2nd PRE-QUALIFYING EXAMS FOR FIRST YEARS

S.Y. 2018-2019

April 6, 2019

PARTNERSHIP

Problems

1. On December 1, 2015, Eleanor and Franco formed a partnership, agreeing to share for profits and
losses in the ratio of 2:3, respectively. Eleanor invested a parcel of land that cost her P250,000.
Franco invested P300,000 cash. The land was sold for P500,000 on the same date, three hours
after formation of the partnership. How much should be the capital balance of Eleanor right after
formation? _______________________

Answer: P500,000

Explanation:

In the formation of a partnership, one or more of the partners will contribute noncash assets to the
business such as inventory, land or equipment, etc. Retaining the recorded cost for such asset would be
inequitable to any partners investing appreciated property. Therefore, the contribution of noncash assets
to a partnership should be recorded based on fair values. In this case, the fair value of the land would be
measured by its sales price on the date of sale, P500,000.

2. On March 1, 2015, Peter and Quinn decide to combine their businesses and form a partnership.
Their balance sheets on March 1, before adjustments, showed the following:

Peter Quinn
Cash P 9,000 P 3,750
Accounts receivable 18,500 13,500
Inventories 30,000 19,500
Furniture and fixtures (net) 30,000 9,000
Office equipment (net) 11,500 2,750
Prepaid expenses 6,375 3,000
Total P 105, 375 P 51,500

Accounts payable P 45,750 P 18,000

Capital 59,625 33,500
Total P 105,375 P 51,500
They agreed to have the following items recorded in their books:
1. Provide 2% allowance for doubtful accounts
 2. Peter’s furniture and fixtures should be P31,000, while Quinn’s office equipment is under-
depreciated by P250.
3. Rent expense incurred previously by Peter was not yet recorded amounting to P1,000, while
salary expense incurred by Quinn was not also recorded amounting to P800.
4. The fair market value of the inventory amounted to:
For Peter P 29,500
For Quinn 21,000

Compute the net (debit) credit adjustment for Peter and Quinn: _____________________

Answer:

Peter Quinn

P (870) P 180

Solutions:

Debit (credit) adjustments to capital accounts: Peter Quinn

Allowance for doubtful accounts:

Peter: 2% x P 18,500 P (370)

Quinn: 2% x P 13,500 P (270)

Furniture and fixture (P31,000 – P30,000) P 1,000

Office equipment P (250)

Accrued rent expense P (1,000)

Accrued salary expense P (800)

Inventory adjustments:

Peter (P29,500 – P30,000) (500)

Quinn (P21,000 – P19,500) _______ 1,500

Net adjustments P (870) P 180

3. The same information in number 2, compute the total liabilities after formation:
________________

Answer: P 65,550

Solutions:

Unadjusted total liabilities (P45,750 + P18,000) P 63,750

Add: (deduct): adjustments:

 Accrued rent expense 1,000

Accrued salary expense 800

Adjusted total liabilities after formation P 65,550

4. The same information in number 2, compute the total assets after formation: ________________

Answer: P 157,985

Solutions:

Unadjusted total assets (P105,375 + P51,500) P 156,875

Add: (deduct): adjustments:

Allowance for doubtful accounts (P370 + P270) (640)

Furniture and fixtures 1,000

Office equipment (250)

Inventory (P1500 – P500) 1000

Adjusted total asset after formation P 157,985

5. Partner A first contributed P50,000 of capital into an existing partnership on March 1, 2018. On
June 1, 2018, the partner contributed another P20,000. On September 1, 2018, the partner
withdrew P15,000 from the partnership. Withdrawals in excess of P 10,000 are charged to the
partner’s capital account. The annual weighted-average capital balance is __________________.

Answer: P 51,667

Solutions:

The annual weighted-average capital would be:

March 1: P 50,000 x 3 P 150,000

June 1: P 70 000 x 3 210,000

September 1: P 65,000 x 4 260,000

P 620,000

Divided by months per annum 12 months

P 51, 667
The following should be noted:

1. Only P5,000 withdrawals should be deducted from capital to compute the average capital.
2. The question is based on annual, therefore the denominator should be 12 months. However,
the 10-month weighted average capital would be P62,000 (P620,000/10months)

6. On June 30, 2015, the balance sheet of Western Marketing, a partnership, is summarized as
follows:
Sundry assets P 150,000
West, capital 90,000
Tern, capital 60,000

West and Tern share profit and losses at a 60:40 ratio, respectively. They agreed to take in Cuba as a
new partner, who purchases 1/8 interest of West and Tern for P25,000. What is the amount of Cuba’s
capital to be taken up in the partnership books if book value method is used?____________________

Answer: P 18750

Solutions:

Amount paid P 25,000

Less: Book value of interest acquired

P 150,000 x 1/8 18,750

Gain of West and Tern P 6,250

7. Roxanne and Xyrelle formed a partnership and agreed to divide initial capital equally, even
though Roxanne contributed P25,000 and Xyrelle contributed P21,000 in identifiable assets.
Under the bonus approach to adjust the capital accounts, Xyrelle’s unidentifiable assets should
be debited for: ___________________
Answer: P 0

Solution/Explanation:

Under the bonus method, unidentifiable assets (i.e., Goodwill) are not recognized. The total resulting
capital is the FMV of the tangible investments of the partners. Thus, there would be no unidentifiable
assets recognized by the creation of this new partnership.
Use the following information for questions 8, 9 and 10.

A summary balance sheet for the McCune, Nall, and Oakley partnership appears below. McCune, Nall,
and Oakley share profits and losses in a ratio of 2:3:5, respectively.

Assets

Cash P 50,000

Inventory 62,500

Marketable securities 100,000

Land 50,000

Building-net 250,000

Total assets P 512,500

Equities

McCune, capital P 212,500

Nall, capital 200,000

Oakely, capital 100,000

Total equities P 512,500

The partners agree to admit Pavic for a one-fifth interest. The fair market value of partnership land is
appraised at P100,000 and the fair market value of inventory is P87,500. The assets are to be revalued
prior to the admission of Pavic and there is P15,000 of goodwill that attaches to the old partnership.

8. By how much will the capital accounts of McCune, Nall, and Oakley increase, respectively, due
to the revaluation of the assets and the recognition of goodwill? _____________________

Answer: P18,000, P27,000, and P45,000.

The assets will be valued upward by $90,000 which, allocated on a 2:3:5 basis, yields
P18,000 to McCune, P27,000 to Nall, and P45,000 to Oakley.
 9. How much cash must Pavic invest to acquire a one-fifth interest? ____________________

Answer: P150,625.

After the revaluation, the assets will be recorded at $602,500. If Pavic is admitted for a one-
fifth interest, the $602,500 represents 80% of the total implied capital. Dividing $602,500 by
80% gives a total capitalization of $753,150 for which $150,625 is required from Pavic for a
20% interest.

10. What will the profit and loss sharing ratios be after Pavic’s investment?
__________________

Answer: 4:6:10:5

Each of the original partners has given up 20% of their interest to Pavic. Their
profit and loss sharing ratios will therefore be 80% of what they were before the
admission of Pavic.

McCune 20% x 80% = 16%

Nall 30% x 80% = 24%

Oakely 50% x 80% = 40%

Pavic = 20%

Expressed as: 4:6:10:5

11. Hara, Ives, and Jack are in the process of liquidating their partnership. Since it may take several
months to convert the other assets into cash, the partners agree to distribute all available cash
immediately, except for P10,000 that is set aside for contingent expenses. The balance sheet
and residual profit and loss sharing percentages are as follows:
Cash P 400,000 Accounts payable P 200,000
Other assets 200,000 Hara, capital (40%) 135,000
Ives, capital (30%) 216,000
Jack, capital (30%) 49,000

Total assets P 600,000 Total liab./equity P 600,000

How much cash should Ives receive in the first distribution? _____________________

Answer: P 147,000.

Losses 40% 30% 30%

Hara Ives Jack

Equities P 135,000 P 216,000 P 49,000

Possible loss on

remaining assets P 200,000 ( 80,000 ) ( 60,000 ) ( 60,000 )

Contingencies 10,000 ( 4,000 ) ( 3,000 ) ( 3,000 )

Subtotals P 51,000 P 153,000 P( 14,000 )

Eliminate Jack’s

debit balance ( 8,000 ) ( 6,000 ) 14,000

Safe payments P 43,000 P 147,000 P 0

Use the following information for questions 12 and 13.

Bloom and Carnes share profits and losses in a ratio of 2:3, respectively. Bloom and Carnes receive salary
allowances of P10,000 and P20,000, also respectively, and both partners receive 10% interest based
upon the balance in their capital accounts on January 1. Partners’ drawings are not used in determining
the average capital balances. Total net income for 2006 is P60,000. If net income after deducting the
interest and salary allocations is greater than P20,000, Carnes receives a bonus of 5% of the original
amount of net income.

Bloom Carnes

January 1 capital balances P 200,000 P 300,000

Yearly drawings ($1,500 a month) 18,000 18,000

12. What are the total amounts for the allocation of interest, salary, and bonus, and, how much
over-allocation is present? _________________

Answer: P80,000 and P20,000.

Interest: (P500,000 x 10%) = P50,000

Salary: (P10,000 + P20,000) = P30,000

Bonus: Condition not met = P0

Total allocations = P 80,000 and over-allocations = P20,000 (P80,000-P60,000)

13. If the partnership experiences a net loss of P20,000 for the year, what will be the final amount
of profit or (loss) closed to each partner’s capital account? _____________________

Answer: (P10,000) to Bloom and (P10,000) to Carnes.

Bloom:

Interest allocation: P20,000

Salary allocation: P10,000

Carnes:

Interest allocation: P30,000

Salary allocation: P20,000

There is a total of P80,000 for positive allocations. To bring them down to a P20,000
loss, a residual adjustment of (P100,000) is needed which is allocated (P40,000) to
Bloom and (P60,000) to Carnes. After these amounts are assigned to the partners,
each partner’s capital account will be reduced by a net P10,000.

14. The XYZ partnership provides a 10% bonus to Partner Y that is based upon partnership income,
after deduction of the bonus. If the partnership's income is P121,000, how much is Partner
Y's bonus allocation? __________________

Answer: P 11,000

B = .1x($121,000 - B)

B = $12,100 - .1B

1.1B = $12,100

B = $11,000

15. The partnership has the following accounting amounts:

i. Sales – P70,000
ii. Cost of Goods Sold – P 40,000
iii. Operating Expenses – P 10,000
iv. Salary allocations to partners – P 13,000
v. Interest paid to banks – P 2000
vi. Partners’ withdrawals – P 8,000

The partnership net income (loss) is: __________________

Answer: P 18,000

Solutions:

Sales P 70,000

Less: COGS 40,000

Gross Profit P 30,000

Less: Operating Expenses 10,000

Operating Income P 20,000

Less: Other expenses: Interest Expense 2,000

Net income P 18,000

Salaries to partners are considered as an allocation of net income rather than as determinant of net
income. In other words, salaries to partners are not expenses of the partnership, but part of profit and
loss sharing plan.

16. Lancelot is trying to decide whether to accept a salary of P 40,000 or a salary of P 25,000 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? _________________

Answer: P 290,000

To equate P40,000 to P25,000 plus bonus, the bonus should amount to P15,000 (P40,000 – P25,000).
Based on the foregoing the following equation should be developed:

Bonus = 10% (NI – Salaries – Bonus)

P15,000 = .10 [NI – (P100,000+P25,000) – P15,000]

P15,000 = .10 (NI – P140,000)

P15,000 + P14,000 = NI

P29,000/.10 = NI = P 290,000

17. Jade, Kahl, and Lane are in the process of liquidating their partnership. Lane has agreed to
accept the inventory, which has a fair value of P60,000, as part of her settlement. A balance
sheet and the residual profit and loss sharing percentages are as follows:

Cash P 198,000 Accounts payable P 149,000

Inventory 80,000 Jade, capital (40%) 79,000
Plant assets 230,000 Kahl, capital (40%) 140,000
Lane, capital (20%) 140,000

Total assets P 508,000 Total liab./equity P 508,000

 If the partners then distribute the available cash, Lane will receive ___________________.

Answer: P 23, 000

Solutions:

40% 40% 20%

Jade Kahl Lane

Equities P 79,000 P 140,000 P 140,000

Distribute inventory to Lane and: ( 60,000 )

recognize $20,000 loss ( 8,000 ) ( 8,000 ) ( 4,000 )

Possible losses on plant ( 92,000 ) ( 92,000 ) ( 46,000 )

Subtotal P( 21,000 ) P 40,000 P 30,000

Eliminate Jade’s debit

balance to Kahl & Lane 21,000 ( 14,000 ) ( 7,000 )

Balance P 0 P 26,000 P 23,000