Week 01: 1A Formation

Total Questions: 24

1.
On June 30, 202A MC, the sole proprietor of MC. Inc., expands the company and establishes a partnership with Tom and Charles.
The partners plan to share profits and losses as follows: MC, 50%; Tom, 25% and Charles 25%.  They also agree that the beginning
capital balances of partnership will reflect this same relationship. 

MC asked Tom to join the partnership because his many business contacts are expected to be valuable during the expansion.  Tom is
also contributing P40,000 and a building that has an original cost of P520,000, book value of P420,000, tax assessment of P310,000
and fair value of P370,000.  The building is subject to a P242,000 mortgage that the partnership will assume.  Charles is contributing
P66,000 and marketable securities costing P252,000 but are currently worth P345,000.

MC’s investment in the partnership is his business.  He plans to pay off the notes with his personal assets.  The other partners have
agreed that the partnership will assume the accounts payable.  The balance sheet for the MC follows:

Balance Sheet
June 30, 202A
Assets Liabilities and Capital
Cash P60,000 Accounts payable P318,000
Accounts receivable (net) 288,000 Notes payable 372,000
Inventory 432,000 MC, Capital 510,000
Equipment-net (dept’n, P120k) 420,000    

The partners agree that the inventory is worth P510,000, 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 MC 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?

a. P694,500; P810,000
b. P694,500; P822,000
c. P810,000; P694,500
d. P810,000; P822,000

2.
        Douglas, a sole proprietor, agreed to form a partnership with Johnny in a business.  Accounts in the ledger for Douglas on November 30, 202A, just before the formation show the following balances:

Cash P 26,000 Accounts payable P 62,000

Accounts receivable 120,000 Douglas, Capital 264,000
Merchandise inventory 180,000    

It is agreed that for purposes of establishing Douglas’s interest, the following adjustments should be made:
1.     An allowance for doubtful accounts of 2% of accounts receivable is to be established.
2.     The merchandise inventory is to be valued at P202,000.
3.     Prepaid expenses of P6,500 and accrued liabilities of P4,000 are to be established.

      Johnny is to invest sufficient funds in order to receive a 1/3 interest in the partnership.  How much must Johnny contribute?

a. P 88,000
b. P 95,360

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c. P 132,000
d. P 143,050

3.
      On February 14, 202A, Allan and Paul agreed to invest equal amounts and share profits equally to form a partnership.  Allan invested P780,000 and a piece of equipment.  Paul invested some assets which are shown
below:

Accounts receivable P100,000 Machineries, net P560,000

inventory 280,000 Intangibles, net 230,000

The assets invested by Paul are not properly valued.  P8,000 of the accounts receivable are proven uncollectible.  Inventories are to be written down to P260,000.  Included in the machineries is an obsolete apparatus
acquired for P96,000 with an accumulated depreciation balance of P84,000.  Part of the intangibles is a patent with a carrying value of P14,000 which was sued upon by a competitor.  Paul unsuccessfully defended the
case and the final decision of the court was released on February 12, 202A.
    
       What is the fair value of the equipment invested by Allan?

a. P242,000
b. P336,000
c. P350,000
d. P390,000

4.
            Scarlett and Natalie decided to form a partnership on May 1, 202A.  The assets to be contributed by the partners are:

  Scarlett Natalie
  Book Value Fair Value Book Value Fair Value
Cash P375,000 P375,000 P875,000 P875,000
Merchandise inventory 95,000 125,000    
Furniture and fixtures 350,000 312,500 872,500 937,500
Transportation     3,262,500 2,812,500
equipment
       
     The transportation equipment is subject to a mortgage loan of P1,125,000, which is to be assumed by the partnership.  The partnership agreement provides that Scarlett and Natalie share profits and losses of 30% and
70% respectively.  Assuming that the partners agreed to bring their respective capital in proportion to their profit and loss ratio, using Natalie capital as base, how much additional cash is to be invested (withdrawn) by
Scarlet?

a. P687,500
b. P875,000
c. (P987,500)
d. (P687,500)

5.
Robert and Leonardo decided to form a partnership on June 1, 202A.  The partnership will take over their assets as well as assume their liabilities.  As of June 1, 202A, the net assets of Robert and Leonardo are P220,000
and P309,375 each respectively.  Liabilities of Robert are 55% less than the book value of its net assets while liabilities of Leonardo are 40% more than the book value of its net assets.  The partners agreed on a 25:75
profit and loss ratio.  Furthermore, the partners arrived on the following agreements: Robert’s inventory is undervalued by P11,000; an allowance for doubtful accounts is to be set up in the books of Robert and Leonardo at
10% of the accounts receivable balances (Robert, P27,500; Leonardo, P41,250).  Accrued salary of P20,250 was not recognized in Leonardo’s books.
 
What is total assets of the partnership immediately after formation if partner’s capital interest should be equal to their profit and loss ratio through withdrawal or additional investment with Leonardo’s capital to be used as
the basis?

a. P380,000
b. P912,125
c. P934,125
 d. P932,375

6.
Ana, Bea and Carol decided to form a partnership contributing the following items.  Ana is to invest her existing business in the partnership consisting of the following accounts; cash of P20,000; accounts receivable of
P50,000; inventory P30,000; fixtures of P40,000; payables of P12,000.  Bea on the other hand is to invest cash of P15,000 and a delivery truck costing P30,000 but is mortgaged with the bank for P20,000.  The partners
agree that the receivables will re have a 90% realizable value.  The inventory would be valued at P20,000.  P5,000 of the payables would be paid prior to the formation of the partnership.  The delivery truck would have a
20% increase in its market value.  The partnership will shoulder only 80% of the mortgage and Carol is to invest cash to be able to have a 40% interest in the partnership.

How much cash should Carol invest in the newly formed partnership?

a. 61200
b. 138000
c. 60800
d. 102000

7.

Glenn and Clarence agree to form a partnership. Glenn is to contribute 135,600 cash and equipment that has a carrying value of 135,000 and a fair value of 115,000. The equipment however, has a mortgage attached to it and it is
agreed by the partners that they will assume it. Clarence, on the other hand contributed 240,000 cash. They share profits and losses in the ratio of 4:5. Furthermore, part of their agreement is to bring their initial capital in
conformity with their profit and loss ratio.

How much is the mortgage of the equipment?

a. 58600
b. 10600
c. 34600
d. 78600

8.

On January 1, 202A, R, J and N formed a partnership with profit or loss sharing agreement of 2:3:5.
R contributed land with assessed value from the city assessor in the amount of P1,000,000. The land is subject to real estate
mortgage, which is annotated to the title of the land in the amount of P800,000. The appraised value of the land is P2,400,000. J contributed a building with a cost of P2,000,000 and accumulated depreciation of P1,500,000. The
fair value of building is P800,000. N contributed investment in trading securities with historical cost of P6,000,000. The trading securities have quoted price in active market of P3,000,000.

The partners decided to bring their capital balances in accordance with their profit or loss sharing agreement. The total agreed capitalization of the partnership is P10,000,000.
Which of the following statements is correct?

a. The agreed capital of N is P500,000.

b. R should contribute additional capital in the amount of P1,800,000
c. J should contribute additional capital in the amount of P2,200,000.
d. N is entitled to withdraw in the amount of P1,000,000.

9.

The partnership of CRC and ACE was formed on March 31, 202A. On this date, CRC invested P50,000 cash and office equipment valued at P 30,000. ACE invested P 70,000 cash, merchandise valued at P110,000 and furniture
valued at P 100,000 subject to a note payable of P50,000 (which the partnership assumes). The partnership provides that CRC and ACE share profits and losses 25:75, respectively. The agreement further provides that partners
should initially have an equal interest in the partnership capital. Under the goodwill and the bonus method, what is the total capital of the partners after formation?

BONUS GOODWILL METHOD

a. P 310,000 P 460,000

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b. P 360,000 P 510,000
c. P 300,000 P 410,000
d. P 350,000 P 400,000

10.

Joseph, Peter and John formed a partnership on April 30, with the following assets, measured at their fair market values, contributed by each partner:

  Joseph Peter John

Cash P   100,000 P 120,000 P 300,000
Automobile       85,000     
Delivery trucks      280,000        
Computer and printer       51,000  
Office furniture       35,000     25,000
Land and building         1,500,000       _________ _________
                                 
  P 1,685,000 P  486,000   P 325,000

Although John has contributed the most cash to the partnership, he did not have the full amount of P 300,000 available and was forced to borrow P 200,000. The land and building contributed by Joseph has a mortgage of P
900,000 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 Joseph, Peter and John, what is the total capital investment of
all the partners at the opening of business on April 30?

a. P 2,496,000
b. P 1,596,000
c. P 1,396,000
d. P 1,664,000

11. C, P and A are new CPA’s and are to form an accounting partnership. C is to contribute cash of P75,000 and his computer originally bought at P80,000 but has a second hand value of P50,000. P is to contribute cash of
P100,000, and tables and chairs worth P20,000 but acquired by P for only P18,000. A, whose family is selling computers, is to contribute cash of P40,000 and a brand new computer plus printer with regular price at P80,000 but
which cost their family’s computer dealership P70,000. Partners agree to share profits 3:2:3. The capital balances of C, P and A, respectively, upon formation are:

a. P155,000; P118,000 and P110,000

b. P125,000; P120,000 and P120,000
c. P143,625; P95,750 and P143,625
d. P136,875; P91,250 and P136,875

12. A, B, and C are forming a new partnership each contributing cash of P200,000 and their respective office equipment and supplies valued at P100,000, P200,000, and P300,000, respectively. A’s noncash contribution is his
own developed audit software valued at cost which he could sell for trice the amount. Partners agree to admit his software at market value and they will share profits equally. The capital balances of A, B, and C, respectively, are:

a. P300,000; P400,000; and P500,000

b. P400,000; P400,000; and P400,000
c. P500,000; P400,000; and P500,000
d. P466,666; P466,666; and P466,667

13.

Joe Con developed an interesting idea for marketing sailboats in Death Valley. He interested Rob White in joining him in a partnership. Following is the information you have collected relative to their original contributions.

Rob contributed P30,000 cash, a tract of land, and delivery equipment. Joe contributed P60,000 cash. After giving special consideration to the tax bases of the assets contributed, the relative usefulness of the assets to the
partnership versus the problems of finding buyers for the assets and contributing cash, and other such factors, the partners agreed that Joe’s contribution was equal to 40 percent of the partnership’s tangible assets, measured in
terms of the fair value of the assets to the partnership. However, since the marketing idea originated with Joe, it was agreed that he should receive credit for 50 percent of the recorded capital. Recent sales of land similar to that
contributed by Rob suggest a market value of P40,000. Likewise, recent sales of delivery equipment similar to that contributed by Rob suggest P40,000 as the market value of the equipment. These sales, of course, were not
entirely representative of the particular assets contributed by Rob and therefore may be a better indicator of their relative values than their absolute values. In reflecting on their venture, the partners agree that it is a rather risky
affair in respect to anticipated profits. Hopefully, however, they will be able to build good customer relations over the long run and establish a permanent business with an attractive long-term rate of return.

Under the most appropriate method, given the circumstances, the entry to record the formation of partnership must be:

Cash 90,000
Delivery Equipment 40,000
Land 40,000
          Con, capital 60,000
          White, capital 110,000
a.
Cash 90,000
Delivery equipment 40,000
Land 40,000
          Con, capital 85,000
White, Capital 85,000
b.
Cash 90,000
Delivery equipment 40,000
Land 40,000
Goodwill 50,000
Con, capital 110,000
White, capital 110,000
c.
Cash 90,000
Delivery equipment 40,000
          Land 40,000
          Con, capital  102,000
          White, capital 68,000
d.

14.

C Cola and R. Crown formed a partnership and agree to divide initial partnership capital equally, even though C. Cola contributed P50,000 in identifiable assets and R. Crown contributed P42,000. Such an agreement implies that
R. Crown is contributing an unidentifiable assets such as individual talent, established clientele, or banking connections to the partnership.

The unidentifiable asset is not recorded on the partnership books, the journal entry necessary to establish equal capital interest is:

Cash P92,000
          C. Cola, capital P50,000
          R. Crown, capital 42,000
a.
Cash P92,000
          C. Cola, capital P46,000
          R. Crown, capital 46,000
b.
Cola, capital P4,000
          R. Crown, capital P4,000
c.
R. Crown, capital P4,000

15.
d.
          C. Cola, capital P4,000

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The balance sheet as of July 31, 202A, for the business owned by Sunshine, shows the following assets and liabilities:

Cash      50,000 Furniture and Fixtures P164,000

Accounts receivable     134,000 Accounts payable 28,800
Merchandise inventory  220,000    

It is estimated that 5% of the receivables will prove uncollectible. The cash balance includes a 1,000 shares marketable equity securities recorded at its cost, P4,000. The stock last sold on the market at P17.50 per share.
Merchandise inventory includes obsolete items costing P18,000 that will probably realized only P4,000. Depreciation has never been recorded; however, the furniture and fixtures are two years old, have an estimated total life of
10 years, and would cost P240,000 if purchased new. Prepaid items amount to P5,000. Paulo is to be admitted as a partner upon investing P200,000 cash and P100,000 merchandise. How much capital is to be credited to
Sunshine upon formation of partnership?

a. P 539,200
b. P 613,000
c. P 565,000
d. P 606,200

16.

Darwin and Sanders are joining their separate businesses to form a partnership. Property and cash are to be contributed for a total capital of P400,000. The property to be contributed and liabilities to be assumed are:

  Darwin   Sanders 
  Book value    Fair value   Book value    Fair value
Accounts receivable       30,000 P  30,000    
Inventories      30,000    45,000 P 80,000 P 90,000
Equipment       50,000    40,000 90,000               95,000
Accounts payable           15,000    15,000 10,000                10,000

The partners’ capital accounts are to be equal after all contributions and assumptions of liabilities. Profit and loss ratio is 45% Darwin and 55% Sanders.
The amount of cash Darwin and Sanders must contribute:

a. P 200,000; P200,000, respectively

b. P 80,000; P45,000, respectively
c. P 5,000; P70,000, respectively
d. P100,000; P25,000, respectively

17.

Paul admits Timothy as a partner in business. Accounts in the ledger for Paul on November 30, 202A, just before the admission of Timothy, show the following balances:

Cash P  26,000 Accounts payable P  62,000

Accounts receivable    120,000 Paul, capital    264,000
Merchandise inventory   180,000    

It is agreed that for purposes of establishing Paul’s interest the following adjustments should be made:

     1. An allowance for doubtful accounts of 2% of accounts receivable is to be established.

     2. The merchandise inventory is to be valued at P202,000.

     3. Prepaid expenses of P6,500 and accrued liabilities of P4,000 are to be established.
Timothy is to invest sufficient funds in order to receive a 1/3 interest in the partnership. How much must Timothy contribute?

a. P 132,000
b. P 143,050
c. P 95,360
d. P 88,000

18. Shane, Pat, and Andy are new CPAs and are to form an accounting partnership. Shane is to contribute cash of P75,000 and his computer originally bought at P80,000 but has a second hand value of P50,000. Pat is to
contribute cash of P100,000 and tables and chairs worth P20,000 but acquired by Pat for only P18,000. Andy, whose family is selling computers, is to contribute cash of P40,000 and a brand new computer plus printer with
regular price at P80,000 but which cost their family’s computer dealership P70,000. Partners agree to share profits 3:2:3. The capital balances of Shane, Pat, and Andy, respectively upon formation are:

a. Shine, P155,000; Pat, P118,000 and Andy, P110,000

b. Shine, P143,625; Pat, P95,750 and Andy, P143,625
c. Shine, P125,000; Pat, P120,000 and Andy, P120,000
d. Shine, P136,875; Pat, P91,250 and Andy, P136,875

19.

Effective August 1, 202A, Alex and Bob agreed to form a partnership from their two respective proprietorships. The balance sheets presented below reflect the financial position of both proprietorships as of July 31, 202A:

  ALEX BOB
Cash P  12,000 P  30,000
Accounts Receivable 72,000 42,000
Merchandise Inventory 198,000 252,000
Prepaid Rent     24,000
Store Equipment 240,000 180,000
Accumulated Depreciation    (90,000) (108,000)
Building 750,000  
Accumulated Depreciation (150,000)  
Land   360,000  
Totals  P1,392,000 P420,000
Accounts Payable        P   45,000 P  18,000
Mortgage Payable       360,000  
Alex, Capital    987,000  
Bob, Capital          402,000
Totals  P1,392,000 P 420,000 

As of August 1, 202A, the fair value of Alex’s assets were: merchandise inventory, P162,000; store equipment, P90,000; building, P1,500,000; and land, P600,000. For Bob, the fair value of the assets on the same date were:
merchandise inventory, P270,000; store equipment, P39,000; prepaid rent, P 0. All other items on the two balance sheets were stated at their fair values. How much capital must be credited to Alex upon formation of partnership?

a. P 2,031,000
b. P 1,791,000
c. P 363,000
d. P 2,394,000

20.

Roy admits Al as a partner in the business. Balance sheet accounts of Roy on September 30, just before admission of Al show:

Cash P 15,600

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Accounts receivable    72,000
Merchandise inventory 108,000
Accounts payable        P  37,200
Roy, capital                 158,400

It is agreed that for purposes of establishing Roy’s interest, the following adjustments shall be made:

     a. An allowance for doubtful accounts of 2% is to be established.

     b. Merchandise inventory is to be valued at P121,200

     c. Prepaid expenses of P2,100 and accrued expenses of P2,400 are to be recognized.

Al is to invest sufficient cash to obtain a 1/3 interest in the partnership. How much is Al’s investment to the partnership?

a. P 84,930
b. P 105,600
c. P 85,830
d. P 47,520

21.

On September 1, 202A, the business assets and liabilities of Garfield and Betty are as follows:

                                                                                          Garfield                                                            Betty

  Book Value Fair Value Book Value Fair Value

Cash    P56,000    P56,000 P124,000 P124,000
Accounts Receivable    400,000    360,000 1,200,000 1,120,000
Inventories    240,000    228,000    400,000    386,000
Land 1,200,000 1,300,000    
Building     1,000,000 1,040,000
Furniture and    100,000      90,000      70,000      66,000
Fixtures
Other Assets        4,000          6,000  
Accounts Payable    360,000    360,000    500,000     500,000
Notes Payable    400,000    400,000    700,000     700,000

Garfield and Betty agreed to form a partnership and to share profits based on their capital contribution. The capital amount to be recorded for Garfield and Betty, respectively are:

a. P1,536,000 and P1,274,000

b. P1,274,000 and P1,536,000
c. P1,240,000 and P1,600,000
d. P1,282,000 and P1,536,000

22. Francis, Chris, and Ivan are to form a partnership. Francis is to contribute cash of P350,000; Chris, P35,000; and Ivan, P350,000. Francis and Ivan are not to actively participate in the business, but will refer customers, while
Chris will manage the firm. Chris has to give up his present job, which gives him an annual income of P420,000. The partners decided that profits & losses should be shared equally. Upon formation, partners’ capital balances
would respectively be:

a. P245,000; P245,000; and P245,000

b. P350,000; P35,000; and P350,000
c. P350,000; P455,000; and P350,000
d. P385,000; P385,000; and P385,000
23.

X and Y are partners sharing profits 60:40. A balance sheet prepared for the partnership on April 1, 202A shows the following:

Cash P    48,000  Accounts payable P   89,000

Accounts receivable 92,000          X, capital 133,000
Inventory        165,000          Y, capital                 108,000
Equipment       70,000    
Accumulated depreciation     (  45,000)   _________
  P 330,000     P 330,000

On this date, the partners agree to admit Z as a partner. The terms of the agreement is that assets and liabilities are to be restated as follows:

     a. An allowance for possible uncollectibles of P 4,500 is to be established.

     b. Inventories are to be restated at their present replacement values of P 170,000.

     c. Equipment are to be restated at a value of P 35,000.

     d. Accrued expenses of P 4,000 are to be recognized.

X, Y, and Z will divide profits in the ratio of 5:3:2. Capital balances for the new partners are to be in this ratio with X and Y making cash settlement outside of the partnership for the required capital adjustment between
themselves and Z investing cash in the partnership for his interest.

How much cash Z should contribute?

a. P 61,875
b. P 49,496
c. P 60,250
d. P 50,625

24.

X and Y are partners sharing profits 60:40. A balance sheet prepared for the partnership on April 1, 202A shows the following:

Cash P    48,000  Accounts payable P   89,000

Accounts receivable 92,000          X, capital 133,000
Inventory        165,000          Y, capital                 108,000
Equipment       70,000    
Accumulated depreciation     (  45,000)   _________
  P 330,000     P 330,000

On this date, the partners agree to admit Z as a partner. The terms of the agreement is that assets and liabilities are to be restated as follows:

     a. An allowance for possible uncollectibles of P 4,500 is to be established.

     b. Inventories are to be restated at their present replacement values of P 170,000.

     c. Equipment are to be restated at a value of P 35,000.

     d. Accrued expenses of P 4,000 are to be recognized.

X, Y, and Z will divide profits in the ratio of 5:3:2. Capital balances for the new partners are to be in this ratio with X and Y making cash settlement outside of the partnership for the required capital adjustment between

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themselves and Z investing cash in the partnership for his interest.

What capital adjustments should be made between X and Y?

a. X must pay Y, P17,785.

b. Y must pay X, P17,785.
c. X must invest cash of P17,785.
d. Y must invest cash of P17,785.D. Y must invest cash of P17,785.