2025 Formation and Operation of Partnership GALLARDO

Reviewer
FORMATION OF PARTNERSHIP
PROBLEM A
Layla, Miya, and Ixia are new CPA’s and are to form a partnership. Layla is to contribute cash of
P110,000 and his computer originally costing P90,000 but has a fair value of P70,000. Miya is to
contribute cash of P100,000. Ixia, whose family is selling computers, is to contribute cash of P90,000
and a brand new computer with a regular selling price of P95,000 but which cost is P23,750.
Partners agree to share profits equally.

Which of the following statement is not correct?

A. Capital balances upon formation are Layla: P180,000 Miya: P100,000 Ixia: P185,000
B. Total cash distribution of partners upon formation is not P300,000
C. Computer Equipment account will have a beginning balance of P165,000 upon formation
D. All statements are correct
Solution
1. Cash 110,000
Computer 70,000
Layla, Capital 180,000
2. Cash 100,000
Miya, Capital 100,000
3. Cash 90,000
Computer 95,000
Ixia, Capital 185,000

Total Assets = 465,000

Total Capital = 465,000
Cash = 300,000
Computer = 165,000
PROBLEM B
Akai and Atlas have just formed a partnership. Akai contributed cash of P2,205,000 and office
equipment that cost P945,000. The equipment had been used in her sole proprietorship and had
been 70% depreciated, the appraised value of the equipment is P630,000. Akai also contributed a
note payable of P210,000 to be assumed by the partnership. Akai is have 60% interest in the
partnership. Atlas contributed only P1,575,000 merchandise inventory at fair value.

Assume the use of bonus method, the partners’ capital must be in conformity with their profit and
loss ratio upon formation. In the formation of a partnership, which of the following is true?
A. The agreed capital of Akai upon formation is P2,625,000
B. The total agreed capital of the partnership is P4,375,000
C. The capital of Atlas will increase by P105,000 as a result of transfer of capital
D. There is either an investment or withdrawal of asset under the bonus method
SOLUTION:
1. Cash 2,205,000
Equipment 630,000
Notes Payable (210,000)
Akai, Capital 2,625,000

2. Merchandise Inventory 1,575,000

Atlas, Capital 1,575,000

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2025 Formation and Operation of Partnership GALLARDO

Contributed A Agreed Capital

Capital
Akai 2,205,000 (105,000) 2,520,000
(4,200,000 x
60%)
Atlas 1,575,000 105,000 1,680,000
(4,200,000 x
40%)

Total 4,200,000 4,200,000

3. Akai, Capital (105,000)

Atlas, Capital 105,000
PROBLEM C
Aldous and Baxia form a partnership. Aldous invests Php 600,000 in cash for her 70% interest in the
capital and profits of the firm. Baxia contributes land that has an original cost of Php 80,000 and fair
market value of Php 140,000, and a building that has a tax basis of Php 100,000 and a fair market
value of Php 180,000. The building is subject to a Php 80,000 mortgage that the partnership will
assume.

What amount of cash should Baxia contribute?

A. P240,000 C. P235,000
B. P168,000 D. P343,000
What is the amount of cash Aldous will contribute?
A. P17,143 C. P15,345
B. P16,543 D. P13,453

SOLUTION:
1. Cash 600,000
Aldous, Capital 600,000
2. Land 140,000
Building 180,000
Mortgage (80,000)
Baxia, Capital 240,000

CC A AC
Aldous 600,000 - 600,000 (70%)
Baxia 240,000 17,143 257,143

Total 840,000 857,143 (600,000

/70%)
3. Cash 17,143
Baxia, Capital 17,143

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2025 Formation and Operation of Partnership GALLARDO

PROBLEM D
On June 1, 2009, Alice and Bruno decided to form a partnership. The balance sheets on June 1, 2009
before the formation were as follows:
Account Titles Alice Bruno
Cash 198,000 316,800
Accounts Receivable 1,296,000 1,440,000
Allowance for Bad debts (32,400) (36,000)
Notes Receivable 360,000 -
Merchandise Inventory 115,200 108,000
Prepaid Rent - 36,000
Transportation Equipment 720,000
Accumulated Depreciation (72,000)
Computer Equipment 576,000
Accumulated Depreciation (43,200)
Total Assets 2,584,800 2,397,600

Accounts Payable – Trade 36,000 43,200

Notes Payable - 360,000
Capital 2,548,000 1994,400
Total Liabilities and Capital 2,584,800 2,397,600

The new partnership is to take over business assets and assumes business liabilities of the partners.
Capitals of the partners are to be based on the net assets invested after the following adjustments:
 4% of the accounts receivable of Alice is estimated to be uncollectible while the accounts
receivable of Bruno is estimated to be 98% realizable
 The merchandise inventory of Alice should be valued at 120,000 while 18,000 of the
inventory of Bruno is considered worthless.
 4/5 of the prepaid rent has expired.
 The transportation equipment of Alice is over depreciated by 12,000
 The computer equipment of Bruno is to be valued at 515,000
 Bruno had office supplies on hand which have been charged to expense amounting to
P8,000. These are still to be used by the partnership.
 Accrued Expense of 6,000 is to be recognized in the book of Alice.

How much is the net adjustment in Alice and Bruno?

A. (8,640); (49,400) C. (41,040); (49,400)
B. (41,040); (67,400) D. (8,640); (67,400)
What is the capital balance of Alice and Bruno after formation of partnership?
A. 2,539,360; 1,945,000 C. 2,506,960; 1,945,000
B. 2,506,960; 1,927,000 D. 2,539,360; 1,927,000

ADJUSTING ENTRIES
ALICE BRUNO
1.Alice, Capital 19,440 1.Allowance for Doubtful Accounts 7,200
Allowance for Doubtful Accounts 19,440 Bruno, Capital
7,200
2.Merchandise Inventory 4,800 2. Bruno, Capital 18,000
Alice, Capital 4,800 Merchandise Inventory 18,000
3./////////////////// 3. Bruno, Capital 28,800
Prepaid Rent 28,800
4.Accumulated Depreciation 12,000 4./////////////////////

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2025 Formation and Operation of Partnership GALLARDO

Alice, Capital 12,000

5.//////////////////////////////// 5.Bruno, Capital 17,800
Accumulated Depreciation
17,800
6.///////////////////////////// 6.Supplies 8,000
Bruno, Capital 8,000
7.Alice, Capital 6,000 7.///////////////////
Accrued Expense 6,000

1. ALICE
CC A AC
A/R 1,296,000 1,296,000
(collectible)
ADA (32,400) (19,440) (51,840) (4%
(uncollectible) uncollectible)

TOTAL 1,263,000 (realizable 1,244,160

value)
1. BRUNO
CC A AC
A/R 1,440,000 1,440,000
ADA (36,000) (7,200) (28,800) (1,440,000 x
2%)

TOTAL 1,404,000

ALICE BRUNO
CAPITAL 2,548,000 1,994,400
ADJUSTMENT (8,640) (49,400)

TOTAL 2,539,360 1,945,000

OPERATION OF PARTNERSHIP
PROBLEM E
The following Statement of Financial Position for the partnership of Karrie, Lesley, and Melissa were
taken from the books on October 1, 2011.
Cash P100,000 Liabilities P200,000
Other assets 400,000 Karrie, capital 120,000
Lesley, captal 95,000
Melissa, capital 85,000
Total assets P500,000 Total liabilities & Capital P500,000
The partners agreed to distribute profits as follows:
 Annual salaries to Karrie and Lesley of P5,000 each.
 Annual interest of 5% on beginning capital.
 Bonus of 15% to Karrie based on income after salaries, interest, and bonus.
 Remaining profits: 25% to Karrie, 35% to Lesley, and 40% to Melissa.

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2025 Formation and Operation of Partnership GALLARDO

The partnership began operations on October 1, 2011 and net income for the ended December 31,
2011 is P69,500.
Which of the following statements is true?
A. The bonus to Karrie is P5,804.
B. Net income after salaries, interest, and bonus is P38,696.
C. Lesley’s total share in net income is P21,688.
D. Melissa’s share in the profit after salaries, interest, and bonus is P13,543.

PROBLEM F
The partnership agreement of Rafaela, Floryn and Estes provides for the division of net income as
follows:
 Floryn, who manages the partnership is to receive a salary of P22,000 per year.
 Each partner is to be allowed interest at 10% on beginning capital.
 Remaining profits are to be divided equally.

During 2012, Rafaela invested an additional P8,000 in the partnership. Floryn withdrew P10,000,
and Estes withdrew P8,000. No other investments or withdrawals were made during 2012. On
January 1,2012, the capital balances were Rafaela, P130,000; Floryn, P150,000; and Estes,
P140,000. Total capital at year-end was P504,000.
Compute the capital balance of each partner at year-end:
Rafaela Floryn Estes
A. P161,000 P187,000 P156,000
B. 130,000 150,000 140,000
C. 156,666 183,000 152,666
D. 187,000 161,000 156,000

PROBLEM G
On January 2, 2012, CECILION and CARMILLA formed a partnership. CECILION contributed capital of
P437,500 and CARMILLA, P62,500. They agreed to share profits and losses 80% and 20%,
respectively. CARMILLA is the general manager and works in the partnership full time and is given a
salary of P12,500 a month; an interest of 5% of the beginning capital (CECILION is also given 5%
interest) and a bonus of 15% of net income before the salary, interests, and bonus. The income
statement of the partnership for the year ended December 31, 2012 is as follows:
Net Sales P2,187,500
Cost of goods sold 1,750,000
Gross profit 437,500
Expenses (including salary, interest and the bonus) 357,500
Net Income P80,000
The capital account balance of CARMILLA at December 31, 2011 is :
A. P523,375 C. P501,500
B. P276,625 D. P78,500

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2025 Formation and Operation of Partnership GALLARDO

PROBLEM H
EDITH and ESMERALDA entered into a partnership as of March 1, 2008 by investing P 125,000 and P
75,000, respectively. They agreed that EDITH , as the managing partner, was to receive a salary of P 30,000
per year and a bonus computed at 10% of the net profit after adjustment for the salary; the balance of the profit
was to be distributed in the ratio of their original capital balances. On December 31, 2008, account balances were
as follows:
Cash P 70,000 Accounts payable P 60,000
Accounts receivable 67,000 EDITH, capital 125,000
Furniture & fixtures 45,000 ESMERALDA, Capital 75,000
Sales returns 5,000 EDITH, drawing (20,000)
Purchases 196,000 ESMERALDA, drawing (30,000)
Operating Expenses 60,000 Sales 233,000
Inventories on December 31, 2008 were as follows: supplies, P 2,500, merchandise, P 73,000.
Prepaid insurance was P 950 while accrued expenses were P 1,550. Depreciation rate was 20% per
year. The partners’ capital balances on December 31, 2008, after closing the net profit and drawing
accounts were:
EDITH ESMERALDA EDITH ESMERALDA
A. P 135,000 P 47, 960 C. P 139,680 P 48,680
B. 139,680 49, 860 D. 142,350
47,670

PROBLEM I
Fanny and Faramis 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 insufficient to
provide said allowances in full amount, the net income shall be divided equally between the
partners. In 2010, the following errors were discovered: Depreciation understated by P2,100.
Inventory overstated by P11,400. The partnership net income was reported to be P19,500. The
capital accounts of the partners should be increased (decreased) by:
A. Fanny, P(6540), Faramis P(6540) C. Fanny, P(3000), Faramis P(3000)
B. Fanny, P(6960), Faramis P(6540) D. Fanny, P(6750), Faramis P(6750)

PROBLEM I
FREYA. FRANCO and FREDRINN partners, share profits on a 5:3:2 ratio. On January 1, 2011 , PP
admitted into the partnership with a 10% share in profits. The old partners continue to participate in
profits in their original ratio. For the year 2001, the net income of the partnership was reported as
P12,500. However, it was discovered that the following items were omitted in the firm’s books:
Unrecorded at year end:
2010 2011
Prepaid expense P800 -
Accrued expense - 600
Unearned income 700 -
Accrued income - 500
16. The new profit and loss ratio for N, and (2) the share of partner FREDRINN on the 2011 net
income:

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2025 Formation and Operation of Partnership GALLARDO

A. (1) 30%; (2) P2,214 C. (1) 27%; (2) P2,286

B. (1) 27%;(2) P2,214 D. (1) 30%; (2) P2,2896

PROBLEM J
On Jan. 1, 2008, Gloo and Grock decided to form a partnership. At the end of the year, the
partnership made a profit of P120,000. The capital accounts of the partnership showed the following
transactions:
Gloo, Capital Grock, Capital
Dr. Cr. Dr. Cr.
Jan. 1 - P40,000 - P25,000
Apr. 1 P5,000 - - -
June 1 - - - P10,000
Aug. 1 - P10,000 - -
Sept. 1 - - P3,000 -
Oct. 1 - P 5,000 P1,000 -
Dec. 1 - P 4,000 - P5,000

Assuming that an interest of 20% per annum is given on average capital and the balance of the
profits is allocated equally, the allocation of profits should be
A. Gloo, P60,000; Grock, P59,400. C. Gloo, P67,200; Grock, P52,800 .
B. Gloo, P61,200; Grock, P58,800. D. Gloo, P68,800; Grock, P51,200.

PROBLEM K
Diggie is trying to decide whether to accept a bonus of 25% of net income after salaries and bonus
or a salary of P97,500 plus a bonus of 10% of net income after salaries and bonus as a means of
allocating profit among the partners. Salaries traceable to the other partners are estimated to be
P450,000.
36. What amount of income would be necessary so that Diggie would consider the choices to be
equal?
A.P1,100,000 B.P1,197,500 C.P650,000 D.P1,262,500