PARCOR

Prelim Review Exercises – Partnership Formation and Operations

1. On May 1, 2015, Cat and Meow formed a partnership and agreed to share profits and losses in the ratio of 3:7,
respectively. Cat contributed a parcel of land that cost her P10,000. Meow contributed P40,000 cash. The land
has a fair value of P15,000. Cat insisted that the value of the land should be P18,000. The partners agreed to
value the land at P18,000. What amount should be recorded in Cat’s capital account on formation of the new
partnership?
a. P18,000
b. P17,400
c. P15,000
d. P10,000

2. Bill and Ken enter into a partnership agreement in which Bill is to have a 60% interest in capital and profits and Ken is
to have a 40% interest in capital and profits. Bill contributes the ff:
Cost Fair Value
Land P10,000 P20,000
Building P100,000 P60,000
Equipment P20,000 P15,000

There is a P30,000 mortgage on the building that the partnership agrees to assume. Ken contributes P50,000 cash to the
partnership. Bill and Ken agree that Ken’s capital account should equal Ken’s P50,000 cash contribution and that
goodwill should be recorded. Goodwill should be recorded in the amount of:
a. P10,000
b. P15,000
c. P16,667
d. P20,000

3. A partner’s withdrawal of assets from a limited liability partnership that is considered a reduction of in that partner’s
equity is debited to the partner’s:
a. Drawing account
b. Retained earnings account
c. Capital account
d. Loan receivable account

4. Albert, Claude, and Jamie form a partnership by contributing P25,000, P70,000, and P80,000, respectively. In addition,
the partners agree that Albert should receive P20,000 of goodwill because of his special skills relevant to this business.
What amount of capital will exist for Claude when the partnership is formed?
a. P60,000
b. P65,000
c. P70,000
d. Some other amount

5. Cat admits Dog as partner in business. Accounts in the ledger for Cat on November 30, 20x2, just before the
admission of Dog, show the following balances:
Cash P6,800
Accounts Receivable P14,200
Merchandise Inventory P20,000
Accounts Payable P8,000
Cat, capital P33,000

It is agreed that or the purposes of establishing Cat’s interest the following adjustments shall be made:
a. An allowance for doubtful accounts of 3% of accounts receivable is to be established
b. The merchandise inventory is to be valued at P23,000
c. Prepaid salary expenses of P600 and accrued rent expense of P800 are to be recognized.

Dog is to invest sufficient cash to obtain a 1/3 interest in the partnership. The amount of cash investment by Dog
a. P11,971
b. P35,347
c. P17,687
d. P18,790
6. The partnership agreement of AAA, BBB and CCC provides for the year-end allocation of net income in the following
order:
 First, AAA is to receive 10% of net income up to ₱100,000 and 20% over ₱100,000
 Second, BBB and CCC each are to receive 5% of the remaining income over ₱150,000  The balance of income
is to be allocated equally among the three partners
The partnership’s 20x2 net income was ₱250,000 before any allocations to partners. What amount should be allocated to
BBB?

a. 71,000
b. 68,000
c. 108,000
d. 110,000

7. A, B, and C’s partnership agreement requires the partners to maintain average investments ₱2,500,000, ₱1,250,000,
and ₱1,250,000, respectively. Six percent (6%) interest per annum is to be computed on any excess or deficiency in the
contributions. After the interest allowances, any remaining profit or loss is shared in the ratio of 5:3:2. Average amounts
invested during the first six months were as follows: A, ₱3,000,000; B, ₱1,375,000; and C, ₱1,000,000. Loss of ₱62,500
was incurred for the first six months. How is the loss distributed among the partners?

A B C
a. 12,500 10,000 49,500
b. 18,375 21,875 22,250
c. 21,875 18,375 22,250
d. 31,250 18,750 12,500

8. The ABC Co., on which A, B and C are partners, reported profit of ₱360,000 during the year. If partners A, B and C
have a profit sharing agreement of 2:3:4, respectively, how much is the share of A in the profit?

a. 60,000
b. 72,000
c. 80,000
d. 84,000

9. AB Partnership was formed on February 28, 20x1. Partner A invested ₱150,000 cash while Partner B invested land
that he originally bought for ₱70,000 but has a current fair value of ₱180,000. Because of cash shortage, B invested
additional cash of ₱60,000 on November 1, 20x1. The partnership contract states the following:
 Monthly salary (recognized as expenses and withdrawn periodically)
 Interest on beginning capital
 Bonus on profit before salaries and interest but after bonus
 Remaining profit or loss

AB Partnership earned profit of ₱120,000 in 20x1 before deducting the bonus and interests. What is the
Capital balance of A on December 31, 20x1?
a. 243,500
b. 226,500
c. 193,500
d. 266,500

10. Cab and Jo are considering forming a partnership whereby profits will be allocated through the use of salaries and
bonuses. Bonuses will be 10% of net income after total salaries and bonuses. Cab will receive a salary of P30,000 and a
bonus. Jo has the option of receiving a salary of P40,000 and a 10% bonus or simply receiving a salary of P52,000. Both
partners will receive the same amount of bonus.

Determine the level of net income that would be necessary so that Jo would be indifferent to the profit sharing option
selected.
a. P240,000
b. P300,000
c. P 94,000
d. P334,000
11. The partnership agreement of RR and SS provides that interest at 10% per year is to be credited to each partner on
the basis of weighted-average capital balances. A summary of the capital account of SS for the year ended December
31, 20x2, is as follows:

Balance, January 1………………………………………………… P 420,000

Additional investment, July 1……………………………………… 120,000
Withdrawal, August 1……………………………………………… (45,000)
Balance, December 31……………………………………………… 495,000

What amount of interest should be credited to SS’s capital account for 20x2?
a. P45,750
b. P49,500
c. P46,125
d. P51,750

12. On January 1, 20x2, A, B, C and D formed Bakya Trading Co., a partnership, with capital contributions as follows: A,
P50,000; B, P25,000; C, P25,000; and D, P20,000. The partnership contract provided that each partner shall receive a
5% interest on contributed capital, and that A and B shall receive salaries of P5,000 and P3,000, respectively. The
contract also provided that C shall receive a minimum of P2,500 per annum, and D a minimum of P6,000 per annum,
which inclusive of amounts representing interest and share of remaining profits. The balance of the profits shall be
distributed to A, B, C, and D in a 3:3:2:2 ratio.

What amount must be earned by the partnership, before any charge for interest and salaries, so that A may receive an
aggregate of P 12,500 including interest, salary and share of profits?
a. P16,667
b. P30,000
c. P30,667
d. P32,333

13. RR and PP share profits after the provision of annual salary allowances of P14,400 and P13,200, respectively in the
ratio of 6:4. However, if partnership’s net income is sufficient to provide for said allowances in full amount, the net income
shall be divided equally between partners. In 20x2, the following errors were discovered: Depreciation for 20x2 is
understated by P2,100, and the inventory on December 31, 20x2 is overstated by P11,400. The partnership net income
for 20x2 was reported to be P19,500.

The capital accounts of the partners should be increased (decreased) by:

a. RR, P (6,540); PP, P (6,540)
b. RR, P 3,000; PP, P 3,000
c. RR, P (6,960); PP, P 6,540
d. RR, P (6,750); PP, P (6,750)

14. Peter and Ronald are partners. They have shared profits and losses 65/35 for a number of years. Peter has indicated
that he is going to reduce his involvement in the partnership so the profit and loss is being modified to 45/55. At the date
of the change in the profit and loss ratio, the partnership own vacant land with a market value of P300,000 and a book
value of P100,000. Peter and Ronald compile a list of assets with market and book value differences. Two years after the
change in the profit and loss ratios, the land is sold for P450,000. How much of the gain is allocated to Peter?
a. P157,500
b. P197,500
c. P227,500
d. P287,500

15. HH, MM, and AA formed a partnership on January 1, 20x2, and contributed P150,000, P200,000, and P250,000,
respectively. Their articles of co-partnership provide that the operating income be shared among the partners as follows:
as salary, P24,000 for HH, P18,000 for MM, and P12,000 for AA; interest of 12% on the average capital during 20x2 of
the three partners; and the remainder in the ratio of 2:4:4, respectively.

The operating income for the year ending December 31, 20x2 amounted to P176,000. HH contributed additional capital of
P30,000 on July 1 and made a drawing of P10,000 on October 1; MM contributed additional capital of P20,000 on August
1 and made a drawing of P10,000 on October 1; and, AA made a drawing of P30,000 on November 1.

The partners’ capital balances on December 31, 20x2 are:

a. HH, P179,680; MM, P229,360; and, AA, P239,360
b. HH, P179,760; MM, P229,520; and, AA, P239,520
c. HH, P189,680; MM, P239,360; and, AA, P269,360
d. HH, P223,180; MM, P272,060; and, AA, P280,760

16. JJ and KK are partners who share profits and losses in the ratio of 60%: 40%, respectively. JJ's salary is P60,000 and
P30,000 for KK. The partners are also paid interest on their average capital balances. In 20x2, JJ received P30,000 of
interest and KK, P12,000. The profit and loss allocation is determined after deductions for the salary and interest
payments. If KK's share in the residual income (income after deducting salaries and interest) was P60,000 in 20x2, what
was the
total partnership income?
a. 192,000
b. 345,000
c. 282,000
d. 387,000

17. Lancelot is trying to decide whether to accept a salary of P40,000 or a salary of P25,000 plus a bonus of 10% of net
income after salary and bonus as a means of allocating profit among the partners. Salaries traceable to the other partners
are estimated to be P100,000. What amount of income would be necessary so that Lancelot would consider the choices
to be equal?
a. P165,000
b. P290,000
c. P265,000
d. P305,000

18. Shawn is a managing partner in a local business. Part of his profit allocation is a bonus based on the store's operating
income. The bonus is 8 percent of operating income in excess of P200,000 after deducting the bonus. If operating income
for the year is P250,000, what is Shawn's bonus (rounded to the nearest peso)?
a. P 3,703
b. P40,000
c. P20,000
d. P40,000

19. Cheryl is the manager of a local store. She is also a partner in the company and she receives a bonus as part of the
profit and loss allocation. Cheryl's bonus is based on the increase in revenues recorded during the period. The bonus
arrangement is that Cheryl receives 1 percent of net income for every full percentage point growth for revenues in excess
of a 5 percent, revenue growth. During the most recent period, revenues grew from P500,000 to P540,000 and net
income grew from P98,000 to P120,000. How much bonus does Cheryl receive for this period?
a. P2,000
b. P1,100
c. P3,600
d. P6,000

20. AA, BB, and CC are partners with average capital balances during 20x2 of P360,000, P180,000, and P120,000,
respectively. Partners receive 10% interest on their average capital balances. After deducting salaries of P90,000 to AA
and P60,000 to CC the residual profit or loss is divided equally. In 20x2 the partnership sustained a P99,000 loss before
interest and salaries to the partners. By what amount should AA's capital account change?
a. P21,000 increase
b. P33,000 decrease
c. P105,000 decrease
d. P126,000 increase