFAR-01

Weeks 1-2: PARTNERSHIP FORMATION & OPERATIONS 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 c. P134,100.00 b. P85,500.00 d. P166,250.00 III 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 DD Book Value Fair Value Book Value Fair Value Accounts Receivable….. P11,250.00 P11,250.00 Inventories……………….. 11,250.00 16,875.00 P30,000.00 P33,750.00 Equipment……………….. 18,750.00 15,000.00 33,750.00 35,625.00 Accounts Payable……… 5,637.50 5,625.00 3,750.00 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 c. CC – P80,625; DD – P78,750 b. CC – P37,500; DD – P5,625 d. CC – P63,750; DD – P5,625 IV – With Solution OO and PP are partners sharing profits in this proportion – 60:40. A balance sheet prepared for the partners on April 1, 20x4 shows the following: Cash . . . . . . . . . . . . . . . . . . . . P48,000 Accounts Receivable . . . . . . . 92,000 Inventories . . . . . . . . . . . . . . . . 165,000 Equipment . . . . . . . . . . . . 70,000 Less: Acc. depreciation . . . . . . . 45,000 25,000 Total Assets . . . . . . . . . . . . . . . . P330,000

Accounts payable . . . . . . . . . OO, capital . . . . . . . . . . . . . . PP, capital. . . . . . . . . . . . . . .

P

89,000 133,000 108,000

Total Liabilities & Capital . . . .

P 330,000

On this date, the partners agree to admit RR as a partner. The terms of the agreement are summarized below. Assets and liabilities are to be restated as follows: • An allowance for possible uncollectible of P4,500 is to be established. • Inventories are to be restated at their present replacement value of P170,000. • Accrued expenses of P4,000 are to be Recognized. OO, PP and RR will divide profits in the ratio of 5:3:2. Capital balances of the partners after the formation of the new partnership are to be in the aforementioned ratio, with OO and PP making cash settlement between them outside of the partnership to adjust their capitals, and RR investing cash in the partnership for his interest. 1. The cash to be invested by RR is: a. P60,250 c. P50,000 b. P47,500 d. P59,375 2. The total capital of the partnership after the admission of RR is: a. P296,875 c. P237,500 b. P301,250 d. P286,850 3. Cash settlement between OO and PP is: a. OO will pay PP P17,537.50 c. OO will invest P17,537.50 b. PP will pay OO P17,537.50 d. PP will withdraw P17,537.50

Answers/Solutions: 1. (d)

2. (a)

Total capital of the new partnership (refer to No. 2) P 296,875 Multiply by RR’s interest 20% Cash to be invested by RR P 59,375 OO PP Total (60%) (40%) Unadjusted capital balances P133,000 P108,000 P241,000 Adjustments: Allowance for bad debts ( 2,700) ( 1,800) ( 4,500) Inventories 3,000 2,000 5,000 Accrued expenses ( 2,400) ( 1,600) ( 4,000) Adjusted capital balances P130,900 P106,600 P237,500 Total capital before the formation of the new partnership (see above) P 237,500 Divide by the total percentage share of OO and PP (50% + 30%) 80% Total capital of the partnership after the admission of RR P 296,875

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AFAR-01

Weeks 1-2: PARTNERSHIP FORMATION & OPERATIONS 3. (a) Contributed Capital OO P 130,900 PP 106,600 Therefore, OO will pay PP P17,537.50

Contributed Capital Settlement P148,437.50 (50% x P296,875) P 17,537.50 89,062.50 (30% x P296,875) (17,537.50)

Partnership Operations V Left and Right are partners. Their capital accounts during 2019 were as follows: Left, Capital Right, Capital 8/23

P3,000

1/1 P15,000 3/5 P4,500 1/1 P25,000 4/3 4,000 7/6 3,500 10/31 3,000 10/7 2,500 Partnership net income is P25,000 for the year. The partnership agreement provides for the division of net income as follows: • Each partner is credited 10 percent interest on his or her average capital (rounded to the nearest month). • Because of prior work experience, Left is entitled to an annual salary of P6,000 and Right is credited with P4,000 • Any remainder income or loss is to be allocated based on beginning capital How much of the partnership net income for 2019 should be assigned to Left and Right? a. Left, P11,833; Right, P13,167 c. Left, P13,194; Right, P11,806 b. Left, P9,375; Right, P15,625 d. Left, P12,500; Right, P12,500 VI Hunt, Rob, Turman and Kelly own a publishing company that they operate as a partnership. The partnership agreement includes the following: • Hunt receives a salary of P10,000 and a bonus of 3% of income after all bonuses. • Rob receives a salary of P5,000 and a bonus of 2% of income after all bonuses. • All partners are to receive 10% interest on their average capital balances. The average capital balances are Hunt, P25,000; Rob, P22,500; Turman, P10,000 and Kelly, P23,500. Any remaining profits and losses are to be allocated equally among the partners. Determine how a profit of P52,500 would be allocated among the partners. a. Hunt, P20,725; Rob, P14,975; Turman, P7,725; Kelly, P9,075 b. Hunt, P14,000; Rob, P8,250; Turman, P1,000; Kelly, P2,350 c. Hunt, P19,850; Rob, P14,600; Turman, P8,350; Kelly, P9,700 d. Cannot be determined. VII PP and QQ are partners operating a chain of retail stores. The partnership agreement provides for the following: PP QQ Salaries……………………………………………. P5,000 P2,500 Interest on average capital balances……… 10% 10% Bonus……………………….................................. 20% of net income before interest but after bonus & salaries Remainder……………………………………….. 30% 70% The income summary account for year 2019 shows a credit balance of P25,500 before any deductions. Average capital balances for PP and QQ are P25,000 and P37,500, respectively. The share of PP and QQ in the P25,500 net income would be: a. PP, P12,031.25; QQ, P13,468.75 c. PP, P11,750; QQ, P13,750 b. PP, P13,270.75; QQ, P12,229.25 d. PP, P13,125; QQ, P12,375 VIII – Bonus as a distribution of profit XX and YY formed a partnership on January 2, 2019 and agreed to share profits and loss in the ratio of 90% and 10%, respectively. XX contributed capital of P6,250. YY 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: • Capital accounts are to be credited annually with interest at 5% of the beginning capital • YY is to be paid a salary of P250 a month • YY is to receive a bonus of 20% of net income calculated before deducting his salary and interest on both capital accounts. • Bonus, interest, and YY’s salary are to be considered as partnership expenses Page 3 of 6...