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- Chapter 1

Partnership
I. Introduction

A partnership is defined as an association of two or more persons who contributes money, property or
industry to a common fund with the intention of dividing the profits among themselves. Accounting for
partnerships should comply with the legal requirements as set forth by the Partnership Law as well as
complying with the partnership agreement itself.

II. Partnership Formation and Capital Accounts

All assets contributed to the partnership are recorded by the partnership at their agreed values (or fair market
values, in the absence of agreed values). All liabilities that the partnership assumes are recorded at their net
present values. Thus, if a partner contributes a noncash asset to the partnership (e.g., land or equipment)
subject to mortgage, the contributing partner’s capital account is credited for the agreed value (or fair
values) of the noncash asset less the mortgage assumed by the partnership.

The capital account is an equity account similar to the shareholders’ equity accounts in a corporation. It is
used to account for permanent withdrawals and additional contributions. Other important accounts include
a drawing account and loans to or from partners. The drawing account is used to account for net income or
loss and personal or normal withdrawals, i.e., share against net income. It is closed at the end of the period
into the capital account. Loan accounts are set up for amounts intended as loans, rather than as additional
capital investments. In liquidation proceedings, a loan to or from a partner is in essence treated as an
increase or decrease in a partner’s capital account.

1
Partnership 2
III. Division of Profit and Losses

As a rule, profits and losses are allocated based on agreement.

● Methods - Various exist for the division of partnership profits and losses, including the following:

1. Equally,
2. Arbitrary ratio,
3. Capital contribution ratio:
a. Original Capital or initial investment
b. Beginning Capital of each year
c. Average Capital
d. Ending Capital of each year
4. Interest on capital balance and/or loan balances and the balance on agreed ratio,
5. Salaries to partners and the balance on agreed ratio,
6. Bonus to partners and the balance on agreed ratio,
a. Bonus as an “expense” in computing the bonus amount. Here, bonus is
computed based on net income after bonus.
b. Bonus as a distribution of profit. Here, the bonus is computed based on net
income before deducting the bonus.
7. Interest on capital and/or loan balances, salaries to partners, and bonus partner and
the balance on agreed ratio.

The method of division to be used in any given situation is generally the method specified in the partnership
agreement. This agreement must always be consulted first, since it is legally binding on the partners. If no
profit and loss sharing arrangement is specified in the partnership agreement, the partnership requires that
profits and losses be shared according to capital contribution. Capital contribution should be interpreted to
be original capital/beginning capital of each year in the absence of original capital; similarly, if the
agreement specifies how profits are to be shared but it is silent as to losses, losses are to be shared in the
same manner as profits. Notice that the profit and loss sharing ratio is totally independent of the partners’
ownership interests. Thus, two partners may have ownership interests of 70% and 30% but share profits
and losses equally.
Partnership 3
IV. Dissolution

A. Admission of a New Partner

A new partner may be admitted to the partnership by purchasing the interest of one or more of the
existing partners or by contributing cash or other assets (i.e., investment of additional capital).
These two situations are discussed below.

1. Purchase of Interest - When a new partner enters the partnership by purchasing the interest
of an existing partner, the price paid for that interest is irrelevant to the partnership
accounting records because it is a private or personal transaction between the buyer and
seller. The assets and liabilities of the partnership are not affected. The capital account of
the new partner is recorded by merely reclassifying the capital account of the old partner.

2. Admission by Investment of Additional Assets - A new partner may be granted an interest


in the partnership in exchange for contributed assets and/or goodwill (e.g., business
expertise, an established clientele, etc.). The admission of the new partner and contribution
of assets may be recorded on the basis of the bonus method.

Bonus method - This method is based upon the historical cost principle. Admittance of a
new partner involves debiting cash or other assets for the FMV of the assets contributed
and crediting the new partner’s capital for the agreed (i.e., purchased) percentage of total
capital. Total capital equals the book value of the net assets prior to admittance of the new
partner, plus the FMV of the assets contributed by the new partner. A difference between
the FMV of the assets contributed and the interest granted to the new partner results in the
recognition of a bonus.

a. No bonus recognized - When an incoming partner’s capital account (ownership


interest) is to be equal to his purchase price, the partnership books merely debit
cash or other assets and credit capital.

b. Bonus granted to the old partners - When the FMV of the assets contributed by an
incoming partner exceeds the amount of ownership interest to be credited to his
capital account, the old partners recognize a bonus equal to this excess. This bonus
is allocated on the basis of the same ratio used for income allocation (unless
otherwise specified in the partnership agreement). Recording involves
crediting the old partners' capital accounts by the allocated amounts.

c. Bonus granted to new partner- An incoming partner may contribute assets


having a FMV smaller than the partnership interest granted to that new
partner. Similarly, the new partner may not contribute any assets at all. The
incoming partner is therefore presumed to contribute an intangible asset,
such as managerial expertise or personal business reputation. In this case, a
bonus is granted to the new partner, and the capital accounts of the old
partners are reduced on the basis of their profit and loss ratio.
Partnership 4
Goodwill method. In PFRS No. 3, goodwill represents the excess of the cost of the business combination over
the fair values of the identifiable net assets obtained. Therefore, the standard provides that goodwill attaches
only to a business as a whole and is recognized only when a business is acquired. This provision of PFRS No. 3
outlawed the use of the goodwill method in partnership accounting particularly admission and retirement of a
partner because there is no business involved. The term "business" is defined in the Appendix A of PFRS No. 3
as:
An integrated set of activities and assets conducted and managed for the purpose of providing:
(a) a return to investor; or
(b) lower costs or other economic benefits directly and proportionately to policyholders or
participants.

A business generally consists of inputs, processes applied to those inputs, and resulting outputs that are, or will
be, used to generate revenues. If good will is present in a transferred set of activities and assets, the transferred
set shall be presumed to be a business.

Refer to Appendix of this chapter for further discussion and illustration.

B. Withdrawal of a Partner

Admission of a new partner is not the only manner by which a partnership can undergo a change in
composition. Over the life of any partnership partners may leave the organization. Thus, some method of
establishing an equitable settlement of the withdrawing partner's interest in the business property is necessary.

For a partner to withdraw or retire from the partnership, the total interest of a partner should be properly
determined which includes the following:

1. Share in the profit and loss of the partnership.


2. Adjustments in assets and liabilities to reflect fair market values.
3. Loans to and from partnership.
4. Drawing accounts, and
5. Capital interest / accounts:

Withdrawal or retirement from the partnership may either be:

1. Selling of an interest to an outsider. This is similar to admission by purchase.


2. Selling of an interest to an existing partner. The interest of the retiring partner will be purchased with the
personal assets of existing partners rather than with the assets of the partnership.
3. Selling of an interest to the partnership/payment from partnership fund. Under this approach, the withdrawal
of a partner maybe treated as:

a. Payment at book value


b. Payment at less than book value- bonus method
c. Payment at more than book value- bonus method
Partnership 5

C. Incorporation of a Partnership

For a variety of reasons, including legal and/or tax reasons, the partners of a partnership may choose to
incorporate. Two approaches of opening the corporate books are in general use. One is to retain the books of the
partnership and to record all assets and liabilities at fair market value concomitant with the closing of the
partners' capital accounts and the opening of a Common Stock account. The other approach is to close out the
partnership book completely and to open a new set of books for the corporation. In this case, the fair market
values are used as the basis for recording all assets and liabilities with the balancing amount credited to
Common Stock. Occasionally, additional cash or other assets may be invested in the corporation.

V. Liquidation

Liquidation is the process of converting partnership assets into cash and distributing the cash to creditors and
partners. Frequently, the sale of assets will not provide sufficient cash to pay both creditors and partners. The
creditors have priority on any distribution. The basic rule is that no distribution is made to any partner until all
possible losses and liquidation expenses have been paid or provided for. An individual prematurely distributing
cash to a partner whose capital account later shows a deficit maybe held personally liable if the insolvent
partner is unable to repay such a distribution. The proceeds of a liquidation may be distributed in a lump sum
after all assets have been sold and all creditors satisfied, or the proceeds may be distributed to partners in
installments as excess cash becomes available.

A. Lump Sum Distribution

The first step in the liquidation process is to sell all non-cash assets and allocate the resulting gain or
loss to the capital accounts of the partners in accordance with their profit and loss sharing ratio. The
second step is to satisfy the liabilities owing to creditors other than partners. The third step is to satisfy
liabilities owing to partners other than for capital and profits. The final step is to distribute any cash
remaining to the partners for capital and finally for profits. Any deficiency (i.e., debit balance) in an
insolvent partner's capital will require that partner to contribute cash equal to the debit balance. If the
deficient partner is insolvent, the debit balance must be absorbed by the remaining partners (usually in
accordance with their profit and loss sharing ratio). Note, however, that in order to achieve an equitable
distribution, a partner's loan to the partnership will first be used to offset a debit balance in his capital
account. Therefore, under this so-called right of offset doctrine, a partner's loan to the partnership will
have distribution priority only to the extent it exceeds a debit balance in the partner's capital account.

B. Installment Distributions

The liquidation of a partnership may take place over a period of several months. Installment
distributions may be made to partners on the basis of a Schedule of Safe Payments or Cash Priority
Program, in conjunction with a Liquidation Schedule similar to the one used for lump sum liquidations.
The Schedule of Safe Payments takes a conservative approach to the distribution by assuming that non-
Partnership 6
cash assets are worthless thus distribution may be mode to partners on the basis of the value of
partnership assets, until the assets are sold.
Partnership 7
MULTIPLE CHOICE QUESTIONS

Note to the Examinees

According to PFRS No. 3 goodwill represents the excess of the cost of the business combination over the fair value of the
identifiable net assets obtained. Therefore, the standard provides that goodwill attaches only to a business as a whole and
is recognized only when business is acquired. This provision of PFRS No. 3 outlawed the use of the goodwill method
in partnership particularly admission and retirement of a partner because there is no business involved.

Partnership Formation:

1. On December 1, 2011, EE and FF formed a partnership, agreeing to share for profits and losses in the ratio of 2:3,
respectively. EE invested a parcel of land that cost him P25,000. FF invested P30,000 cash. The land was sold for
P50,000 on the same date, three hours after formation of the partnership. How much should be the capital balance
of EE right after formation.

a. P25,000 c. P60,000
b. 30,000 d. 50,000

2. On March 1, 2011, II and JJ formed a partnership with each contributing the following assets:

II JJ ___
Cash.................................................... P300,000 P700,000
Machinery and Equipment.................. 250,000 750,000
Building.............................................. - 2,250,000
Furniture and Fixtures........................ 100,000 -

The building is subject to mortgage loan of P800,000 which is to be assumed by the partnership agreement provides
that II and JJ share profits and losses 30% and 70% respectively. On March 1, 2011 the balance in JJ’s capital
account should be:

a. P3,700,000 c. P3,050,000
b. 3,140,000 d. 2,900,000

3. The same information in Number 3, except that the mortgage is not assumed by the partnership. On March 1, 2011
the balance in JJ’s capital account should be:

a. P3,700,000 c. P3,050,000
b. 3,140,000 d. 2,900,000
(Adapted)
Partnership 8

4. As of July 2, 2011, FF and GG decided to form a partnership. Their balance sheets this date are:

FF GG .
Cash........................................... P15,000 P37,500
Accounts Receivable................. 540,000 225,000
Merchandise Inventory.............. - 202,500
Machinery and Equipment......... 150,000 270,000
Total............................... P705,000 P735,000
Accounts Payable....................... P135,000 P240,000
FF, Capital.................................. 570,000
GG, Capital................................. - 495,000
Total........................................... P705,000 P735,000

The partners agreed that the machinery and equipment of FF is underdepreciated by P15,000 and that of GG by
P45,000. Allowance for doubtful accounts is to be set up amounting to P120,000 for FF and P45,000 for GG. The
partnership agreement provides for a profit and loss ratio and capital interest of 60% to FF and 40% to GG. How
much cash must FF invest to bring the partners’ capital balances proportionate to their profit and loss ratio?

a. P142,000 c. P172,500
b. 52,500 d. 102,500

5. On August 1, AA and BB pooled their assets to form a partnership, with the firm to take over their business assets
and assume the liabilities. Partners capitals are to be based on net assets transferred after the following adjustments.
(Profit and loss are allocated equally.)

BB’s inventory is to be increased by P4,000 an allowance for doubtful accounts of P1,000 and P1,500 are to be set
up in the books of AA and BB, respectively; and accounts payable of P4,000 is to be recognized in AA’s books.
The individual trial balance on August 1, before adjustments follow:

AA BB .
Assets........................ P75,000 P113,000
Liabilities.................. 5,000 34,500

What is the capital AA and BB after the above adjustments?

a. AA, P68,750; BB, P77,250 c. AA, P65,000; BB, P76,000


b. AA, P75,000; BB, P81,000 d. AA, P65,000; BB, P81,000
Partnership 9
6. CC admits DD as partner in business. Accounts in the ledger for CC on November 30, 2011 just before the admission
of DD, show the following:

Cash..................................................................... P6,800
Accounts receivable............................................. 14,200
Merchandise Inventory........................................ 20,000
Accounts Payable................................................ 8,000
CC, Capital.......................................................... 33,000

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

a) An allowance fro 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

DD is to invest sufficient cash to obtain 1/3 interest in the partnership.

Compute for: (1) CC’s adjusted capital before the admission of DD; and (2) the amount of cash investment by DD:
a. (1) P35,347; (2) P11,971 c. (1) P35,374; (2) P17,687
b. (1) 36,374; (2) 18,487 d. (1) P28,174; (2) 14,087
(Adapted)

7. MM, NN and OO are partners with capital balances on December 31, 2011 of P300,000, P300,000 and P200,000,
respectively. Profits are shared equally. OO wishes to withdraw and it is agreed that OO is to take certain equipment
with second-hand value of P50,000 and a note for the balance of OO’s interest. The equipment may cost P80,000.
Compute for: (1) OO’s acquisition of the second-hand equipment will result to reduction in capital; (2) the value of
the note that will OO get from the partnership’s liquidation.

a. (1) P15,000 each for MM and NN (2) P150,000


b. (1) P5,000 each for MM, NN and OO (2) P145,000
c. (1) P5,000 each for MM, NN and OO (2) P195,000
d. (1) P7,500 each for MM and NN (2) P145,000
(Adapted)
Partnership 10
8. Jones and Smith formed a partnership with each partner contributing the following items:

Jones Smith
Cash……………………………………………………….. P 80 000 P 40 000
Building – cost to Jones…………………………………. 300 000
- fair value……………………………………... 400 000
Inventory – cost to Smith………………………………… 200 000
- fair value……………………………………… 280 000
Mortgage payable………………………………………… 120 000
Accounts payable………………………………………… 60 000

Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed by the Jones and Smith
partnership. What is the balance in each partner's capital account for financial accounting purposes?

Jones Smith
A. P350 000 P270 000
B. P260 000 P180 000
C. P360 000 P260 000
D. P500 000 P300 000

a. Option A c. Option C
b. Option B d. Option D

9. The business assets of LL and MM appear below:


LL MM
Cash………………………………………………. P 11 000 P 22 354
Accounts receivable…………………………….. 234 536 567 890
Inventories……………………………………….. 120 035 260 102
Land……………………………………………… 603 000 -
Building…………………………………………… - 428 267
Furniture and fixture…………………………….. 50 345 34 789
Other assets……………………………………… 2 000 3 600
Total……………………………………… P1 020 916 P1 317 002

Accounts payable……………………………….. P 178 940 P 243 650


Notes payable…………………………………… 200 000 345 000
LL, capital……………………………………….. 641 976 -
MM, capital………………………………………. - 728 352
Total……………………………………… P1 020 916 P1 317 002
Partnership 11
LL and MM agreed to form a partnership by contributing their respective assets and equities subject to the following
adjustments:
a. Accounts receivable of P20 000 in LL's books and P35 000 in MM's are uncollectible.
b. Inventories of P5 500 and P6 700 are worthless in LL's and MM'S respective books.
c. Other assets of P2 000 and P3 600 in LL's and MM's respective books are to be written off.

The capital account of the partners after the adjustments will be:
a. LL, P615,942; MM,P717,894 c. LL, P640.876; MM P683,050
b. LL, P640,876; MM, P712,345 d. LL, P614,476; MM, P683,052

10. The same information in Number 9, how much total assets does the partnership have after formation?
a. P2,337,918 c. P2,265,118
b. 2,237,918 d. 2,365,218

11. On March 1, 2011, PP and QC decide to combine their businesses and form a partnership. Their balance sheets on
March 1, before adjustments, showed the following:

PP QQ
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
Partnership 12
They agreed to have the following items recorded in their books:
1. Provide 2% allowance for doubtful accounts.
2. PP's furniture and fixtures should be P31,000, while QQ's office equipment is under-depreciated by P250.
3. Rent expense incurred previously by PP was not yet recorded amounting to P1,000, while salary expense
incurred by QQ was not also recorded amounting to P800.
4. The fair market value of inventory amounted to:

For PP…………………………………………. P29 500


For QQ………………………………………… 21 000
Compute the net (debit) credit adjustment for PP and QQ:
PP QQ PP QQ

a. P 2870 P 2820 c. P (870) P 180


b. (2870) (2820) d. 870 (180)

12. The same information in Number 11, compute the total liabilities after formation:
a. P61 950 c. P65 550
b. 63 750 d. 63 950

13. The same information in Number 11, compute the total assets after formation:
a. P157 985 c. P160 765
b. 156 875 d. 152 985

14. On April 30, 2011, XX, YY and ZZ formed a partnership by combining their separate business proprietorships. XX
contributed cash of P75,000. YY contributed property with a P54,000 carrying amount, a P60,000 original cost, and
P120,000 fair value. The partnership accepted responsibility for the P52,500 mortgage attached to the property. ZZ
contributed equipment with a P45,000 carrying amount, a P112,500 original cost, and P82,500 fair value. The partnership
agreement specifies that profits and losses are to be shared equally but is silent regarding capital contributions. Which
partner has the largest April 30, 2011, capital balance?
a. XX c. ZZ
b. YY d. all capital account balances are equal
Partnership 13

Partnership Operations:
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 2011, 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 2011, what was the total partnership income?

a. P192,000 b. P282,000
c. 345,000 d. 387,000

(Adapted)
16. The Partnership has the following accounting amounts:

(1) Sales = P70,000


(2) Cost of Goods Sold = P40,000
(3) Operating Expenses = P10,000
(4): Salary allocations to partners = P13,000
(5) Interest paid to banks = P2,000
(6) Partners' withdrawals = P8,000

The partnership net income (loss) is:


a. P 20,000 b. P 5,000
c. 18,000 d. (3,000)

(Adapted)

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. P 165,000 b. P 265,000
c. 290,000 d. 305,000

(Adapted)
18. 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
Partnership 14
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. P 240,000 b. P 94,000
c. 300,000 d. 334,000

19. The partnership agreement of XX, YY & ZZ provides for the year-end allocation of net income in the following order:

 First, XX is to receive 10% of net income up to P200,000 and 20% over P200,000.

 Second, YY and ZZ each are to receive 5% of the remaining income over P300,000.

 The balance of income is to be allocated equally among the three partners.

The partnership's 2011 net income was P500,000 before any allocations to partners. What amount should be allocated to
XX?

a. P 202,000 b. P 206,000
c. 216,000 d. 220,000

(AICPA)

20. 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, 2011,
is as follows:

Balance, January 1 ......................................................................................................................... P420,000


Additional investment, July 1......................................................................................................... 120,000
Withdrawal, August 1...................................................................................................................... (45,000)
Balance, December 31.................................................................................................................... 495,000
Partnership 15

What amount of interest should be credited to SS's capital account for 2011?
a. P 45,750 b. P 46,125
c. 49,500 d. 51,750

(AICPA)

21. AA, BB, and CC are partners with average capital balances during 2011 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 2011 the partnership sustained a P99,000 loss before interest
and salaries to partners. By what amount should AA's capital account change?

a. P 21,000 increase b. P 105,000 decrease


c. 33,000 decrease d. 126,000 increase

(AICPA)

22. AA and DD created a partnership to own and operate a health-food store. The partnership agreement provided that AA
receive a salary of P10,000 and DD a salary of P5,000 to recognize their relative time spent in operating the store. Remaining
profits and losses were divided 60:40 to AA and DD, respectively. Income for 2011, the first year of operations of P13,000
was allocated P8,800 to AA and P4,200 to DD.

On January 1, 2012, the partnership agreement was changed to reflect the fact that DD could no longer devote any time to
the store's operations. The new agreement allows AA a salary of P18,000, and the remaining profits and losses are divided
equally. In 2012 an error was discovered such that the 2011 reported income was understated by P4,000. The partnership
income of P25,000 for 2012 included the P4,000 related to year 2011.

In the reported net income of P25,000 for the year 2012. AA and DD would have:

AA DD AA DD
a. P 21,900 P 3,100 b. P 0 P 0
c. 17,100 17,100 d. 12,500 2,500

(Adapted)
Partnership 16
23. On January 1, 2008, DD and EE decided to form a partnership. At the end of the year, the partnership made a net
income of P120, 000. The capital accounts of the partnership show the following transactions.

DD, Capital EE, Capital


Dr. Cr. Dr. Cr.
January 1……………………. - P40, 000 - P25, 000
April 1………………………. P5, 000 - - -
June 1……………………….. - - - 10,000
August 1 ……………………. - 10, 000 - -
September 1 ………………… - - 3, 000 -
October 1 …………………… - 5, 000 1, 000 -
December 1 ………………… - 4, 000 - 5, 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. DD, P60, 000; EE, P59, 400 c. DD, P67, 200; EE, P52, 800
b. DD, P61, 200; EE, P58, 800 d. DD, P68, 800; EE, P51, 200

24. The partnership of DD and BB was formed and commenced operations on March 1, 2011, with DD contributing P30,
000 cash and BB investing cash of P10, 000 and equipment with an agreed upon valuation of P20, 000. On July 1,
2011, BB invested an additional P10, 000 in the partnership, DD made a capital withdrawal of P4, 000 on May 2,
2011 but reinvested the P4, 000 on October 1, 2011. During 2011, DD withdrew P800 per month and BB, the
managing partner, withdrew P1, 000 per month. These drawings were charged to salary expense. A preclosing trial
balance taken at December 31, 2011 is as follows:

Debit Credit

Cash …………………………………………….. P 9, 000


Receivable – net ………………………………... 15, 000
Equipment – net ………………………………... 50, 000
Other assets …………………………………….. 19, 000
Liabilities ………………………………………. P 17,000
DD, Capital ……………………………………. 30, 000
BB, Capital …………………………………….. 40, 000
Service Revenue ……………………………….. 50, 000
Supplies Expense ……………………………..... 17, 000
Utilities Expense ………………………………. 4, 000
Salaries to Partners ……………………………. 18, 000
Other Miscellaneous Expenses ……………….. 5, 000
Total………………………………….. P137, 000 P137,000
Partnership 17
Compute for the share of DD and BB in the partnership net income assuming monthly salary allowances P800 and
P1, 000 for DD and BB, respectively; interest allowance at a 12% annual rate on average capital balances; and
remaining profits allocated equally.

a. DD, P10, 520; BB, P13, 480 c. DD, P10, 800; BB, P13, 200
b. DD, P12, 000; BB, P12, 000 d. DD, P10, 600; BB, P13, 400

25. AA and BB formed a partnership in 2011 and made the following investments and capital withdrawals during the
year:

AA BB
Investment Draws Investment Draws
March 1 …………………………. P30, 000 P20, 000
June 1 …………………………… P10, 000 P10, 000
August 1 ………………………… 20, 000 2, 000
December 1 …………………….. 5, 000

The partnership’s profit and loss agreement provides for a salary of which P30, 000 was paid to each partner for
2011. AA is to receive a bonus of 10% on net income after salaries and bonus. The partners are also to receive
interest of 8% on average annual capital balances affected by both investments and drawings. Any remaining profits
are to be allocated equally among the partners.

Assuming net income of P60, 000 before salaries and bonus, determine how the income would be allocated among
the partners:

a. AA, P31, 138; BB, P28, 862 c. AA, P30, 633; BB, P29, 367
b. AA, P33, 537; BB, P26, 463 d. AA, P30, 684; BB, P29, 316

26. Partner A first contributed P50, 000 of capital into an existing partnership on March 1, 2011. On June 1, 2011, the
partner contributed another P20, 000. On September 1, 2011, the partner withdrew P15, 000 from the partnership,
Withdrawals in excess of P10, 000 are charged to the partner’s capital account. The annual weighted-average capital
balance is

a. P62, 000 c. P60, 000


b. 51, 667 d. 48, 333
Partnership 18
27. WW and RR share profits and losses equally, WW and RR receive salary allowances of P20, 000 and P30, 000,
respectively, and both partner receive 10% interest on their average capital balances. Average capital balances are
calculated at the beginning of each month regardless of when the capital contributions and capital withdrawals were made,
and partners drawings are not used in determining the average capital balances. Total net income for 2011 is P120, 000.

WW RR
January 1capital balances ............................. P 100, 000 P 120, 000
Yearly drawings (P 1, 500 a month) .............. 18, 000 18, 000
Permanent withdrawals of capital:
June 3 ................................................... (12, 000)
May 2 .................................................... (15, 000)
Additional investment of capital:
July 3 .................................................... 40, 000
October 2 ............................................. 50, 000

What is the weighted average capital for WW and RR respectivy for 2011?

a. P110, 667 and P119, 583 c. P100, 000 and P120, 000

b. P105, 333 and P126, 667 d. P126, 667 and P105, 333

28. HH, MM, and AA formed a partnership on January 1, 2011, and contributed P150, 000, P200, 000 and P250, 000,
respectively. The 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; inteest of 12% on the average capital during 2011 of the
three partmers; and the remainder in the ration of 2:4:4, respectively.

The operating income for the year ending December 31, 2011 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, 2011 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
Partnership 19
29. capital account has a net decrease of P1,200,000 during the calendar year 2011. During 2011, Merlin withdrew
P2,600,000 (charged against his capital account) and contributed property valued at P500,000 to the partnership.
What was the net income of the Camelot Partnership for year 2011?

a. P3,000,000 c. P7,000,000
b. 4,666,667 d. 11,000,000
(AICPA)

30. On January 2, 2011, BB and PP formed a partnership. BB contributed capital of P175,000.00 and PP, P25,000.00.
They agreed to share profits and losses 80% and 20%, respectively. PP is the general manager and works in the
partnership full time and is given a salary of P5,000.00 a month; an interest of 5% of the beginning capital (of both
partner) and a bonus of 15% of net income before the salary, interest and the bonus.

The profit and loss statement of the partnership for the year ended December 31, 2011 is as follows:

Net Sales ………………………………………………………………….... P875,000


Cost of goods sold …………………………………………………………. 700,000

Gross profit ………………………………………………………………… P175,000


Expenses (including the salary, interest and the bonus) …………………… 143,000
Net income …………………………………………………………………. P 32,000

The amount of bonus to PP in 2011 mounted to:

a. P13,304 c. P18,000
b. 16,456 d. 20,700

31. On January 1, 2011, 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 is inclusive of amount 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.
Partnership 20
What amount must be earned by the partnership, before any charge for interest and salaries, so that A may receive
an aggregate if P12,500 including interest, salary and share of profits?

a. P16,667 c. P30,667
b. 30,000 d. 32,333

(PhilCPA)
32. AA, BB AND CC are partners with average capital balances during 2011 of P472,500, P238,650, and P162,350,
respectively. The partners receive 10% interest on their average capital balances; after deducting salaries of
P122,325 to AA and P82,625 to CC, the residual profits or loss is divided equally.
\
In 2011, the partnership had a net loss of P125,624 before interest and salaries to partners.

By what amount should AA’s and CC’s capital account change – increase (decrease)?

AA CC AA CC

a. P30,267 P(40,448) c. P(40,844) P31,235


b. 29,476 17,536 d. 28,358 32,458

(PhilCPA)
33. The same information in Number 32, except the partnership had a loss of P125,624 after the interest and salaries to
partners, by what amount should BB’s capital account change – increase (decrease)?

a. P(115,443) c. P(41,875)
b. 23,865 d. (18,010)

34. XX, YY and ZZ formed a partnership on January 1, 2011. Each contributed P120,000.

Salaries were to be allocated as follows:

XX YY ZZ

P30,000 P30,000 P45,000

Drawings were equal to salaries and be taken out evenly throughout the year.
Partnership 21
With sufficient partnership net income, XX and YY could split a bonus equal to 25 percent of partnership net
income after salaries and bonus (in no event could the bonus go below zero).

Remaining profits were to be split as follows: 30% for XX; 30% for YY, and 40% for ZZ.

For the year, partnership net income was P120,000.

Compute the ending capital for each partner:

a. XX, P155,100; YY, P155,100; ZZ, P169,800


b. XX, P126,000; YY, P126,000; ZZ, P124,500
c. XX, P125,100; YY, P125,100; ZZ, P124,800
d. XX, P125,500; YY, P125,500; ZZ, P124,000

35. CC, PP and AA, accountants, agree to form a partnership and to share profits in the ratio of 5:3:2. They also agreed
that AA is to be allowed a salary of P28,000, and that PP is to be guaranteed P21,000 as his share of the profits.
During the first year of operation, income from fees are P180,000, while expenses total P96,000. What amount of
net income should be credited to each partner’s capital account?

a. CC, P28,000; PP, P16,800; AA, P11,200


b. CC, P25,000; PP, P21,000; AA, P38,000
c. CC, P24,000; PP, P22,000; AA, P38,000
d. CC, P25,000; PP, P21,000; AA, P39,000

36. 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 P20,000 and a bonus of 3% of income after all bonuses
 Rob receives a salary of P10,000 and a bonus of 2% of income after all bonuses.
 All partners are to receive 10% interest on their average capital balances.
Partnership 22
The average capital balances are as follows:

Hunt........................................... P50,000

Rob............................................ 45,000

Turman...................................... 20,000

Kelly........................................... 47,000

Any remaining profits and loss are to be divided equally among the partners.

Determine how a profit of P105.000 would be allocated among the partners.

a. Hunt, P41,450; Rob, P29.950; Turman, P15,450; Kelly, P18,150

b. Hunt, P28,000; Rob, P16,500; Turman,P 2,000; Kelly, P 4,700

c. Hunt, P39,700; Rob, P29.200; Turman,P16,700; Kelly, P19,400

d. Cannot be determined.

(Adapted)

37. 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 insufficient to provide for said allowances in full amount, the net
income shall be divided equally between the partners. In 2011, the following errors were discovered: Depreciation for
2011 is understated by P2,100, and the inventory on December 31, 2011 is overstated by P11,400. The partnership net
income for 2011 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) c. RR, P(6,960); PP, P 6,540

b. RR, P 3,000; PP,P 3,000 d. RR, P(6.750): PP, P(6,750)

(Adapted)

38. JJ and KK are partners sharing profits 60% and 40% respectively. The average profits for the past two years are to be
capitalized at 20% per year (for purposes of admitting a new partner) in determining the aggregate capital of JJ and KK,
after adjusting the profits for the following items omitted from the books:

Omissions at Year-End 2011 2012

Prepaid Expense ............................................................................................... P1,600

Accrued Expense ............................................................................................. 1,200

Deferred Income .............................................................................................. P1,400

Accrued Income ............................................................................................... 1,000


Partnership 23
Other pertinent information are as follows:

2011 2012

Net income of partnership..................................................................... P14,400 P13,600

Capital accounts, end of the year:

JJ…………………………………………………………….. 45,400 54,000

KK ………………………………………………………….. 45,000 55,000

The aggregate capital of JJ and KK after capitalizing the average profits at 20% per annum is:

a. P67.765 c. P69,000

b. 72,105 d. 71,000

(PhilCPA)

39. MM, NN and OO partners, share profits on a 5:3:2 ratio. On January 1, 2012, 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 2012, 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 2011 2012

Prepaid expense……………………………………………………… P800

Accrued expense…………………………………………………….. P600

Unearned income ................................................................................ 700

Accrued income .................................................................................. 500

(1) The new profit and loss ratio for N, and (2) the share of partner OO in the 2012 net income:

a. (1) 30%; (2) P2,214 c. (1) 27%; (2) P2,286

b. (1) 27%; (2) P2,214 d. (1) 30%; (2) P2,286

(PhilCPA)

40. A, B, and C are partners in an accounting firm. Their capital account balances at year-end were A P90,000; B
P110,000 and C P50,000. They share profits and losses on a 4:4:2 ratio, after the following special terms:

1. Partner C is to receive a bonus of 10% of net income after the bonus.

2. Interests of 10% shall be paid on that portion of a partner's capital in excess of P100,000.

3. Salaries of P10,000 and P12,000 shall be paid to partners A&C respectively.


Partnership 24
Assuming a net income of P44,000 for the year, the total profit share of Partner C was:

a. P 7,800 c. P19,400

b. 16,800 d. 19,800

(PhilCPA)

41. X. Y and Z, a partnership formed on January 1, 2011 had the following initial investments:

X - P100,000

Y - 150,000

Z - 225,000

The partnership agreement states that profits and losses are to be shared equally by the partners after consideration is
made for the following:

- Salaries allowed to partners: P60,000 for X, P48.000 for Y and 36,000 for Z.

- Average partner's capital balances during the year shall be allowed 10%.

Additional information:

- On June 30, 2011 X invested an additional P60,000

- Z withdrew P70,000 from the partnership on September 30, 2011.

- Share in the remaining partnership profit was P5,000 for each partner.

The total partnership capital on December 31, 2011 was:

a. P405,000 c. P480,000

b. 671,500 d. 672,750

(PhilCPA)

42. X and Y are in partnership, sharing profits equally and preparing their accounts to 31 December each year. On 1 July
2011, Z joined in the partnership, and from that date profits are shared X 40%. Y 40%, and Z 20%.

In the year ended 31 December 2011. profits were:

6 months to 31 June 2011 .............................................................. P200,000

6 months to 31 December 2011...................................................... 300,000


Partnership 25

It was agreed that X and Y only should bear equally the expense for a bad debt of P40.000 written-off in the six months to
31 December 2011 in arriving at the P300,000 profit.

Which of the following correctly states X's profit share for the year?

a. P216,000 c. P220,000

b. P200,000 d. P224.000

(ACCA)

43. S and T are in partnership and prepare their accounts to 31 December each year. On 1 July 2011. U joined the
partnership. Profit sharing arrangements are:

6 months to 6 months to
30 June 2011 31 December 2011
Salary………………… S P15,000 P25,000
Share of balance in profit S 60% 40%
T 40% 20%
U 20%

The partnership profit for the year ended 31 December 2008 was P350.000 accruing evenly over the year. What are the
partners' total profit shares for the year ended 31 December 2011?

S T U

a. P196,000 P124,000 P30,000

b. P217,000 P108,000 P25,000

c. P155,000 P130,000 P65,000

d. P175,000 P145,000 P35,000

(ACCA)

44. AA and BB entered into a partnership as of March 1, 2011 by investing P125,000 and P75,000, respectively. They
agreed that AA, as the managing partner, was to receive a salary of P30,000 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, 2011, account balances were as follows:

Cash ............................... P70,000 Accounts payable. P 60,000

Accounts receivable….. … 67,000 AA, capital ............ 125,000

Furniture and fixtures….. 45,000 BB, capital ............. 75.000

Sales returns ................... 5,000 AA, Drawing .......... ( 20.000)

Purchases........................ 196,000 BB, drawing. ( 30,000)

Operating expenses......... 60,000 Sales ........... 233,000


Partnership 26
Inventories on December 31, 2011 were as follows: supplies, P2,500, merchandise, P73,000. Prepaid insurance was P950
while accrued expenses were P1,550. Depreciation rate was 20% per year.

The partners' capital balances on December 31, 2011, after closing the net profit and drawing accounts, were:

AA BB AA BB

a. P135,940 P47,960 c. P139,680 P48,680

b. P139,540 P49,860 d. P142,350 P47,670

(PhilCPA)

45. In the AA-BB partnership, AA and BB had a capital ratio of 3:1 and a profit and loss ratio of 2:1, respectively. The
bonus method was used to record CC's admittance as a new partner. What ratio would be used to allocate, to AA and BB,
the excess of CC's contribution over the amount credited to CC's capital account?

a. AA and BB's new relative ratio.

b. AA and BB's new relative profit and loss ratio.

c. AA and BB's old capital ratio.

d. AA and BB's old profit and loss ratio.

(AICPA)

46. The FF and II partnership agreement provides for FF to receive a 20% bonus on profits before the bonus. Remaining
profits and losses are divided between FF and Il in the ratio of 2 to 3, respectively. Which partner has a greater advantage
when the partnership has a profit or when it has a loss?

Profit Loss

a. FF II
b. FF FF
c. II FF
d. II II
(AICPA)
Partnership 27
Assignment of Interest to a Third Party:

47. Capital balances and profit and loss sharing ratios of the partners in the BIG Entertainment Gallery are as follows:

Betty, capital (50%) P140,000


Iggy, capital (30%) 160,000
Grabby, capital (20%) 100,000

Total P 400.000

Betty needs money and agrees to assign half of her interest in the partnership to Yessir for P90,000 cash. Yessir
pays directly to Betty. Yessir does not become a partner.

What is the total capital of the BIG Partnership immediately after the assignment of the interest to Yessir?

a. P310,000 c. P490,000

b. 200,000 d. 400,000

(Adapted)

Partnership Dissolution: Admission of a New Partner - Purchase or investment

48. Presented below is the condensed balance sheet of the partnership of KK, LL and MM who share profits and losses
in ratio of 6:3:1, respectively:

Cash P 85,000 Liabilities. P 80,000

Other assets 415,000 KK, capital ................ 252,000

LL, capital 126,000

MM, capital 42,000

Total P500,000 Total... P500,000

The partner agree to sell NN 20% of their respective capital and profit and loss interests for a total payment of
P90,000. The payment by NN is to be made directly to the individual partners. The capital balances of KK, LL and
MM, respectively after admission of NN are:

a. P198.000; P 99,000: P33,000.

b. P201,600; P100,800; P33,600.

c. P216,000; P108,000; P36,000.

d. P255,600: P127,800; P42,600

(AICPA)
Partnership 28
49. On June 30, 2011, the balance sheet of Western Marketing, a partnership, is a summarized as follows:

Sundry assets ………………………………………………………… P150.000


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?

a. P12,500 c. P25,000
b. 18,750 d. 31,250
(Adapted)
50. The capital accounts of the partnership of NN, VV, and JJ on June 1, 2011 are presented below with their
respective profit and loss ratios:

NN ………………………………………………………… P139, 200 1/2


VV ………………………………………………………… 208,300 1/3
JJ .……………………………………………………….... 96,000 1/6

On June 1, 2011, LL is admitted to the partnership when LL purchased, for P132, 000, a proportionate interest from NN
and JJ in the net assets and profits of the partnership. As a result of a transaction LL acquired a one-fifth interest in the net
assets and profits of the firm. What is the combined gain realized by NN and JJ upon the sale of a portion of their interest
in the partnership to LL?

a. P 0 c. P62, 400
b. 43, 200 d. 82, 000
(AICPA)
51. PP contributed P24, 000 and CC contributed P48, 000 to form a partnership, and they agreed to share profit in the
ratio of their original capital contributions. During the first year of operations, they made a profit of P16, 290; PP
withdrew P5, 050 and CC P8, 000. At the start of the following year, they agreed to admit GG into the partnership. He
was to receive a one-fourth interest in the capital and profits upon payment of P30, 000 to PP and CC, whose capital
accounts were to be reduced by transfers to GG’s capital account of amounts sufficient to bring them back to their original
capital ratio. How should the P30, 000 paid by GG be divided between PP and GG?

a. PP, P 9, 825; CC, P20, 175 c. PP, P10, 000; CC, P20, 000
b. PP, P15, 000; CC, P15, 000 d. PP, P 9, 300; CC, P20, 700
Partnership 29
(Adapted)

52. On January 31, 2011, partners of Lon, Mac & Nan, LLP, had the following loan and capital account balances
(after closing entries for January):

Loan receivable from Lon ………………………………………………………… P 20, 000 dr


Loan payable to Nan ………………………………………………………… 60, 000 cr
Lon, Capital .……………………………………………………….... 30,000 dr
Mac, Capital .……………………………………………………….... 120, 000 cr
Nan, Capital .……………………………………………………….... 70000 cr

The partnership’s income sharing ratio was Lon, 505; Mac, 20%, and Nan, 30%. On January 31, 2011, Ole was admitted
to the partnership for a 20% interest in total capital of the partnership in exchange for an investment of P40, 000 cash.
Prior to Ole’s admission, the existing partners agreed to increase the carrying amount of the partnership’s inventories to
current fair value, a P60, 000 increase. The capital account to be credited to Ole:

a. P60, 000 c. P52, 000


b. 40, 000 d. 46 , 000
(Adapted)

53. Partners AA, B, and CC divide profits and losses 5:3:2, respectively, and their balance sheet on September 30,
2011 is as follows:

ABC Partneship
Balance Sheet
September 30, 2011
Cash ………………………………………………………… P 80, 000
Other assets ………………………………………………………… 720, 000
Total assets .……………………………………………………….... P800, 000

Account Payable ………………………………………………………… P200, 000


AA, Capital ………………………………………………………… 148, 000
BB, Capital .……………………………………………………….... 260, 000
CC, Capital .……………………………………………………….... 192, 000
Total Liabilities and capital .……………………………………………………….... P800, 000
Partnership 30

The assets and liabilities are recorded at approximate current fair values, DD is to be admitted as a new partner with a
20% interest in capital and earnings in exchange for a cash investment. Goodwill or bonus will not be considered.
How much cash should DD contribute?

a. P120, 000 c. P150, 000


b. 144, 000 d. 160, 000

(PhilCPA)
54. The following considered balance sheet is presented for the partnership of LL, PP, and QQ, who share profit and
losses in the ratio of 4:3:3, respectively:
Cash ………………………………………………………… P 90, 000
Other assets ………………………………………………………… 830, 000
LL, loan .……………………………………………………….... 20, 000
P940, 000

Account Payable ………………………………………………………… P210, 000


QQ, loan ………………………………………………………… 30, 000
LL, Capital .……………………………………………………….... 310, 000
PP, Capital .……………………………………………………….... 200, 000
QQ, Capital .……………………………………………………….... 190, 000
P940, 000

Assume that the assets and liabilities are fairly valued on the balance sheet and that the partnership decides to admit FF as
a new partner, with a 20% interest. No goodwill or bonus is to be recorded.
How much should FF contribute in cash or other assets?

a. P140, 000 c. P175, 000


b. 142, 000 d. 177, 500
(AICPA)
55. CC and DD are partners who share profits and losses in the ratio of 7:3, respectively. On October 21, 2011, their
respective capital were as follows:
PP ………………..………………………………………………………............. 35, 000
QQ………………..………………………………………………………............. 30, 000
Partnership 31
On that date they agreed to admit EE as a partner with a one-third interest in the capital and profits and losses, and upon
his investment of P25,000. The new partnership will begin with a total capital of P90,000. Immediately, after EE's
admission, what are the capital balance of CC, DD, and EE, respectively?

a. P30,000: P30,000; P30,000; c. P31,667; P28.333; P30,000;

b. P31,500; P28,500; P30,000; d. P35.000; P30,000; P25,000;

(AICPA)

56. The capital accounts for the partnership of LL and MM at October 31, 2011 are as follows:

LL, capital ………………………………………………………………………………………………….P 80,000

MM, capital ……………………………………………………………………………………………....... 40,000

P120.000

The partners share profits and losses in the ratio of 3:2 respectively.

The partnership is in desperate need of cash, and the partners agree to admit NN as a partner with one-third in the capital
and profits and losses upon his investment of P30,000. Immediately after NN's admission, what should be the capital
balonces of LL, MM and NN respectively, assuming bonus is to be recognized

a. P50,000; P50,000; P50,000. c. P66,667; P33,333; P50,000.

b. P60,000: P60,000; P60,000. d. P68,000: P32,000: P50,000.

(AICPA)

57. 00 and IT are partners with capital balances P60.000 and P20,000, respectively. Profits and losses are divided in the
ratio of 60:40.00 and TT decided to form a new partnership with GG,who invested land valued at P15,000 for a 20%
capital interest in the new partnership. GG's cost of the land was P12,000. The partnership elected to use the bonus
method to record the admission of GG into the partnership. GG's capital account should be credited for:

a. P12,000 c. P16,000

b.15,000 d. 19.000

(AICPA)
Partnership 32
58. RR and XX formed a partnership and agreed to divide initial capital equally, even though RR contributed P25,000 and
XX contributed P21,000 in identifiable assets. Under the bonus approach to adjust the capital accounts. XX's
unidentifiable assets should be debited for:

a. P11,500 c. P2,000

b. 4.000 d. 0

(AICPA)

59. In the AD partnership. Allen's capital is P140,000 and Daniel's is P40,000 and they share income in a 3:1 ratio,
respectively. They decide to admit David to the partnership. Each of the following questions is independent of the others.
Allen and Daniel agree that some of the inventory is obsolete. The inventory account is decreased before David is
admitted. David invests P40,000 for a one-fifth interest. What is the amount of inventory written down?

a. P4,000 c. P15.000

b. P10,000 d. P20,000

60. Using same information in No.59, David directly purchases a one-fifth inter paying Allen P34,000 and Daniel
P10,000. The land account is increased before David is admitted. By what amount is the land account increased?

a. P40,000 c. P20,000

b. P36,000 d. P10,000

61. Using the same information in No. 59, David invests P40,000 for a one-fifth interest in the total.capital of P220,000.
The journal to record David's admission into the partnership will include:

a. A credit to Cash for P40,000.

b. A debit to Allen, Capital for P3,000.

c. A credit to David, Capital for P40,000.

d. A credit to Daniel, Capital for P1,000.


Partnership 33

Retirement or Withdrawal of a Partner

62. On June 30, 2011, the statement of financial position for the partnership of CC, MM, and PP, together with their
respective profit and loss ratios, were as follows:

Assets, at cost ………………………………………………………………………………. P180,000

CC, loan .................................................................................................................................. 9,000

CC. capital (20%) ................................................................................................................... 42,000

MM, capital (20%)................................................................................................................... 39,000

PP, capital (60%) ..................................................................................................................... 90,000

Total ........................................................................................................................... P 180,000

CC decided to retire from the partnership. By mutual agreement, the assets are to be adjusted to their fair value of
P216,000 at June 30, 2011. It was agreed that the partnership would pay CC P61,200 cash for CC's partnership interest,
including CC's loan which is to be repaid in full. No goodwill is to be recorded. After CC's retirement, what is the balance
of MM's capital account?

a. P36,450 c. P45,450

b. 39,000 d. 46,200

(AICPA)

63. The December 31, 2011, statement of financial position of the BB, CC, andDD partnership is summarized as follows:

Cash ……………………………. P100,000 CC, loan ............................ P100,000

Other assets, at cost .... ……………500,000 BB, capital .......................... 100,000

CC, capital .......................... 200,000

______ DD, capital ………............. 200,000

P600,000 P600,000

The partners share profits and losses as follows: BB, 20%: CC, 30%; and DD, 50%, CC is retiring from the partnership
and te partners have agreed that "other assets" should be adjusted to their fair value of P600,000 at Decembern31, 2011.
They further agree that CC will receive P244,000 cash for his partnership interest exclusive of the loan, which is to be
paid in full. No goodwill implied by CC's payment will be recorded.

P65, 000
Partnership 34
After CC’s retirement, the capital balances of BB and DD, respectively, will be:
a. P116,000 and P240,000 c. P100,000 and P200,000
b. P101,714 and P254,286 d. P73,143 and P182,857
64. The partners’ capital (income-sharing ratio in parentheses) of Nunn, Owen, Park & Quan LLP on May 31, 2011, were
as follows:
Nunn (20%) ……………………………………………………………. P 60,000
Owen (20%) ……………………………………………………………. 80,000
Park (20%) ……………………………………………………………… 70,000
Quan (40%) …………………………………………………………….. 40,000
Total partners’ capital (20%) ……………………………………………P250,000
On May 31, 2011, with the consent of Nunn, Owen and Quan:
a. Sam Park retired from the partnership and was paid P50,000 cash in full settlement of his interest in the
partnership.
b. Lois Reed was admitted to the partnership with a P20,000 cash investment for a 10% interest in the net assets
of Nunn, Owen and Quan.
The capital account to be credited to Reed is:
a. P22,000 c. P20,000
b. P27,000 d. P25,000
Business Combination: Each Partnership Has Undervalued Tangible Assets and Goodwill
65. The partnership of A, B, C, and D has agreed to combine with the partnership of X and Y. The individual capital
accounts and profit and loss sharing percentage of each partner follow:
P & L Sharing % %
Capital Accounts __Now _Proposed_
A …………………………….. P50,000 40 28
B …………………………….. 35,000 30 21
C …………………………….. 40,000 20 14
D …………………………….. 25,000__ 10 _ 7__
150,000 100 70
X …………………………….. P60,000 50 15
Y …………………………….. 40,000__ 50 ____15__
P100,000 100 30
Partnership 35
A, B, C, and D’s partnership has undervalued tangible assets of P20,000, and X and Y partnership has undervalued
tangible assets of P8,000. All the partners agreed that:

(a) The partnership of A, B, C, and D possesses goodwill of P30,000 and


(b) The partnership of X and Y possesses goodwill of P10,000
The combined businesses will continue to use the general ledger of A, B, C, and D.

Assume that tangible assets are to be revalued and goodwill is to be recorded. Compute the amount of goodwill
recognized in the partnership goods:

a. Zero c. P40,000
b. P30,000 d. P68,000
66. Using the same information in No.65, compute the capital balances of A and X, respectively:

a. A, P70,000; X, P69,000 c. A, P58,000; X, P64,000

b. A, P62,000; X, P65,000 d. A, P50,000; X, P60,000

67. Using the same information in No.65 except that bonus method is to be used with the respect to undervalued assets
and goodwill. Compute the amount of goodwill recognized in the books:

a. zero c. P40,000

b. P30,000 d. P68,000

68. Using the same information in No.65 except that bonus method is to be used with the respect to undervalued assets
and goodwill. Compute the capital balances of A and X, respectively:

a. A, P70,000; X, P69,000 c. A, P58,000; X, P64,000

b. A, P50,000; X, P60,000 d. A, P50,960; X, P58,800


Partnership 36
Incorporation of a Partnership
69. Roy and Gil are partners sharing profts and losses in the ratio of 1:2, respectively. On July 1, 2011, they decided to
form the R & G Corporation by transferring the assets and liabilities from the partnership to the Corporation in
exchange of its shares. The following is the post-closing trial balance of the partnership:

Debit Credit
Cash …………………………………………………………. P 45,000
Accounts Receivable (net) …………………………………... 60,000
Inventory …………………………………………………….. 90,000
Fixed Assets (net) …………………………………………… 174,000
Liabilities ……………………………………………………. P 60,000
Roy, Capital …………………………………………………. 94,800
Gil, Capital …………………………………………………… 214,200
P369,000 P369,000

It was agreed that adjustments be made to the following assets to be transferred to the corporation:
Accounts Receivable …………………………………………. P 40,000
Inventory ……………………………………………………… 68,000
Fixed Assets …………………………………………………… 180,600

The R & G Corporation was authorized to issue P100 par preferenced shares and P10 par ordinary share. Roy and Gil
agreed to receive for their equity in the partnership 720 ordinary share each, plus even multiples of 10 shares for their
remaining interest.
The total number of shares of preference and ordinary share issued by the Corporation in exchange of the assets and
liabilities of the partnership are:
Preference Share Ordinary Share Preference Share Ordinary Share
a. 2,540 shares 1,500 shares c. 2,642 shares 1,440 shares
b. 2,592 shares 1,440 shares d. 2,642 shares 1,550 shares
Partnership 37
70. Partners Art and Tony, who share equally in profits and losses, have the following balance sheet as of December 31,

2011:

Cash……………………………..P 120,000 A/payable………………………… P 172,000


A/Receivable……………….. 100,000 Accum.dep’n……………………. 8,000
Inventory………………………. 140,000 Art, capital……………………….. 140,000
Equipment…………………... 80,000 Tony, capital…………………….. 120,000
Total……………………………..P 440,000 Total……………………………….P 440,000

They agreed to incorporate their partnership, with the new corporation absorbing the net assets after the following
adjustments: provision of allowance for bad debts of P10,000; restatement of the inventory at its current fair value of
P160,000; and recognition of further depreciation on the equipment of P3,000. The corporation’s capital stock is to have a
par value of P100, and the partners are to be issues corresponding total shares equivalent to their adjusted capital balances.

The total par value of the shares of capital stock that were issued to partners Art and Tony was:

a, P260,000 c. P273,000
b. 267,000 d. 280,000

71. JJ & KK partnership’s balance sheet at December 31, 2011, reported the following:

Total assets……………………………………………………………… P100,000


Total Liabilities…………………………………………………………. 20,000
JJ,capital…………………………………………………………………… 40,000
KK,capital…………………………………………………………………. 40,000

On January 2, 2012, JJ and KK dissolved their partnership and transferred all ssets and liabilities to a newly-formed
corporation. At the date of incorporation, the fair value of the net assets was P12,000 more than the carrying amount on
the partnership’s books, of which P7,000 was assigned to tangible assets 5000 was assigned to goodwill. JJ and KK were
each issued 5,000 shares of the corporation’s P1 par value ordinary share. Immediately following corporation, share
premium/additional paid-in-capital in excess of par should be credited for:

a. P68,000 c.P77,000
b. 70,000 d. 82,000
Partnership 38
72. The following condensed balance sheet is presented for the partnership of AA, BB and CC, who share profits and
losses in the ratio of 4:3:3, respectively.

Cash…………………………………………………………………………………………… P160,000
Other Assets…………………………………………………………………...………………. 320,000
Total…………………………………………………………………………………… P480,000

Liabilities………………………………………………………………………………………. P180,000
AA, capital………………………………………………………………………………..……. 48,000
BB, capital…………………………………………………………………………………...…. 216,000
CC, capital………………………………………………………………………………………. 36,000
Total……………………………………………………………………………………. P480,000

The partners agreed to dissolve the partnership after selling the other assets for P200, 000. Upon dissolution of the
partnership. AA should have received.

a. P 0 c. P72, 000
b. 48,000 d. 84,000

73. W,X and Y are partners sharing profits and losses in the ratio of 4:3:3, respectively. The condensed balance sheet of
Heidi partnership as of December 31, 2011 is:

Heidi Partnership
Balance Sheet
December 31, 2011

Cash…………………………………………………………………………………………… P 50,000
Other assets……………………………………………………………………………………. 130,000

Total assets…………………………………………………………………………………… P180,000

Liabilities……………………………………………………………………………………… P 40,000
W, capital………………………………………………………………………………………. 60,000
X, capital……………………………………………………………………………………….. 40,000
Y, capital…………………………………………………………………………………….…. 40,000

Total liabilities and capital……………………………………………………………………. P180,000


Partnership 39
Assume instead that the Heidi Partnership is dissolved and liquidated by installments, and the first realization of P40,000
cash is on the sale of other assets with book value of P80,000. After the payment of liabilities, the available cash shall be
distributed to W, X and Y, respectively, as follows:

a. P36,000; P27,000; and, P27,000


b. P44,000; P28,000; and, P28,000
c. P16,000; P12,000; and, P12,000
d. P24,000; P13,000; and, P13,000

74. the partners of the M&Npartnership started liquidating their business on July 1, 2011, at which time the partners were
sharing profits and losses 40% to M and 60% to N. the balance sheet of the partnership appeared as follows:

M&N Partnership
Balance Sheet- July 1, 2011

Assets Liabilities & Equity

Cash…………………………………… P 8,800 Accounts payable……………………… P32,400


Receivable……………………………. 22,400 M, capital……………… P31,000
Inventory………………………………. 39,400 M, drawing………………(5,400) 25,600
Equipment…………………………..….P65,200 N, capital……………… P33,200
Accumulated N, drawing……………… (200) 33,000
depreciation (30,800) 34,400 N, loan……………………………..…… 14,000
Total……………………………………P105,000 Total…………………………..……… P105,000

During the month of July, the partners collected P600 of the receivables with no loss. The partners also sold during the
month the entire inventory on which they realized a tital of P32,400

How much of the cash was paid to M’s capital on July 31, 2011?

a. P22,600 c. P320
b. 5,400 d. 0

75. After operating for five yers, the books of the partnership of Bo and By showed the following balances:

Net assets………………………………………………………………………………………… P169,000


Bo, capital………………………………………………………………………………………… 110,500
By, capital………………………………………………………………………………………… 58,500
Partnership 40
If liquidation takes place at this point and the net assets are realized at book value, the books are entitled to:

a. Bo to receive P117,000 & By to receive P52,000


b. Bo to receive P126,750 & By to receive P42,250
c. Bo to receive P84,500 & By to receive P84,500
d. Bo to receive P110,500 & By to receive P58,500

(PhilCPA)

76. RR, SS and TT decided to dissolve the partnership on November 30, 2011. Their capital balances and profit ratio
on this date, follow:

Capital Profit
Balances Ratio

RR …………………………………………………………………………………… P50,000 40%

SS …………………………………………………………………………………… 60,000 30%

TT …………………………………………………………………………………… 20,000 30%

The net income from January 1 to November 30, 2011 is P44,000. Also, on this date, cash and liabilities are P40,000
and P90,000, respectively. For RR to receive P55,200 in full settlement of his interest in the firm, how much must be realized
from the sale of the firm’s non-cash assets

a. P196,000 c. P193,000
b. 177,000 d. 187,000

(Adapted)

77. Silverio, Domingo, Reyes, and Pastor are partners, sharing earnings in the ratio of 3/21, 4/21, 6/21 and 8/21,
respectively. The balances of their capital accounts on December 31, 2011 as follows:

Silverio ………………………………………………………………………………………….. P 1,000

Domingo ………………………………………………………………………………………… 25,000

Reyes ……………………………………………………………………………………………. 25,000

Pastor ……………………………………………………………………………………………. 9,000

The partners decide to liquidate, and they accordingly convert the non-cash assets into P23,200 of cash. After paying
the liabilities amounting to P3,000 they have P22,200 to divide. Assume that a debit balance in any partner’s capital is
uncollectible.
Partnership 41
After the P22,200 was divided, the capital balance of Domingo was:

a. P3,200 c. P 4,500
b. 3,920 d. 17,800

(PhilCPA)

78. As of December 31, 2011, the books of Tan Partnership showed capital balances of: T P140,000; O P25,000; N
P5,000. The partner’s profit and loss ratio was 3:2:1, respectively. The partners decided to liquidate and they sold all non-
cash assets for P37,000. After settlement of all liabilities amounting P12,000, they still have cash of P28,000 left for
distribution. Assuming that any capital debit balance is uncollectible, the share of T in the distribution of the P28,000 cash
would be:

a. P17,800 c. P19,000
b. 18,000 d. 17,000

(PhilCPA)

79. A local partnership was considering the possibility of liquidation since one of the partners is solvent (Tillman) and
the others are insolvent. Capital balances at that time were as follows. Profits and losses were divided on a 4:2:2:2 basis,
respectively.

Ding, capital……………………………………………………………………………………….. P 60,000

Laurel, capital……………………………………………………………………………………… 67,000

Ezzard, capital……………………………………………………………………………………... 17,000

Tillman, capital…………………………………………………………………………………….. 96,000

Ding’s creditors filed a P25,000 claim against the partnership’s assets. At that time, the partnership held assets
reported at P360,000 and liabilities of P120,000. If the assets could be sold for P228,000, what is the minimum amount that
Ding’s creditors would have received?

a. P 0 c. P36,000
b. 2,500 d. 38,720

80. The Keaton, Lewis and Meador partnership had the following balance sheet just before entering liquidation:

Cash…………………….. P 10,000 Liabilities…………… P130,000

Non-cash assets………… 300,000 Keaton, capital…….. 60,000

Lewis, capital……… 40,000

Meador, capital.…… 80,000

P310,000 P310,000
Partnership 42
Keaton, Lewis, and Meador share profits and losses in ratio of 2:4:4, Non-cash assets were sold for P180,000. Liquidation
expenses were P10,000. Assume that Keaton was personally insolvent with assets of P8,000 and liabilities of P60,000.
Lewis and Meador were both solvent and able to cover deficits in their capital accounts if any. What amount of cash could
Keator’s personal creditors have expected to receive from partnership assets?

a. P 0 c. P30,000
b. 26,000 d. 34,000

81. The following account balances were available for the Perry, Quincy and Renquist partnership just before it entered
liquidation:

Cash…………………….. P 90,000 Liabilities…………… ... P170,000

Non-cash assets………… 300,000 Perry, capital………… 70,000

Quincy, capital……… 50,000

Renquist, capital.…... 100,000

P390,000 P390,000

Perry, Quincy and Renquist had shared profits and losses in a ratio of 2:4:4. Liquidation expenses were expected to
be P8,000. All partners were solvent. What would be the minimum amount for which the non-cash assets must have been
sold for, in order for Quincy to receive some cash from the liquidation?

a. Any amount in excess of P175,000


b. Any amount in excess of P117,000
c. Any amount in excess of P183,000
d. Any amount in excess of P198,667

82. AA, BB and CC are partners in ABC Partnership and share profits and losses 50%, 30% and 20%, respectively.
The partners have agreed to liquidate the partnership and some liquidation expenses to be incurred. Prior to the liquidation,
the partnership balance sheet reflects the following book values:

Cash……………………………………………………………………………………….. P 25,200

Non-cash assets…………………………………………………………………………… 297,600

Notes payables to CC…………………………………………………………………….. 38,400

Other liabilities……………………………………………………………………………. 184,800

AA, capital………………………………………………………………………………… 72,000

BB, capital deficit…………………………………………………………………………. (12,000)

CC, capital…………………………………………………………………………………. 39,600


Partnership 43
Assuming that the actual liquidation expenses are P16.800 and that the non-cash assets with a book value of P240,000 are
sold for P216,000.
How much cash should CC receive?
a. P46,457 c. P74,571
b. 39,600 d. --0--
(Adapted)
83.After all noncash assets have been converted into cash in the liquidation. of the AA and JJ partnership, the ledger
contains the following account balances:
Debit Credit
Cash……………………………………..………. P34,000
Accounts payable………………………………… P25,000
Loan payable to AA……………………………… 9,000
AA, capital ......................................................... 8,000
JJ, capital……………………………………......... 8,000

Available cash should be distributed: P25,000 to accounts payable and;


a. P9,000 loan payable to AA C. P1,000 to AA and P8,000 to JJ
b. P4,500 each to AA and JJ d. P8,000 to AA and P1,000 to JJ
(Adapted)
84. Arthur, Baker and Carter are partners in textile distribution business, sharing profits and losses equally. On December
31, 2011 the partnership capital and partners drawings were as follows:
Arthur Baker Carter Total
Capital. P100,000 P80,000 P300,000 P480,000
Drawing 60,000 40,000 20,000 120,000

The partnership was unable to collect on trade receivables and was forced to liquidate. Operating profit in 2011 amounted
to P72,000 which was all exhausted, including the partnership assets. Unsettled creditors' claims at December 31, 2011
totalled P84,000. Baker and Carter have substantial private resources, but Arthur has no personal assets.
The final cash distribution to Carter was:

a. P78,000 b. P108,000 :
b. 84,000 d. 162.000 (PhilCPA)
Partnership 44
Ram, and Millo, who divide profits and losses 50%, 30%, and 20%, spectively, have the following October 31, 2011
account balances:
Jar, drawing (Dr.) ............................................................................. P12,000
Millo, drawing (Cr.) .......................................................................... 4,800
Accounts receivable - Jar……………………………………………… 7,200
Loans payable - Ram ....................................................................... 14,400
Jar, capital………………………………………………………………... 59,400
Ram, capital……………………………………………………………… 44,400
Millo, capital……………………………………………………………… 39,000

The partnership's assets are P211,200 (including cash of P64,200). The partnership is liquidated and Millo receives
P33,000 in final settlement. How much is the total ioss on realization?
a. P10,800 C. P54.000
b. 31.200 d. 64,200
(Adapted)
86. When Mikki and Mylene, partners who share earnings equally, were incapacitated in an airplane accident, a liquidator
was appointed to wind up their business. The accounts showed cash, P35.000; other assets, P110,000; Liabilities, P20,000;
Mikki, capital, P71,000; and Mylene, capital, P54,000. Because of highly specialized nature of the noncash assets, the
liquidator anticipated that considerable time would be required to dispose them. The expenses of liquidating the business
(advertising, rent, travel, etc.) are estimated at P10,000.

How much cash can be distributed safely to each partner at this point?

a. P5,000 to Mikki; and PO to Mylene


b. P5,000 to Mikki, and P500 to Mylene
c. P3,000 to Mikki; and PO to Mylene
d. P5,000 to Mikki; and P1,000 to Mylene
(Adapted)
81. A balance sheet for the partnership of KK, LL and MM, who share profits
2:1:1 respectively, shows the following balances just before liquidation:

Cash Other Assets Liab. KK, Cap. LL. Cap. MM, Cap.
P.48.000 P238,000 P80,000 P88,000 P62,000 P56,000
Partnership 45
In the first month of liquidation, P128,000 was received on the sale of certain assets. Liquidation expenses of P4,000
were paid, and additional liquidation, expenses of P3,200 are anticipated before liquidation is completed. Creditors were
paid P22,400. The available cash was distributed to the partners.

The cash to be received by each partner based on the above data:

KK LL MM KK LL MM
a. P56,600 P28,300 P28,300. C. P29,400 P32,700 P26,700
b. 86,000 61,000 55,000 d. 88.000 62,000 56,000
(Adapted)
88. NN, OO, PP, and GG, partners to a law firm, shares profits at the ratio of
5:3:1:1. On June 30, relevant partners' accounts follow:
Advances Loans Capital
Dr. Cr. Cr.
NN…………………………………. ---- P20,000 P160,000
00…………………………………. 40,000 120,000
PP………………………………… P18,000 --- 60,000
GG……………………………. 10,000 --- 100,000

On this day, cash of P72,000 is declared as available for distribution to partners as profits. Who among the partners will
benefit from the P72,000 cash distribution?
a. PP and GG c. All. equally
b. 00 and d. NN and OO
(Adapted)
89. The partnership of AA, BB, and CC was dissolved on June 30, 2011 and account balances after non-cash assets were
converted into cash on September 1, 2011 are:
Assets Liabilities and Equity
Cash ....................... P50,000 Accounts payable ......... P120,000
AA, capital (30%) .......... 90,000
BB, capital (30%) .......... (60,000)
CC, capital (40%) ........ (100.000)
Partnership 46
Personal assets and liabilities of the partners at September 1, 2011 are:

Personal Personal
Asset Liabilities
AA…………………………………………………. P80,000 P90,000
BB…………………………………………………. 100,000 61,000
CC…………………………………………………. 192,000 80,000

If CC contributes P70,000 to the partnership to provide cash to pay the creditors, what amount of AA’s P90,000
partnership equity would appear to be recoverable?

a. P90,000 c. P79,000
b. 81,000 d. None
(Adapted)

90. After all partnership assets were converted into cash and all available cash was distributed to creditors, the ledger of
the Daniela, Erika, and Fredline partnership showed the following balances:

Debit Credit
Accounts payable………………………………….. P20,000
Daniela, capital (40%)…………………………….. 10,000
Erika, capital (30%)……………………………….. 60,000
Fredline, capital (30%)…………………………….. P90,000 ________
P90,000 P90,000

Percentages indicated are residual profit and loss sharing ratios. Personal assets and liabilities of the partners are as
follows:

Daniela Erika Fredline


Personal assets P50,000 P50,000 P100,000
Personal liabilities 45,000 40,000 40,000

The partnership creditors proceed against Fredline for recovery of their claims, and the partners settle their claims against
each other.

How much would Erika receive?

a. P -0- c. P47,143
b. 45,000 d. Cannot be determined
(Adapted)
Partnership 47

91. The August, Albert and Gerry partnership became insolvent on January 1, 2011, and the partnership is being
liquidated as soon as practicable. In this respect the following information for the partners has been marshaled:

Capital Balances Personal Assets Personal Liabilities


August…………. P 70,000 P80,000 P40,000
Albert………….. (60,000) 30,000 50,000
Gerry…………… (30,000) 70,000 30,000
Total……………. P(20,000)

Assume that residual profits and losses are shared equally among the three partners. Based on this information, calculate
the maximum amount that August can expect to receive from the partnership liquidation is:

a. P20,000 c. P70,000
b. 40,000 d. 110,000
(Adapted)

92. Gardo and Gordo formed a partnership on July 1, 2011 to operate two stores to be managed by each of them. They
invested P30,000 and P20,000 and agreed to share earnings 60% and 40% respectively. All their transactions were for
cash, and all their subsequent transactions were handled through their respective bank accounts as summarized below:
Gardo Gordo
Cash receipts………………………………………………………….. P79,100 P65,245
Cash disbursement…………………………………………………….. 62,275 70,695

On October 31, 2008, all remaining noncash assets in the two stores were sold for cash of P60,000. The partnership was
dissolved and cash settlement was effected. In the distribution of the P60,000 cash, Gardo received:

a. P24,000 c. 34,000
b. 26,000 d. 36,000
(PhiCPA)

93. PP, QQ, and RR, partners to a firm, have capital balances of P11,200, P13,000, an p5,800, respectively, and share
profits in the ratio of 4:2:1. Prepare a schedule showing how available cash will be given to the partners as it becomes
available. Who among the partners shall be paid first with an available cash of P1,400?

a. QQ c. RR
b. No one d. PP
(Adapted)
Partnership 48

94. The PQR Partnership is being dissolved. All liabilities have been paid and the remaining assets are being realized
gradually. The equity of the partners is as follows:

Loans to
Partners (from) Profit and
Accounts Partnership Loss Ratio
P P24,000 6,000 3
Q 36,000 - 3
R 60,000 (10,000) 4

The second cash payment to any Partner(s) under a program of priorities shall be made thus:

a. To R, P2,000 c. To R, P8,000
b. To Q, P6,000 d. To Q, P6,000 & R, P8,000
(PhilCPA)

95. A cash distribution plan (payment priority program) for the Matthew, Norell, and Reams partnership appears below:

Priority
Creditors Matthew Norell Reams
First P300,000……………………… 100%
Next P80,000……………………… 70% 30%
Next P70,000…………………….. 3/7 4/7
Remainder…………………………. 22% 34% 44%

If P550,000 of cash is to be distributed, how much will be received by the priority creditors, Matthew, Norell and Reams?

Priority Creditors Matthew Norell Reams


a. P 0 P 0 P 0 P 0
b. 0 121,000 187,000 242,000
c. 300,000 55,000 85,000 110,000
d. 300,000 108,000 58,000 84,000

(Adapted)
Partnership 49
96. The assents and equities of the Queen, Reed and Stac Partnership at the end of its fiscal year on October 31, 2011 are
as follows

Assets Liabilities and Equity


Cash…………….….P15 000 Liabilities P 50 000
Receivables – net.. 20 000 Loan form Stac 10 000
Inventory 40 000 Queen, capital – 30% 45 000
Plant assets – net 70 000 Reed, capital-50% 30 000
Loan to Reed 5 000 Stac, capital-20% 15 000
Total Assets P 150 000 Total Liabilities and Equity P 150 000

The partners decide to liquidate the partnership. The estimate that the noncash assets , other than the loan to Reed, can be
converted into P 100 000 cash over the two- months period ending December 31, 2011. Cash is to be distributed to the
appropriate parties as it becomes available during the liquidation process.

The partner most vulnerable to partnership losses on liquidation is:

a. Queen c. Reed and Queen


b. Reed d. Stac
(adapted)

97. Using the same information in No.96 and P65 000 is available for first distribution, it should be paid to:
Priority
Creditors Queen Reed Stac
a. P 60 000 P 5 000 P0 P0
b. 60 000 1 500 2,500 1,000
c. 50 000 1,500 0 10 000
d. 50 000 12, 000 0 3,000

50 Chapter 1
Partnership 50

Appendix- lllustration of Goodwill Method as Outlawed by. PFRS No.3(Business


Combined)

Under PFRS No.3 Business Combined),goodwill represents the excess of the cost of the business combination over the
fair value of the identifiable net assets obtained. Therefore, the standard provides that goodwill attaches only to a
business as a whole and is recognized only when a business is acquired. This provision of PFRS NO.3 outlawed the
use of the goodwill method in partnership
particularly admission and retirement of a partner because there is.no business involved. The term "business" is defined in
Appendix A of PFRS No.3 as:

An integrated set of activities and assets conducted and managed for the purpose of providing:
(a) return to investor; or
(b) lower costs or other economic benefits directly and proportionately to policyholders or participants.

A business generally consists of inputs, processes applied to. Those inputs, and resulting outputs that are, or will
be, used to generate revenues. If goodwill is present in a transferred set of activities and assets, he transferred set
shall be presumed to be a business.

This view of recognizing that goodwill attaches only to the business as a whole was supported by E.John Larsen in
his book Modern Advanded Accounting. which invokes FASB Statement No.142,"Goodwill and Other Intangible
Assets," par F1. In other words, recognizing goodwill on the admission of a partner (or even retirement of a partner) in
partnership is not considered to be in accordance with GAAP.

In cases of sole proprietor (or partnership) joining business either with sole proprietor or partnership, then goodwill should
be appropriately recognized.

The author firmly believes that accounting pronouncements of the IASB,FASB and its predecessor oraanizations are
intended primarily for publicly owned corporations,which must follow GAAP. Most partnerships, however choose to
ignore GAAP; the will of the partners may prevail. Such a departure usually falls into one of the following categories:

1. Cash basis instead of accrual basis


2. Prior-period adjustments:
3. Current values instead of historical cost
4. Recognition of goodwill

However, for board examination only bonus method will be allowed. This was made after consultaion with authorities on
accounting standards
Partnership 51
Admission by Purchase
1.XX,YY and ZZ are partners who share profits and losses in the ratio of 5:3:2,respectively.They agree to sell a 25%of
their respective capital and profits and losses ratio for a total payment directly to the partners in the amountof
P140,000.They agree that goodwill of P60.000 is to be recorded prior to
admission of AA.The-condensed balance sheet of the XYZ Partnership is as follows:

Cash........................ P 60,000 Liabilities..............P100.000


Non-cash assets..... 540,000 XX,Capital......... 250,000
YY;Capital......... 150,000
Z;Capital........... 100.000
Total......................P600.000. Total.....................P600,000

The capital of XX,YY and ZZ respectively after the payment and admission
of AA are:
a. P187,500;P112,500;and P75,000
b. P21.0,000;P126,000;and P84,000
C. P280,000;P168,000;and P112,000
d. P250,000;P150,000;and P100,000
(PhilCPA)
Answer:(b)
The goodwill of P60,000 can be determined by the following computation:

Amount paid............................... P140,000


Less:Book value of interest acquired:
(P250,000+P.150,000+.P100,000)x25%)............... _125.000_
Excess......................................... -P 15.000
Divided by/capitalized at.............................. 25%
Goodwill............................................................. P 60.000

XX:[P250,000+(P60,000.x 50%)].X75%=.... P210.000


YY:[P150,000+(P60,000 x.30%)]X75%=..... P126.000
ZZ:[P100,000+(P60,000x20%)]x75%=........................ P-84,000(b)
Partnership 52
Admission by Investment
2. DD and GG with capital account balances of P12, 000 and P18, 000, respectively. Thyey agree to admit ZZ and a
partner with one-third interest in capital and profits, for an investment of P20,000, after revaluing the assets of
DD and GG. Goodwill to the original partners should be:
a. P 0 c. P10, 000
b. 6, 667 d. 13, 333
(AICPA)
Answer: (c)
Goodwill is recognized by thye original (old) partners, therefore the P20, 000 represents one-third capital interest.
Accordingly,
Total agreed capital (P 20,000 / 1/3)............................................................ P60,000
Less: Total contributed (P12,000 + P18,000 + P20,000)............................... 50,000
Goodwill to old partners............................................................................... P10,000(c)

3. AA, BB< and CC are parters sharing profits in a 5:3:2 ratio, and with capital balances of P95,000, P80,000, and
P60,000, respectively on december 31, 2011. The partners decided to admit D as a new partner on January 1,
2008. DD will contribute cash of P80, 000 to the partnership and also pay P10,000 for 15% of BB’s share. Dd is
to have a 20% share in profits. After the admission of DD, the total capital will be P330, 000 and DD’s capital
will be P70,000.
After the admission of DD, BB’s capital balance would be:

a. P72, 600 c. P79,100


b. 74, 600 d. 89,100
(Adapted)

AA BB CC DD Total
Caqpital balances before admission of DD P 95,000 P 80,000 P 60,000 - P235, 000
Admission by Purchase: book value:
(15% x (12,000) 12,000 -
P80,000)................................
Admission by investment............................ 80,000 80,000
Total contributed capital............................. P 95,000 P 68,000 P 60,000 P 92,000 P 315,000
Bonus to old partners (5:3:2)..................... 11,000 6,600 4,400 (22,000)** -
Goodwill to old(5:3:2)................................. 7,500 4,500 3,000 - 15,000***
Total Agreed Capital.................................... P113,500 P79,100 P67,400 P70,000* P330,000*(C)

Answer: (c)

*Given per Problem.


**Transfer of capital, therefore, bonus.
***Total agreed capitaql differs from total contributed capital, therefore, goodwill.
Partnership 53
Retirement or withdrawal of Partner(s)
4. On June 30, 2011, the considered balance sheet for the partnership of DD, FF and GG, together with their
respective profit and loss sharing percentages was as follows:
Assets net of liabilities........................................................................... P320,000
DD, capital (50%)................................................................................... P160,000
FF, capital (30%).................................................................................... 96,000
Gg, capital (20)................................................................................... 64,000
P320,000
DD decided to retire from the partnership and, by mutual agreement, is to be paid P180, 000 out of partnership
funds for his interest. Total goodwill implicit in the agreement is to be recorded. After DD’s retirement, what are
the capital balances of the other partners?
FF GG FF GG
a. P84,000 P56,000 c. P108,000 P72,000
b. 102,000 68,000 d. 120,000 80,000
(AICPA)
Answer:(c)
Asmount paid............................................................................................. P 180,000
Less: BV interest of DD (50%)..................................................................... 160, 000

Excess / Partial goodwill............................................................................. P 20,000


Divided by/capitalized at............................................................................ 50%

Total goodwill............................................................................................. P 40,000

Therefore, the capital of the remaining partners:

FF: [P96,000 + (P 40,000 x 30%)].................................................... P 108,000


GG: [P64,000 + (P40,000 x 20%)]................................................... P 72,000 (c)

The capital interest and profit and loss ratio are assumed to be the same.

\
Partnership 54
5. Smith a partner in an accounting firm, decided to withdraw from the partn ership, Smith’s share of the
partnership profits and losses was 20%.Upon withdrawing from the partnership, he was paid P88,000 in final
settlement for his interest. The total of the partner’s capital accounts before recognition of partnership goodwiull
and prior to Smith’s withdrawal, was P252,000. After his withdrawal the remaining partners’ capital accounts,
excluding their share of goodwill, totalled P192,000. The goodwill of the firm was:

a. P144,000 c. P192,000
b. 168,000 d. 300,000
` (AICPA)
Answer: (a)
Amount paid........................................................................... P 88,000
Less: Book value of interest of Smiths (20%)
Total partners’ capital before withdrawal P252,000
Less: Total partners’ capital after
Withdrawal.................................................................... 192,000 60,000

Excess/ Partial goodwill........................................................... P 28,800


Divided by (capitalized at)....................................................... 20%

Total goodwill.......................................................................... P144,000(c)


Partnership 55
MULTIPLE CHOICE ANSWERS

1. d 17. b 33. d 48. b 63. a 78. a 93. a


2. d 18. d 34. c 49. b 64. a 79. b 94. d
3. a 19. b 35. b 50. b 65. c 80. d 95. d
4. c 20. c 36. a 51. d 66. a 81. c 96. b
5. d 21. a 37. d 52. c 67. a 82. b 97. d
6. c 22. a 38. c 53. c 68. d 83. c
7. d 23. b 39. b 54. c 69. b 84. a
8. c 24. d 40. c 55. b 70. b 85. c
9. d 25. d 41. d 56. d 71. d 86. a
10. c 26. b 42. a 57. d 72. a 87. c
11. c 27. a 43. a 58. d 73. d 88. b
12. c 28. d 44. b 59. d 74. c 89. b
13. a 29. a 45. d 60. a 75. d 90. b
14. c 30. c 46. b 61. b 76. c 91. a
15. c 31. d 47. d 62. c 77. b 92. b
16. b 32. a

MULTIPLE CHOICE ANSWERS EXPLAINED

1. (d)
In the formation of a partnership, one or more of the partners will contribute noncash assets to the business such as
inventory, land, equipment, etc. Retaining the recorded cost for such asset would be inequitable to any partners investing
appreciated properly. 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, P50,000.

2. (d)

___JJ___
Cash……………………………………………………………………………………………………. P 700,000
Machinery and equipment……………………………………………………………………………... 750,000
Building………………………………………………………………………………………………... 2,250,000
Total assets invested…………………………………………………………………………………... P3,700,000
Less: Mortgage loan…………………………………………………………………………………... - 800,000

Capital balance of JJ on March 1, 2011……………………………………………….. P2,900,000


Partnership 56
Refer to No. 1 for discussion. Profits and loss ratios are ignored and does not have any bearing in the problem, unless the
noncash assets are invested and recorded in the partnership and subsequent adjustments are required to reflect agreed
value or fair values.
3. (a)

___JJ___
Cash……………………………………………………………………………………………………. P 700,000
Machinery and equipment……………………………………………………………………………... 750,000
Building………………………………………………………………………………………………... 2,250,000
Total assets invested………………………………………………………………………………….... P3,700,000
Less: Mortgage loan…………………………………………………………………………………... _______0
Capital balance of JJ on March 1, 2011……………………………………………………………….. P3,700,000
Refer to Nos. 1 and 2 for discussion.
4. (c)

GG’s adjusted capital*...………………………………………………………………………………. P 405,000


Divided by: GG’s P&L percentage..…………………………………………………………………... 40%
Total Agreed Capital…………………………………………………………………………………...P 1,012,500
Multiplied by FF’s P&L percentage………………………………………………………………….... 60%
FF’s agreed capital……………………………………………………………………………………... P 607,500
Less: FF’s adjusted contributed capital*……………………………………………………………….. 435,000
Additional cash to be invested by FF….……………………………………………………………….. P 172,500
*Computation of adjusted contributed capital:
FF GG
Unadjusted capital……….……………………………………………………… P570,000 P495,000
Add (deduct): adjustments:
Accumulated depreciation…………………………………………………. ( 15,000) ( 45,000)
Allowance for doubtful accts. …………………………………………….. ( 120,000) ( 45,000)

Adjusted contributed capital………………………………………………………P435,000 P405,000


Partnership 57
5. (d)
AA__ BB__
Assets…………………….……………………………………………………….… P 75,000 P113,000
Less: Liabilities…………………...………………………………………………… 5,000 34,500
Unadjusted capital…………………………………………………………………... P 70,000 P 78,500
Add (deduct): adjustments:
Increase in inventory……..…………………………………………………. 4,000
Allowance for doubtful accounts…………………………..……………….. ( 1,000) ( 1,500)
Accounts Payable…………………………………………………………… ( 4,000) ________
Adjusted capital balances…………………………………………………………… P 65,000 P 81,000

6. (c)

Unadjusted capital of CC……………………………………………………………………..……. P 33,000


Add (deduct): Adjustments:
Allowance for doubtful accounts (3% x P14,200)…………………………………………….. ( 426)
Increase in merchandise inventory (P23,000 – P20,000)……………………………………… 3,000
Prepaid Salary………………………………………………………………………………….. 600
Accrued rent expense…………………………………………………………………………... ( 800)
Adjusted capital balance of CC…………………………………………………………………… P 35,374
Divided by: Capital interest of CC………………………………………………………………………... 2/3
Total capital of the partnership……………………………………………………………………… P 53,061
Less: Adjusted capital balance of CC……………………………………………………………..…... 35,374
Capital balance of DD………………………………………………………………………...……... P 17,687

7. (b)

(1) Reduction in Capital:

Equipment at carrying value……………………………………………………………………. P 65,000


Equipment at second-hand value (fair value)…………………………………………………... 50,000
Decrease in equipment………………………………………………………………………….. 15,000
Multiplied by: Profit and loss ratio of MM, NN and OO………………………………………. 1/3
Reduction in capital…………………………………………………………………………….. P 5,000

(2) Notes payable to OO:

Unadjusted capital of OO……………………………………………………………………….. P 200,000


Les: Share in the decrease of equipment……………………………………………………………... 5,000
Adjusted capital of OO………………………………………………………………………….. P 195,000
Less: Equipment received at second-hand value……………………………………………………. 50,000

Value of notes payable……………………………………………………………………… P 145,000


Partnership 58
Incidentally, the journal entry would be:
OO, capital…………………………………………………… 200,000
NN, capital…………………………………………………… 5,000
MM, capital…………………………………………………... 5,000
Equipment, carrying value…………………………… 65,000
Notes Payable………………………………………… 145,000

8. (c)
Jones Smith
Asset at fair value
Jones: P80,000 + P400,000………………………………………. P480,000
Smith:P40,000 + P280,000………………………………………. P320,000
Less: Liabilities assumed…………………………………………….. 120,000 60,000_
Capital………………………………………………………………... P360,000 P260,000

9. (d)
LL MM
Unadjusted capital balance…………………………………………... P641,976 P728,352
Add (deduct): adjustments
Uncollectible receivables ..………………………………………. ( 20,000) ( 35,000)
Write-off of inventories …………………………………………. ( 5,500) ( 6,700)
Write-off of other assets ………………………………………… ( 2,000)_ ( 3,600)_
Adjusted capital balance……………………………………………... P614,476 P638,052 (d)

10. (c)
Unadjusted total assets (P1,020,916 + P1,317,200)…………………………………………. P2,337,918
Add (deduct): Adjustments:
Uncollectible receivables (P20,000 + P35,000) ..……………………………………….. ( 55,000)
Write-off of inventories (P5,500 + P6,700)……………………………………………... ( 12,200)
Write-off of other assets (P2,000 + P3,600)…………………………………………….. ( 5,600)__
Adjusted total assets after formation………………………………………………………… P2,265,118 (c)

11. (c)
Debit (credit) adjustments to capital accounts: PP QQ
Allowance for doubtful accounts:
PP: 2% x P18,500………………………………………………… P(370)
QQ: 2% x P13,500………………………………………. ………. P(270)
Furniture and fixture (P31,000 – P30,000)………………………………… 1,000
Office Equipment…………………………………………………………. (250)
Accrued rent expense……………………………………………………… (1,000)
Accrued salary expense…………………………………………………… (800)
Inventory adjustments:
PP (P29,500 – P30,000)………………………………………….. (500)
QQ (P21,000 – P19,500)………………………………………… 1,500
Net Adjustments……………………………………………………………… P870 P180 (c)
Partnership 59
12. (c)
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 (c)

13. (a)
Unadjusted total assets (P105,375 + P51,500)………………………………………………. P156,875
Add (deduct): adjustments:
Allowance for doubtful accounts (P370 + P270) ..……………………………………… ( 640)
Furniture and fixtures……………………………………………………………………. 1,000
Office Equipment……………………………………………………………………....... ( 250)
Inventory (P1,500 – P500)………………………………………………………………. 1,000__
Adjusted total assets after formation………………………………………………………… P 157,985 (a)

14. (c)
XX YY
ZZ
Cash………………………………………………………………….. P 75,000
Property……………………………………………………………… P120,000
Equipment……………………………………………………………
P82,500
Less: Mortgage assumed……………………………………………. 52,500_
_________
Capital balances…………………………………………………….. P 75,000 P 67,500
82,500 (c)
Refer to Nos. 2 and 3 for discussion.

15. (c)
JJ KK
Total
Salary………………………………………………………………….. P 60,000 P 30,000 P
90,000
Interest………………………………………………………………… 30,000 12,000
42,000
Balance or Residual profit……………………………………………. 60,000(1)
150,000(2)

P282,000 (c)
1
Given
2
P60,000 ÷ 40% profit and loss ratio = P150,000
Partnership 60
16. (b)
Sales…………………………………………………………………………………………. P 70,000
Less: Cost of goods sold…………………………………………………………………….. 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 (b)

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.

17. (b)
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 = .10 NI – P14,000
P29,000/.1 = NI
NI = P290,000 (b)

or, alternatively:

P40,000 = P25,000 + .10 (NI – Salaries – Bonus)


P40,000 = P25,000 + .10 [NI – (P100,000 + P25,000) – P15,000]
P40,000 = P25,000 + .10 [NI – P140,000]
P40,000 = P25,000 + .10 NI – P14,000
P40,000 = P11,000 + .10 NI
P29,000 = .10 NI
NI = P290,000 (b)
Partnership 61
18. (d)
To equate P52,000 to P40,000 plus bonus, the bonus should amount to P12,000 (P52,000 - P40,000) to be
indifferent under the two profit-sharing options. Since Cab would receive the same bonus, the total bonus would
have to be P24,000 (P12,000 x 2). Based on the foregoing, the following equation should be developed:
Bonus = 10% (Net income-Salaries - Bonus)
P24,000 = .10 [NI - (P30,000 + P40,000) - P24,000)
P24,000 = .10 (NI - P94,000) P24,000 = .10 NI-P9,400
P33,400 = .10 NI
P33,400 /.10.= NI
NI = P334,000 (d)
or, alternatively:
Bonus = P52,000-P40,000 = P12.000 x 2 = P24,000
P24,000 = .10 (NI -Salaries-- Bonus)
P24,000 = .10 (NI-P70,000 --P24,000) P24,000 = .10 NI-P9,400
P33,400 = .10 NI
NI = P334,000
19. (b)
XX YY ZZ Total
XX First P200,000 X 10%..................................................... P 20,000 P 20,000
Over P200,000: (500,000 - P200,000) 20%................... 60,000 60,000
YY and ZZ: 5% of remaining income
over P300,000: (P500,000 - P20,000 -
P60,000 - P300,000) < 5% P 6,000 P 6,000 12,000

Balance: Allocate equally………………………………….. 136,000 136,000 136,000 408,000


P 216,000 P142,000 P142,000 P500,000 (b)
Partnership 62

20. (c)
The weighted average capital is computed as follows:
January 1 - July 1 : P420,000 x 6 months ........ P2,520.000
July 1 - August 1 : P540,000 x 1 month .......... 540,000
August 1 - December 31: P495,000 x 5 months ......... 2,475,000
P5,535,000
Divided by:…............................................................... 12 months
Weighted average capital ............................................ P 461.250
Multiply by: Interest rate per year............................... 10%
Amount of interest per year.......................................... P 46,125 (c)
21. (a)
AA BB CC Total
Interest on Average Capital:
AA: P360,000 x 10% ......... P 36,000

BB:P180,000 x 10% .......... P 18,000

CC: P120,000 x 10% …… P 12,000 P 66,000

Salaries ........................................... 90,000 60,000 150,000


Balance or Residual: Equally……. (105,000) (105,000) (105,000) (315,000)

Increase (decrease)……………….. P 21,000 P (87,000) P (3,000) P(99,000) (a)

22. (a)
AA DD Total
Salary ............................................. P18,000 P18,000

Balance: Equally ... ……………… 1,500 P1,500 3,000

Income for year 2012 only ………. P19,500 P1,500 P21,000


Income for year 2011 (60:40) ........ 2,400 1,600 4,000
Reported income for year 2012…..
P21,900 P3,100 P25,000 (a)
23. (b)
DD EE Total
Interest on Average Capital:
DD: 20% P42,000". P8,400

EE: 20% x 30,000 .... P 6,000 P 14,400

Balance: equally.......... 52,800 52,800 105,600


P61,200 P58,800 P120,000 (b)

Average Capitals:

(1)
Partnership 63
DD:
1/1-4/1: P40,000 x 3……………………………………. P120,000
4/1 - 8/1: P35,000 x 4…………………………………. 140,000
8/1 - 10/1: P45,000 x 2................................. 90000
10/1 - 12/1: P50,000 x 2……………………………… 100000
12/1 - 12/31 : P54,000 x 1................................ 54000
P504,000
Divided by: ...... 12 months
Weighted average capital... P 42,000

EE:
(2)
1/1-6/1: P25,000 x 5....................................... P125,000
6/1 - 9/1: P35,000 x 3………………………………….. 105,000
9/1 - 10/1: P32,000 x 1 ................................... 32000
10/1 - 12/1: P31,000 x 2 ................................. 62000
12/1 - 12/31 : P36,000 x 1............................... 36000
P360,000

Divided by:.. 12 months


Weighted - average capital P 30, 000

24. (d)

DD BB TOTAL

Salary Allowances ........ P 8,000 P10,000* P18,000


Interest on Average Capital .... 2,800** 3,600** 6,400
Balance (equally) ..... ..... ( 200) ( 200) ( 400)
P10,600 P13,400 P24,000

Net income of P24,000 would be computed as follows:


Service Revenue ……………………………………………..…… P50000

Less: Expenses:
Supplies ………………………………………. P17,000
Utilities…………………………………………. 4,000
Other miscellaneous expenses ............................ 5,000 26,000
Net Income………………………………………………………………………… 24000

*DD: P800 x 10 = P8,000


*BB:P1.000 x 10 = P10,000

Refer to No. 16 for discussion on salaries.

***Interest on Average Capital:


DD: P30,000 x 2= P 60,000
Partnership 64
P26,000 x 5 = 130,000
P30,000 x 3 = 90,000
P280,000

10-month Average Capital: P280.000 / 10 = P28,000 x 12% x 10/12 = P2,800


Annual Average Capital: P280.000 / 12 = P23,333 x 12% = P2,800

BB: P30,000 x 4 =P120,000


P40,000 x 6 = 240.000
P 360, 000

10-month Average Capital : P360,000 / 10 = P36,000 x 12% x 10/12 = P3,600


Annual Average Capital: P36,000/12 = P30,000 x 12% = P3,600

25 (d)

AA BB Total

Salaries ........................ P30,000 P30,000 P60,000

Bonus…………………….. -- -- --

Interest on Average Capital ..... 2,167 800 2.967

Balance (equally) ...... (1,483) (11,484) (2,967)

P30,684 P29,316 P60.000 (d)

Refer to No. 16 for discussion on salaries.

*No bonus, since the basis of such computation would be zero.


**Interest on Average Capital:
AA: P30,000 x3 = P 90.000
P20,000 x 2 = 40,000
P40,000 x 4= 160,000
P35,000 x1 = 35,000
P325,000

10-Month Average Capital: P325,000/10= P32,500 x 8% x 10/12=P2,167


Annual Average Capital: P32,500/12 = P27,083 x 8% = P2.167

BB: P20,000 x 3 = P 60,000


P10,000 x 2 = 20,000
P 8,000 x 5 = 40,000
P120,000

10 Month Average Capital: P120,000/ 10 = P12.000 x 8% x 10/1


Annual Average Capital: P120,000/12= P10,000 x 8% = P800
Partnership 65

26. (b)

The annual weighted average capital would be:

March 1: P50, 000 x 3 ……………………………………………………….…….P150, 000


June 1:70,000 x 3…………………………………………………………….…….P210, 000
September 1: P65, 000 x 4…………………………………………………………P260, 000
P620, 000
Divided by: Months per annum……………………………………….…………..12 months
P51, 667 (b)
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 should be capital should be P62,000 (P62,000, 10 months)

27. (a)

The weighted average capital should be

WW:
January P100,000 x 6 (Jan.-Jun.)……………………………….P 600,000
July P 88,000 x 1 (Jul)…………………………………………...88,000
August P128,000 x 5 (Aug-Dec)…………………………………..,640,000
P1,328,000
Divided by: Months per annum …………………………………………12 months
P110,667 (a)

It should be noted that the number of months in the computation includes the current month (before the date of investment
or date of withdrawal) since the counting should start at the beginning of the month (let’s say June 3, therefore the month
of June should be included in the counting to compute the average capital for theP100,000)
Partnership 66

RR:
January P120,000 x 5 (Jan.- May)………………... P 600,000
June P105,000 x5(Jun-Oct)………………………..525,000
November P155,000 x2 (Nov.-Dec)……………………..310,000
P1,435,000
Divided by: Months per annum……………………...……..12, months
P119,583 (a)

Drawings are ignored as stated in the problem

28 (d)

HH MM AA Total
Capital January 1, 2011…………………………. P150,000 P200,000 P250,000 P650,000
Add: Investment……………………………….... 30,000 20,000 .- 50,000
Net income………………………………………. 53,180 62,060 60,760 176,000
Total P233,180 P282,060 P 310,760 P826,000
Less Withdrawals………………………………... 10,000 10,000 30,000 50,000
Capital: December 31, 2011……………………... P223,180 P272,060 P280,760 P776,000 (d)

HH MM AA Total
Salary…………………………………………… P24,000 P18,000 P12,000 P54,000
Interest on average capital*
HH: 12% x P162,500…………………… 19,500
MM: 12% x P205,883………………….. 24,700
AA: 12% x P245,000…………………... 29,400 73,600
Balance :2:4:4 9,680 19,360 19,360 48,400
P 53,180 P62,060 P60,760 P176,000

*Average capitals
HH:
1/1-7/1 :P150,000 x 6 ……………………………………………………………………P900,000
7/1-10/1:P180,000x3………………………………………………………………………540,000
10/1-12/31:P170,000x3……………………………………………………………………510,000
P 1,950,000
Divided by: Months per annum …………………………………………………………………………..12 months
Weighted average capital…………………………………………………………………………………..P162,500
Partnership 67
MM:

1/1 – 8/1 : P200,000 x 7 ……………………………………….. P 1,400,000


8/1 – 10/1 : P220,000 x 2 ……………………………………… 440,000
10/1 – 12/31 : P210,000 x 3 …………………………………… 630,000

P 2,470,000
Divided by: Months per annum ……………………………….. 12 months

Weighted-average capital ……………………………………… P 205,833

AA:

1/1 – 11/1 : P250,000 x 10…………………………………….. P 2,500,000


11/1 – 12/31 : P220,000 x 2 …………………………………... 440,000

P 2,940,000
Divided by: Months per annum ……………………………….. 12 months

Weighted-average capital ……………………………………… P 245,000

29. (a)
Withdrawals………………………………………..…………………… P (2,600,000)
Investment ………………………………………..……………………. 500,000
Share in net income (balancing figure) ………………………………… 900,000

Net (decrease) increase …………………………..…………………….. P (1,200,000)

Net income of the partnership: P900,000 . 30% ..……………………… P 3,000,000 (a)

30. (c)
Bonus = .15 (NI before salaries, interest and bonus)
B = .15 (NI after salaries, interest and bonus + salaries + interest + bonus)
B = .15 [P32,000 + (P5,000x12) + [5% x P200,000] + B]
B = .15 [P32,000 + P60,000 + P10,000 + B]
B = .15 [P102,000 + B]
B = P15,300 + .15B
B = .15B = P15,300
.85B = P15,300
B = P15,300/.85
B = P18,000(c)
Partnership 68

31. (d)

A B C D Total
5% interest on capital* P 2,500 P1,250 P1,250 P1,000 P 6,000
Salaries - -
5,000 3,000 8,000
……………...……..…….....
Balance (3:3:2:2)
5,000 5,000 3,333 3,333 16,666
………………...…
Additional profit -
1,667 1,667
……………………
P 12,500 P9,250 P4,583 P6,000 P32,333 (d)

* A : P50,000 X 5% = P 2,500
B : P25,000 X 5% = 1,250
C : P25,000 X 5% = 1,250
D : P20,000 X 5% = 1,000

First, determine who among the partners will receive a fixed amount, then, compute for the residual amount, i.e. for AA
P12,500 – P2,500 – P5,000 resulting to a share in the residual profits of P5,000 share in residual profits of AA represents
30%, therefore capitalize P5,000 by 30% to arrive at P16,666 which will be allocated to all partners based on their profit
and loss ratio.

Second, determine who among the partners will receive a minimum amount. Any partner who receives an amount lower
than the minimum amount is required to have an additional profit, i.e. for partner DD, which in DD’s case P1,667 is needed
to satisfy the minimum amount provided therein. Any partner who receive an amount equal, or more than the minimum
amount obviously does not need an additional profit.

32. (a)

AA BB CC Total
10% interest on average capital* P 47,250 P23,865 P16,235 P 87,350
Salaries ……………...……..……..... 122,325 - 82,625 204,950
Balance : equally………………...…. (139,308) (139,308) (139,308) (417,924)
Increase (decrease) ………………… P 30,267 P(115,443) P(40,448) P(125,624) (a)

* AA : 10% X P472,500 = P 47,250


BB : 10% X P238,650 = P 23,865
CC : 10% X P162,350 = P 16,235

33. (d)

AA BB CC Total
10% interest on average capital* P 47,250 P23,865 P16,235 P 87,350
Salaries ……………...……..……..... 122,325 - 82,625 204,950
Balance : equally………………...…. (41,875)* (41,875)* (41,875)* (125,624)
P 85,200 P(18,010) P56,985 P166,676 (d)

*Not rounded due to discrepancy of P1.


Partnership 69

34. (c)

XX YY ZZ Total
Capital, January 1, 20…...................................... P120,000 P120,000 P120,000 P360,000

Add: Net Income

Salaries…………………………....…. P 30,000 P 30,000 P 45,000 P105,000

Bonus*………………..……………… 1,500 1,500 – 3,000

Balance: 30%: 30%: 40%...................... 3,600 3,600 4,800 12,000

Share in Net Income………………… P 35,100 P 35,100 P 49,800 P120,000

Less: drawings – personal…………… 30,000 30,000 45,000 105,000

P 5,100 P 5,100 P 4,800 P 15,000

Capital, December 31, 2011…………………... P125,100 P125,100 P124,800 P375,000 (c)

*Bonus = 25% (NI – Salaries – Bonus)

B = .25 (P 120,000 – P105,000 – B)

B = P3,750 – .25 B

1.25 B = P3,750

B = P3,000; P1,500 for XX and YY.

35. (b)

CC PP AA Total

Salary…………………………………………. P 28,000 P 28,000

Balance (P84,000 – P28,000), 5:3:2…………. P28,000 P16,800 11,200 56,000

Additional profit to PP (P21,000 – P16,800) (3,000) 4,200 (1,200) –

P25,000 P21,000 P38,000 P84,000* (b)

Net Income would be:

Fees………………………………… P180,000

Less: Expenses……………………... P 96,000

P 84,000

It should be noted that the additional profit given to PP actually came from CC and AA based on their respective revised
P&L ratio (5:2). The P4,200, additional profit should not be added to total net income because by doing so, it would be
tantamount to distorting the net income of P84,000.
Partnership 70
On the other hand,assumingtheP24,000 would be added to net income of P84,000, the total net income will now be
P88,200, but an adjustments of P4,200should be reflected to make it P84,000, and such adjustments will Be shared
accordingly by CC and AA (5:2). Mathematically, the final results remain the same.

36. (a)

Hunt Rob Turman Kelly Total

Salaries…………………………………. P20,000 P10,000 – – P30,000

Bonus*…………………………………. 3,000 2,000 – – 5,000

10% Interest an Average Cap………….. 5,000 4,500 P 2,000 P 4,700 16,200

Balance (equally)……………………… 13,450 13,450 13,450 13,450 53,800

P41,450 P29,950 P15,450 P18,150 P105,000 (a)

*Bonus = (3% + 2%) (Net Income – Bonus)

B = 5% (P105,000 – B)

B = P5,250 – .05 B

1.05 B = P5,250

B = P5,250 / 1.05

B = P5,000, therefore Hunt should receiveP3,000 (P5,000 x 3/5), while Rob will receive P2,000 (P5,000 x2/5).

37. (d)

Correcting the allocated net income:

RR PP Total

Correct allocation of net income, equally………….. P3,000 P3,000 P6,000

Allocation of net income per books, equally………. 9,750 9,750 19,500

Adjustments increased (decreased)……………….. P(6,750) P(6,750) P13,500 (d)

It should be noted that the P19,500 was erroneously recorded in the partnership book; what we are simply looking forareadjustments
necessary to reflect the correct allocation ofnetincome.

*The adjusted/corrected net income for 2011 would be:

Unadjusted Net Income (per books)………………… P19,500

Add (deduct): adjustments:

Understatement of depreciation…………… (2,100)

Overstatement of ending inventory………... (11,400)


Partnership 71
Adjusted net income………………………………... P 6,000

38. (c)

2011 2012

Unadjusted net income……………………………………. P14,400 P13,600

Add (deduct): adjustments:

Prepaid expenses – 2011………………………… 1,600 ( 1,600)

Accrued expenses – 2011……………………….. ( 1,200) 1,200

Deferred income – 2012………………………… ( 1,400)

Accrued income – 2012…………………………. 1,000

Adjusted Net Income……………………………………… P14,800 P12,800

Total adjusted Net Income (P14,800 + P12,800) P27,600

Divided by……………………………………………….. 2

Average net income……………………………………… P13,800

Divided by (capitalized at)………………………………. 20%

Aggregate capital………………………………………... P69,000 (c)

39. (b)

(1) Profit and loss ratio:

Old New

MM 50% x 90% = 45%

NN 30% x 90% = 27%

OO 20% x 90% = 18%

PP – 10% 10%

100% 100% 100% (b)

(2) Reported Net Income…………………………………………………….P 12,500

Add (deduct): adjustments:

a. Prepaid expenses – 2011………………………………….. ( 800)


b. Accrued expenses – 2012…………………………………. ( 600)
c. Unearned income – 2011………………………………….. 700
d. Accrued income – 2012………………………………….... 500
Adjusted Net Income……………………………………………………. P 12,300
Partnership 72
Multiply by: P & L ratio of OO…………………………………………. 18%

Share of OO in Net Income……………………………………………... P 2,214 (b)

a. Omission of prepaid expense at the end of 2011 indicates the expense was recognized when paid in 2011 and not
when used in 2012. Thereby understating the expenses and overstating income in 2012.
b. Omission the accrued expense at the end of 2012 understate expenses and overstate income.
c. Omission of unearned income at the end of 2011 indicates income was recognized when received in 2011 and not
when earned in 2012, thereby understating the 2012 income.
d. Omission of accrued income at the end of 2012 understate income.

40. (c)
___A___ ___B___ ___C___ _Total_
Bonus*……………………………………… P4,000 P4,000
Interest” 10% (P110,000 – P100,000) P1,000 - 1,000
Salaries……………………………………… P10,000 - P12,000 22,000
Balance: 4:4:2……………………………….. 3,400 17,000
P19,400 P44,000 (c)

*Bonus = 10% (NI – Bonus)


B = .10 (P44,000 – B)
B = P4,400 - .10B
1.10B = P4,400
B = P4,000

41. (d)
__Total__
Capital, January 1, 2011 ……………………………………………………………… P475,000
Add: Investment ……………………………………………………………………… 60,000
Net Income* ……………………………………………………………………. 207,750
Total ………………………………………………………………………………….. P742,750
Less: Withdrawals ……………………………………………………………………. 70,000
Capital, December 31, 2011………………………………………………………….. P672,750 (d)
Partnership 73

*Net Income

___X___ __Y__ ___Z___ __Total__


Salaries…………………………………… P60,000 P48,000 P36,000 P144,000
Interest on Average Capital:
X : 10% x P130,000…………………….... P13,000
Y : 10% x P150,000…………………….... 15,000
Z : 10% x P207,500 20,750 48,750
Balance: …………………………………… 5,000 5,000 5,000 15,000
P207,750

Average Capital:
X : P100,000 x 6 = P 600,000
P160,000 x 6 = 960,000
P1560,000 ÷ 12 = P130,000

Z : P225,000 x 9 = P 2,025,000
P155,000 x 3 = 465,000
P2,490,000 ÷ 12 = P207,500

42. (a)
First 6 months X Y Z Total
Equally ………………………............ 100,000 100,000 200,000

Second 6 months
Bad Debts Expense (equally) ( 20,000 ) ( 20,000 ) ( 40,000 )
Balance (40%: 40%: 20%) ………….. 136,000 136,000 68,000 340,000
300,000
Share in Profit ………………………….. 216,000 500,000

43. (a)
First 6 months S T U Total
Salaries ………………………......... 15,000 100,000 15,000
Balances (60%:40%) ……………… 96,000 64,000 160,000
175,000

Second 6 months
Salaries ………………………......... 25,000 25,000
Balances (60%:40%) ……………… 60,000 60,000 30,000 150,000
___ _____ 175,000
Evenly means average 196, 000 124,000 30,000 350,000
Partnership 74

44. (b)
__AA__ __BB__ __Total__
Capital, March 1,2011………………. P 125,000 P75,000 P 200,000
Add: Net Income* …………………... 34,540 4,860 39,400

Total …………….…………………… P 159,540 P79,860 P 239,400


Less: Drawings …………………….... 20,000 30,000 50,000

Capital, December 31, 2011 ……….. P 139,540 P 49,860 P 189, 400 (b)

*Allocation of Net Income __AA__ __BB__ __Total__


Salary (10 months) …………….. P 25,000 - P 25,000
Bonus* 1,440 - 1,440
Balance: 125:75 8,100 4,860 12,960

P 34,540 P 4,860 P 39,400

Sales …………………………………………….. P 233,000


Less: Sales Returns ……………………………... 5,000
Net Sales ………………………………………... P 228,000
Less: Cost of goods sold:
Inventory, March 1 ………………………... P -0-
Add: Purchases ……………………………. 196,000

Cost of goods available for sale …………… P 196,000


Less: Inventory, December 31 …………….. 73,000 123,000

Gross Profit …………………………………….. P 105,000


Less: Operating Expenses [60,000 – 2,500 – 950
+ 1550 (20% x 45,000 x 10/12 …………….. 65,600

Net Income ………………………………………. P 39,400

*Bonus = 10% [NI – Salaries]


B = .10 [39, 400 – (P30,000 x 10/12)]
B = .10 (P14,400)
B = 1,440

45. (d)
The bonus method implied that the old partner either received a bonus from the new partner, or they paid a bonus to
the new partner. In this case, CC, the new partner invested an amount in excess of the amount credited to CC’s capital
account. Accordingly, the excess should be treated as bonus to AA and BB. This bonus should be treated as an adjustment
to the old partners’ capital accounts and should be allocated by using AA and BB’s old profit and loss ratio.
Partnership 75

46. (b)

Whether there is a profit or a loss, FF will have a greater advantage. When there is a profit, FF will obtain a 20%
bonus, and also take 40% of the profit after the bonus. II on the other hand, will receive only 60% of the profit after
the bonus. The following example illustration this:

FF II Profit
P & L ratio ……………………… 40% 60%
20% Bonus ……………………... 200 0 200
Share in Profit …………….......... 320 480 800
Total distribution ……… 520 480 1,000

In case of a loss, it can easily be seen, since FF has a smaller percentage share in the loss.

47. (d)

A partnership is not dissolved when a partner assigns his or her interest in the partnership to a third party because
such agreement does not in itself change the relations among partners. Such assignment only entities the assignee
to receive the assigning interest partner’s interest in future partnership profits and in partnership assets in the event
of liquidation. The assignee does not become a partner, however, and does not obtain the right to share in
management of the partnership. If the assignee does not become a partner, the only change required on the
partnership books is for transfer of the capital interest of the assignor partner to the assignee. The assignment by
Betty to Yessir of his 50% interest in the BIG Entertainment Company is recorded as follows:

Betty, capital (P140,000 x 50%) ………………………… 70,000


Yessir, capital ………………............................... 70,000

The amount of the capital have based is equal to the recorded amount of Betty’s capital at the time of the
assignment, and it is independent of the consideration received by Betty for her 50& interest. If the recorded amount
of Betty’s is P70,000, then amount of the transfer entry is P70,000, regardless of whether Yessir pays Betty P70,000
or some other amount. Therefore, the capital of the partnership after the assignment of interest remains the same at
P400,000.
Partnership 76

48. (b)
No goodwill is to be recognized in cases of admission of new partner (refer to No. 53 for further discussion)
therefore, book value method is used.
The capital balances after admission are as follows:

KK: P252,000 x 80% = P201,600


LL: P126,000 x 80% = 100,800
MM: P42,000 x 80% = 33,600 (b)
49. (b)
Amount paid ……………………………………………………….. P 25,000
Less: Book value of interest acquired:
P150,000 x 1/8 ……………………………………………. 18,750 (b)
Gain of West and Tern ……………………………………………. P 6,250

50. (b)
Amount paid ……………………………………………………….. P 132,000
Less: Book value of interest acquired:
(P136,200 + P208,000 + P96,000) x 1/5 …………………. 88,800
Gain ………………….……………………………………………. P 43,200 (b)

51. (d)
PP CC Total
Capital balances before net income ……… P 24,000 P48,000 P72,000
Net income (24:48) or (1/3:2/3) …………. 5,430 10,860 16,290
Drawings ……………................................ ( 5,050) ( 8,000) ( 13,050)
Capital balances before admission ……… P24,380 P50,860 P75,240

Amount paid ……………………………………………………….. P 30,000


Partnership 77
Less: Book value of interest acquired (P75,240 x ¼) …………….. 18,810
Gain of PP and C.…….……………………………………………. P 11,190
Therefore, the P30,000 cash should be allocated as follows:
PP CC Total
Capital balances before admission …………. P24,380 P50,860 P75,240
Required capital balances
[P & L Ratio – 1/3; 2/3 of
P56;430 (P75,240 – P18,810)] …..... 18,810 37,620 56,430
Transfer of capital to needed to
bring back to original capital ratio ………... P 5,570 P 13,240 P 18,810
Add: Personal gain (refer above), 1/3, 2/3 … 3,730 7,460 11,190
Personal cash distribution ………….……… P9,300 P20,700 P30,000 (d)

52. (c)
Total agreed capitalof the new partnership (equal to total
Contributed capital*) …………………………… P 260,000
Multiplied by: interest acquired …………………………. 20%
Capital account to be credited to Ole .…….…………….. P 52,000
*Total contributed capital (P120,000 + 40,000 cash investment + 30,000 adjustment to fair value) =- P260,000.
For illustration purposes, goodwill method for admission and retirement of partner (s) is presented in the appendix
of this chapter.

53. (c)
Total agreed capital of the new partnership
(P148,000 + 260,000 + P192,000) +80% ……………………………… P 750,000
Less: Contributions of old partners (AA, BB and CC) ………………………… 600,000
Cash Investment of DD .…….………………………………………………….. P 150,000 (c)
Or, alternatively:
Total agreed capital of the new partnership …………………………… P750,000
Multiply by: capital interest of DD …………………………………… 20%
P150,000 (c)
Partnership 78
Since no goodwill or bonus is to be recorded, DD must invest an amount equal to 20% of the total agreed capital
of the new partnership after DD’s contribution. The old partners’ capital account of P600,000 represents 80% of
the total agreed capital of the new partnership
54. (c)
total agreed capital of the new partnership
(P310,000+P200,000+ P190,000) 80%.................................................................. P875,000
less: Contribution of old partners (LL, PP, and QQ) . …………………………………….._700.000_

Cash investment of FF …………………………………………………………………… P175.000 (c)


or, alternatively:

Total agreed capital of the new partnership ………………………………………. P875,000


Multiplied by: capital interest of FF……………………………………………… 20%
P175.000 (c)

Refer to No. 54 for further discussion. Take note that the loans to or from partners are ignored in the admission of a new
partner because the focus will be more on capital interest rather than total interest.

55 .(b)
Total agreed capital of the new partnership. ……………………………………………....P 90,000
Less: Total contributed capital (P35,000+ P30,000+ P25,000)…………………………… 90,000
P 0

Following the admission of EE, the partnership began with a total capital of PP0,000, and EE received a one-third interest:
therefore his capital balance must be credited for P30,000 (P90.000 x 1/3). But EE contributes only P25.000 so the P5.000
difference represents bonus (P30.000P25,000) must be debited and allocated to the old partners in the ratio of 7:3:

CC [P35,000-(70% x P5,000)] ………………………………………………………..….. P 31,500


DD [P30,000-(30%x P5,000)] ....................................................................................... 28,500
EE (P90,000x 1/3) …………………………………………………………………………... 30,000
Total agreed capital. ………………………………………………………………….. P90,000 (b)

56.(d)
Since bonus method is recognized, the total agreed capital of them partnership should be equa to the total contributed
capital. Therefore, the bonus would be computed as:

Total agreed capital (P120,000+ P30,000). …………………………………………….. P 150,000


Multiplied by: NN's capital interest……………………………………………………… 1/3

Agreed capital to be credited to NN. …………………………………………………… P 50,000


Contributed/Invested capital of NN .. …………………………………………………… 30.000
Bonus to NN (new partner) ………………………………………………………………. P 20,000

The bonus to NN will be deducted fo LL and MM:


LL: [P80,000-(P20000 x 3/5)]…………………………………………………………… P 68,000
Partnership 79
MM: [P40,000-(P20,000 x 2/5)]………………………………………………………… 32.000
NN……………………………………………………………………………………… 50.000
Total agreed capital……………………………………………………………………........ P150.000(d)

57. (d)
Since bonus method is recognized, the total agreed capital of thepartnership should equal to the total contributed capital.

Total agreed capital (P60,000 +P20,000 + P15.000)…………………………………….. P 95,000


Multiplied by: GG's capital interest.. …………………………………………………… 20%
Agreed capital to be credited to GG............................................................................. P 19.000 (d)

The investment made by GG is in the form of non-cash assets; therefore, they should be recorded based on agreed value
(or fair value).

58. (d)
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.

59. (d)
Total agreed capital after the admission of David:
(P40,000x5)……………………………………………………………………………. P 200,000
Less: Contribution/Investment of David……………………………………………………. 40,000
Capital balances of AD before the admission of David. ………………………………… P 160,0000
Capital contribution (P140,000 + P40,000…………………………………………………. 180.000
Reduction of inventory ……………………………………………………………………….. P 20,000

60. (a)
Amount paid: (P34,000+ P10,000). ………………………………………………………. P 44,000
Less: Book value of interest acquired:
(P140,000+P40,000) x 1/5................................................................................... 36.000
Excess ………………………………………………………………………………………… 8,000
Divided by / capitalized at …………………………………………………………………... 1/5
Amount of land to be increased…………………………………………………………….. P 40,000

61. (b)

Total agreed capital (given........................................................................................ P 220.000


Multiplied by: David's capital interest……………………………………………………… 1/5
Agreed capital to be credited to David…………………………………………………… P 44,000
Contributed/invested capital of David.. …………………………………………………. 40,000
Partnership 80
Bonus to David (new partner) ..…………………………………………………………. P 4,000

incidentally, the entry to admit David should be:


Cash... …………………………………………40,000
Allen, capital (4,000 x )... …………………… 3,000
Daniel, capital (4,000 x )……………………. 1.000
David, capital............................................... 44,000

62. (c)
Amount paid... ……………………………………………………………………………… P61,200
Less: Book value of interest of CC (20%)* . ……………………………………………….. 58,200
Bonus to retiring partner . ……………………………………………………………………P 3,000

*Total interest of CC:


Loans. …………………………………………………………………………………………..P 9.000
Capital…………………………………………………………. P42,000
Add: Share in adjustment of asset
(P216,000-P180,000) x 20%.......................................................... 7.200 49 200
Total Interests………………………………………………………………. P58,200.

Therefore, the capital balance of MM would be:


MM: [P39,000 (P216,000- P180,000]) x 20%
(P3,000 x 2/8**)]…………………………………………………………………….. P45,450 (c)

*New profit and loss ratio:


MM:2/8
PP :6/8
63.(a)
BB: P100,000+(P600,000- P500,000) x 20% = P120,000 (P14,000 x 2/7) = P116.000
CC: P200,000+ (P600,000- P500,000) x 30% = P230,000
DD: P200,000+ (P600,000- P500,000) x 50% = P250.000 -(P14,000 x 5/7) = P240,000

Amount paid ……………………………………………………………………………… P244,000


Less: BV of interest of CC ………………………………………………………………….. 230.000
Bonus to retiring partner............................................................................................ P 14.000
Partnership 81

64. (a)
Total capital before retirement…………………………………………………………........... P250,000
Less: Retirement of Park……………………………………………………………………… 70,000
Add: Bonus to remaining partners due to retirement of Park…………………………………. 20,000

Capital balance before the admission of Reed………………………………………………... P200,000


Add: Cash investment of Reed………………………………………………………………... 20,000
Total agreed capital of the partnership (equal to the contributed capital)…………………….. 220,000
Multiplied by: Interest-acquired………………………………………………………………. 10%

Capital account to be credited to Reed………………………………………………………... P 22,000 (a)

65. (c)

Goodwill of A, B, C, and D partnership……………………………………............................. P30,000


Goodwill of X and Y partnership……………………………………………………………... 10,000
Total goodwill………………………………………………………………………………… 40,000 (c)

66. (a)

A X
Unadjusted Capital Balances P50,000 60,000
Undervalued Tangible Assets:
A: P20,000 x 40% 8,000 70,000
X: P8,000 x 50% 70,000 4,000
Goodwill:
A: P30,000 x 40% 12,000
X: P10,000 x 50% 5,000
Adjusted Capital Balances P 70,000 P 69,000 (a)

67. (a) – Zero, since bonus method was used to account for the undervalued tangible assets and goodwill.
Partnership 82

68. (d)
A: P50,000 + (P2,400* x 40%) ………………………………………………… P50,960
X: P60,000 - (P2,400* x 50%) …………………………………………………... P58,800 (d)

*The P2,400 bonus to A, B, C, and D were calculated as follows:

Bonuses to A, B, C, and D: This is the portion of A, B, C, and D’s undervaluation


that X and Y might share in if realized or allocated as bonus.
Undervalued tangible assets of P20,000 x 30% (X and Y’s new profit and loss
sharing percentage) …………………………………………………….. P 6,000
Goodwill of P30,000 x 30% (X and Y’s new profit and loss sharing percentage) 9,000

Total Bonus to A, B, C, and D ………………………………………………… P 15,000

Bonuses to X and Y: This is the portion of X and Y’s undervaluation that A, B, C, and D’s
might share in if realized or allocated as bonus.
Undervalued tangible assets of P8,000 x 70% (A, B, C, and D’s new profit and loss
sharing percentage) …………………………………………………….. P 5,600
Goodwill of P10,000 x 70% (A, B, C, and D’s new profit and loss sharing
percentage) ……………………………………………………………... 7,000

Total Bonus to A, B, C, and D ………………………………………………… P 12,600

Bonus to A, B, C, and D ………………………………………………. P 2,400

of Net Bonus to A, B, C, and D to Achieve Equity

(1) Assume full realization of items not recognized on the books:


A, B, C, and D:
Undervalued assets …………………………………………… P20,000
Goodwill ………………………………………………………. 30,000

Total ………………………………………………….. P50,000


X and Y:
Undervalued assets …………………………………………… P 8,000
Goodwill ………………………………………………………. 10,000

Total ………………………………………………….. P18,000

Total …………………………………………………………………… P68,000

(2) Allocation of P68,000 assumed to be realized


A, B, C, and D X and Y
(70%) (30%)
70% of P68,000 ……………………………………. P 47,600
30% of P68,000 ……………………………………. P 20,400
Amounts not recognized on the books 50,000 18,000
P 2,400 (P 2,400)
Partnership 83

69. (b)
Total Roy Gil
Capital before adjustment ……………………………………… P309,000 P94,000 P214,200
Less: Net adjustment* …………………………………………. 35,400 11,800 23,600
Capital, after adjustment ………………………………………. P273,000 P83,000 P190,600
Less: Portion covered by ordinary share,
par P10 (720 share to each partner) …………………….. 14,400 7,200 7,200
Portion to be covered by preference share, par 100 …………… P259,200 P75,800 P183,400

Shares to be issued:
Preference share ……………………………………… 2,592 758 1,834
Ordinary share ……………………………………… 1,440 720 720

*FV , P40,000 + P68,000 + P180,600 – BV, P60,000 + P90,000 + P174,000

70. (b)

Unadjusted capital balances (P140,000 + P120,000) ……………………….. P260,000


Add (deduct): adjustments:
Allowance for doubtful accounts ………………………………….. ( 10,000)
Revaluation of inventory (P160,000 – P140,000)………………….. 20,000
Additional depreciation ……………………………………………. ( 3,000)
Adjusted capital balances equivalent to
the total shares issued ……………………………………………… P267,000 (b)

71. (d)
Carrying value of net assets (P100,000 – P20,000) ………………………… P80,000
Add: Adjustments to reflect fair value ……………………………………… 12,000
Fair value of net assets ……………………………………………………… P92,000
Less: Common Stock, P1 par (5,000 shares x 2 x P1) ……………………… 10,000
Additional paid-in capital / share premium ………………………………… P82,000 (d)

72. (a)

Capital balances before liquidation ………………………. P48,000 P216,000 P36,000


Loss on Realization (P320,000 – P200,000):
4:3:3 ……………………………………………… (48,000) (36,000) (36,000)
Cash Received ……………………………………………. P 0 P180,000 P 0 (a)
Partnership 84
73. (d)
W X Y
Balances before liquidation.................. P 60,000 P 40,000 P 40,000
Les on realization (P80,000-P40,000):
4:3:3:............................................. ( 16,000) ( 12,000) ( 12,000)
Balances ............................................. P 44,000 P 28,000 P 28,000
Loss on possible unrealization of noncash
assets (P130.000-P80,000): 4:3:3 . ( 20,000) ( 15,000) ( 115,000)
Cash received ........ P 24,000 P 13,000 P 13,000

74. (c)

Drawing........................................................................ P( 5,400) P( 200)


Loan ............................................................................ - 14,000
Capital ......................................................................... 31,000 33,200
Total Interest ............................................................... P 25,600 P 47,000
Loss on realization: 40%: 60%
Receivables - collection .... P 600
Less: book value................. 22,400. P21,800*
Proceeds-inventory .......... P32,400
Less: book value .............. 39,400 7,000
Unrealized non-cash assets 34,400*
P63,200 (25,280) (37,920)
P 320 P 9,080
(c)
*Unrealized non-cash assets.

75. (d)
The non-cash assets are realized at book value therefore; There is no gain
or loss, in which case partners are entitled to received an amount
equivalent to their capital interest.

76. (c)
Total Capital (P50,000 + P60,000 + P20,000 + P44,000)...... P174,000
Total Liabilities ....................................................................... 90,000
Total Assets ........................................................................... P264,000
Less: Cash ............................................................................. 40,000
Non-cash assets ..................................................................... P224,000
Less: Loss on realization: (P55,200 -P67,600*) + 40% ........ 31,000
Partnership 85
Proceeds from sale .............................................................. P193,000 (c)
*50.000 + (P44,000 x 40%)]
77. (b)
Silverio Domingo Reyes Pastor Total
Balances before liquidation.. P 1,000. P25,000 P25,000 P9,000 P60,000
Loss or realization:
(P22,200 - P60,000)
3/21: 4/21: 6/21: 8/21....... ( 5.400) ( 7.200) ( 10,800) (14,400) ( 37,800)
Balances.................................. P(4,400) P17.800 P14,200 P(5,400) P22,200
Loss for possible insolvency
of Silverio and Pastor: 4:6.
(P4,400 + P5,400)..... 4.400 ( 3,920) (5,880) 5,400 -
Cash received......................... P13,880 P 8,320 P22,200
Therefore, the capital balance of Domingo after cash settlement is:
Capital balance after loss on realization but before
payment to partners ........................................... P17,800
Less: cash received ......................................................... 13,880
P 3,920 (b)
78. (a)
T O N Total
Balances before liquidation ......... P40,000 P25,000 P 5,000 P70.000
Loss on realization:
(P28,000 - P70,000) 3:2:1 ..... ( 21.000) ( 14.000) ( 7.000) (42,000)
Balances .................................. P19.000 P11,000 P(2.000) P28,000
Loss on possible insolvency of N:
3:2 .................................. ( 1,200) ( 800) . 2,000 0
Cash received............................... P17,800 P!0.200 P28,000 (a)

79. (b)
Ding Laurel Ezzard Tillman
Total
Balances before liquidation ....... P60,000 P67,000 P17,000 P96,000 P240.000
Loss on realization - 4:2:2:2
(P228,000 - P360,000) ..... . (52,800) ( 26,400) ( 26,400) ( 13,200) (132,000)
Balances ................................... P 7.200 P40,600 P(9.400) P 69,600 P108.000
Loss on possible insolvency
(4:2:2) .................................. ( 4.700) ( 2,350) 9,400 ( 2,350) P67.250
Balances..................................... P 2,500 P38,250 -0- P67,250 P108,000
Partnership 86
*Loss on liquidation amounted:
Liabilities P84,000
Capital (P64,000 + P64,000 + P34,000) 432,000

Total Assets P516,000

The P516,000 assets are exhausted with no proceeds arising from it, therefore the P516,000 represents loss on realization

**The P162,000 capital deficiency of Baker will ultimately be considered as additional investment since he has
substantial resources to cover it. The P162,000 investment will be applied first to unpaid liabilities of P84,000, then the
balance will be given to Carter, P78,000(a).

85. ( c )

Total Interest of Millo:


Capital P39,000
Drawing 4,800 P43,800
Less: Cash received in final settlement 33,000
Share in loss on realization P10,800
Divided by: Profit and loss ratio of Millo 20%
Loss on Realization P54,000 ( c )

86.(a)
Mikki Mylene Total
Balances before liquidation P71,000 P54,000 P125,000
Loss on possible unrealization of non-cash
assets (equally) (55,000) (55,000) (110,000)
Balances P16,000 P(1,000) P15,000
Liquidation expenses(equally) (5,000) (5,000) (10,000)
Balances P11,000 P(6,000) P5,000
Loss for possible insolvency of
Mylene (6,000) 6,000
Cash received P5,000 P5,000 (a)
Partnership 87
Or alternatively
AA BB CC
Total Interest P72,000 P(12,000) P78,000
Offset deficit (5:2) (8,751) 12,000 (3,249)
Balances P63,429 P74,571
Loss on Realization (P216,000- (17,143) (6,857)
P240,000)
Balances P46,286 P67,714
Payment of liquidation expenses (12,000) (4,800)
Balances P34,286 P62,914
Loss on possible unrealization of non-
cash assets
(P297,600-P240,000) (41,143) (16,457)
Balances P(6,857) P46,457
Loss for insolvency of AA 6,857 (6,857)
P39,600 (b)

83. ( c )
Accounts
Cash Payable AA JJ
Balances before liquidation P34,000 P25,000 P1,000* P8,000
Payment of accounts
payable (25,000) (25,000)
Balances P9,000 P1,000 P8,000
Payment to Partners (9,000) (1,000) (8,000)

*Net Capital Deficit

84. (a)
Arthur Baker Carter Total
Balances before net income
Capital P100,000 P80,000 P300,000 P480,000
Drawings 60,000 40,000 20,000 120,000
Totals P40,000 P40,000 P280,000 P360,000
Add: Net income (equally) 24,000 24,000 24,000 72,000
Total Interests P64,000 P64,000 P304,000 P432,000
Loss on liquidation* (172,000) (172,00) (172,000) (516,000)
Balances P(108,000) P(108,000) P132,000 P(84,000)
Loss for insolvency of
Arthur (equally) 108,000 (54,000) (54,000) -
P(162,000)*** P78,000 P(84,000)
Partnership 88
80. (d)
Keaton Lewis Meador Total
Balances before liquidation P60,000 P40,000 P80,000 P180,000
Liquidation expenses (2:4:4) (2,000) (4,000) (4,000) (10,000)
Loss on Realization- 2:4:4
P180,000-P300,000 (24,000) (48,000) (48,000) (120,000)
Balances P34,000 P12,000 P28,000 P50,000
Additional Investment 12,000 12,000
Payment to partners P34,000 -0- P28,000 P62,000

81. ( c )
Quincy capital before liquidation P50,000
Less: Share in liquidation expenses (P8,000x 40%) 3,200
Quincy capital before realization of non-cash assets P46,800
Less: Cash received by Quincy (minimum) 0
Share in the loss on realization P46,800
Divided by: Profit and loss ratio 40%
Loss on realization P117,000
Less: Non-cash assets 300,000
Proceeds from sale P183,000

82. (b)
AA BB CC
Capital (deficit) balance P72,000 P(12,000) P39,600
Notes Payable 38,400
Total Interest P72,000 P(12,000) P78,000
Loss on realization: (P216,000-P240,000)
50%:30%:20% (12,000) (7,200) (4,800)
Balances P60,000 P(19,200) P73,200
Payment of liquidation expenses (8,400) (5,040) (3,360)
Balances P51,600 P(24,240) P69,840
Loss on possible unrealization of non-
cash assets (P297,600-P240,000) (28,800) (17,280) (11,520)
Balances P22,800 P(41,520) P58,320
Loss for possible insolvency of BB (5:2) (29,657) 41,250 (11,863)
Balances P(6,857) P46,457
Loss for possible insolvency of A 6,857 (6,857)
Cash received 39,600 (b)
Partnership 89

87. (C)
KK LL MM TOTAL
Balances before liquidation ……… P88,000 P62.000 P56,000 P206,000
Loss on realization (P128.000 - P238,000):2:1:1... (55,000) (27,500) (27,500) (110,000)
Balances………………………………………… P33.000 P34.500 P28.500 P 96.000
Payment of liquidation expenses…………….… (2, 000) (1,000) (1,000) (4,000)
Balances……………………………………… . P31,000 P33,500 P27,500 P 92,000
Anticipated liquidation expenses………………… (1,600) ( 800) ( 800) ( 3,200)
Cash received………………………………… P29, 400 P32,700 P26,700 P 88,800 (c)

88. (B)
NN OO PP GG TOTAL
Balances before liquidation: Advances… P(18,000) P(10,000) P(I28,000)
Loans………………………………… P 20,000 P 40,000 - - 60,000
Capital……………………………….. 160, 000 120, 000 60, 000 100, 000 440, 000
Total interests………………………… P180, 000 P160,000 P 42, 000 P 90, 000 P472,000
Loss on liquidation (5:3:1:1)…… ( 200,000) (120,000) ( 40, 000) ( 40,000) (400,000)
Balances…………………… P( 20,000) P40,000 P 2,000 P 50000 P 72, 000
Loss for possible insolvency 3:1:1 ….... 20, 000 (12, 000) (4, 000) ( 4,000) -
Balances…………………… P 28,000 P (2,000) P 46,000 P 72,000
Loss for possible insolvency: 3:1…….. (1,500) 2000 (500) -
Cash received…………………… P (26,500 P 45,500 P 72, 000(b)
P72,000 - P472,000

89. (B)
AA BB CC TOTAL
Balance before liquidation. P90,000 P(60,000) P(100,000) P(70,000)
Additional investment……...................................... - - 70,000 70,000
P90,000 P(60,000) P( 30,000) P -
Additional Investment.............................................. 39,000 39,000
P90,000 P(21,000) P( 30,000) P 39,000
Additional loss
for insolvency of BB (3:4)... …. (9, 000) 21,000 ( 12,000) -
P 81000 P ( 42.000) P 39,000
Additional investment
(P192,000-P80,000 - $70,000)............... 42, 000 P 42,000
P 81,000 P 81, 000 (b)
Partnership 90
90. (b)
Daniela Erika Fredline Total
Total Interest…………………………. 10, 000 60, 000 (90,000) (20,000)
Payment of liabilities by Fredline …… 20,000 20,000
Balances………………………………. 10,000 60,000 (70, 000) -0-
Additional investment
(100,000- 40,000-20,000=40,000.. 40,000 40,000
Balances………………………………. 10,000 60,000 (30,000) 40,000
Additional loss for possible insolvency (4:3… (17,143) (12,857) 30,000 -0-
Balances………………………………. (7, 143) 47,143 40,000
Investment……………………………. 5, 000 5,000
Balances………………………………. (2,143) 47,143 45,000
Additional loss for possible insolvency.. 2,143 (2.143) -0-
45,000 45,000
c)

August Albert Gerry


Balances before realization………….. 70,000 (60,000) (30,000)
Additional Investment……………….. 30,000
Balances……………………………… 70,000 (60,000)
Additional loss (1:1)…………………. (30,000) 60,000 (30,000)
Balances………………………………. 40,000 (30,000)
Additional investment
(P70,000 - P30,000 – P30,000) 10,000

Balances………………………………. 40,000 (20,000)


Additional loss……………………….. (20,000) 20,000

Balances.............................................. 20,000
Partnership 91
92. (b)

Gardon (60%) Gardo (40%) Total


Initial Investment… P30,000 P20,000 P50,000
Investments (Personal disbursement)... 62, 275 70, 695 132, 970
Withdrawals (Personal receipts)… (79,100) (65,245) (144, 345)
Balance before liquidation……… . P13, 175 P25, 450 P38, 625
Gain on realization
(P60, 000 - P38, 625)..... 12,825 8,550 21, 375
Balances before payment to partners... . P 26, 000 P 34, 000 P 60,000
Payment to partner……………. (26,000) (34,000) (60,000) (b)

Since personal disbursements were made by partners on behalf of the partnership, such transaction were treated
they are an “investment”. To analyze further, the following partnership entry would be as follows:

Purchase/Expenses (or any appropriate acct.)…… xxx


Capital (personal cash)………………………. Xxx

For personal receipts (as if “withdrawals), the entry would be:

Capital/Drawings (personal cash) ………………. xxx


Sales for any appropriate acct.)……………… xxx
3. (a)

The cash payment priority program is presented as follows to determine the distribution of P1,400.
Interests Payments
PP QQ RR PP QQ RR Total
Balances before realization P11,200 P13,000 P5,800
Divided by: P & L ratio… 4/7 2/7 1/7
Loss absorption ability……. P19,600 P45,500 P40,600
Priority I…………………… (4,900) P 1, 400 P 1, 400
P19,600 P40,600 P40,600
Priority II………………….. - (21, 000) (21,000) - 6,000 P3,000 9,000
P19,600 P19,600 P19,600 P - P 7, 400 P3.000 P10, 400

Cash Distribution: Available PP QQ RR

Cash payment to partner….. P 1,400

Less: Priority……………… (1, 400) P1, 400 (a)


Partnership 92

– Chapter 2
Corporate Liquidation
I. Introduction
When the financial position of the debtor is such that it cannot resolve its financial difficulties it
will have to resort to a liquidation. This process may be started by the debtor filing a voluntary
petiton or by creditors filing an involuntary petition which entails the process of an orderly
realization of the debtor's assets and payment of the debtor's liabilities.

II. Accounting and Reporting for Liquidation


The basic focus of accounting for liquidation is that of a "quitting concer" rather than a "going
concern" which is the usual assumption in accounting The statement of affairs is a statement
that has been devised to address the issue of liquidation. And in the process of liquidation, the
trustee in bankruptcy must report periodically to those interested parties regarding the progress
of the liquidation process, and for this objective, a statement of realization and liquidation must
be prepared.
III. Statement of Affairs
Statement of Affairs is a statement of financial condition that emphasizes liquidation values and
provides relevant information for the trustee in liquidating the debtor corporation. This
statement is prepared as of a specific date or any given point in time and it shows balance sheet
information with assets measured at expected net realizable values and classified on the basis of
availability for fully secured, partially secured, priority, and 'Unsecured creditor. Liabilities are
classified in the statement of affairs as priority, fully secured, partially secured, and unsecured.
Historical cost valuations are included in the statement for reference purposes.
Partnership 93
The most vulnerable is the partner with the lowest absorption ability. In order to determine their
vulnerability to possible losses, the equity of each partner is divided by his or her profit sharing
ratio to identify the maximum loss that a partner could absorb without reducing his or her equity
below zero. The vulnerability ranks indicate that Reed is most vulnerable to losses because his
equity would be reduced to zero with a total partnership loss on liquidation of P50,000.

97. (d)
Balances before liquidation: Queen Reed Stac Total
Loan (to) from ................ P(5,000) P10,000
Capital balances .............. P45,000 30,000. 15,000. _______
Total Interests.................. P45,000. P25,000. P25,000 P95,000
Reduction in equity ................... (24,000) (40,000). (16,000). (80,000)
Payment to partners .................. P21,000 (15,000) 9,000 15,000
Additional loss (3:2) ................. (9,000) 15,000. (6,000) ----
Payment to Partners .................. P12,000. P3,000 P15,000
*Cash available for first distribution…………………………………. P65,000
Less: Priority creditors ....................................................................... 50,000
Payment to partners ............................................................................ 15,000
Partnership 94
94. [D]
INTERESTS PAYMENTS
P. Q. R. P. Q. R. Total
Balances before realization:
Loans ………................... P6,000 (10,000)
Capital ............................. 24,000 P 36,000 60,000
Total interests ………….. P 30,000 P36.000 P50.000
Divided by: P & L ratio .. 3/10 3/10. 4/10
Loss absorption ability .... P100,000 P120,000 P125,000
Priority I .......................... --- --- (5,000). P2,000. P2,000
P100.000 P120,000 P120,000
Priority II……………….. --- (20,000) ( 20.000) 6,000 P8,000 14,000 [d]
100,000. 100,000. 100,000 P-- 6,000. 10,000. 16,000
95. (d)
Priority
Creditors Matthews. Norell Reams. Total
First P300,000 ............. P300,000. P300,000
Next P80.000 (7:3) P 56,000. P24,000. 80,000
Next P70,000 (3:4) 30,000. P40,000. 70,000
Remainder* ................. 22,000 34,000 44,000 100,000
P300,000 P108,000 P58,000 P84,000. P550,000 (d)
*P550,000 - P300,000 - P80.000 - P70,000 = P100,000
96. b)
Balances before realization:. Quen. Reed. Stac
Loans ………................... P(5,000) P10,000
Capital Balance ................ 45,000 30,000 15,000
Total interests ………….. P 45,000 P25.000 P25.000
Divided by: P & L ratio .. 30% 50% 20%
Loss absorption ability .... P150,000 P50,000 P125,000

Vulnerability Rankings (1 most vulnerable). 3. 1. 2


The following are captions commonly found in the statement of affairs:
Partnership 95
1. Assets Pledged to Fully Secured Creditors. These are assets with realizable values equal to, or in excess of the
liabilities for which they have been pledged as collateral.
2. Assets Pledged to Partially Secured Creditors. These are assets with realizable values that are less than the liabilities
for which they have been pledged as security.
3. Free Assets. These are assets not pledged to specific secured liabilities or pledged assets, with a realizable value in
excess of the amount needed to satisfy claims of secured creditors.
4. Unsecured Liabilities with Priority. These are liabilities that must, by statute, be paid off before any secured debts
can be satisfied.
5. Fully Secured Creditors. These are liabilities covered by a pledge of specific assets of realizable value equal to or
in excess of such liabilities.
6. Partially secured Creditors. These are liabilities covered by a pledge of assets of a realizable value that is less than
such liabilities.
7. Unsecured Liabilities without priority. These liabilities have no legal priority nor a security interest in specific
property. They are paid off (pro-rated when there is an asset deficiency) after all priority and secured liabilities have
been satisfied.
8. Stockholders' Equity. The balances of the stockholders' equity accounts depend on the amount of free assets
available. If there is a deficiency of assets to satisfy unsecured creditors, all claims of equity holders are
extinguished. Only if there are free assets in excess of unsecured liabilities can stockholders share in any
distributions.
IV. Statement of Realization and Liquidation

A statement of realization and liquidation is an activity statement that is intended to show progress toward the liquidation
of a debtor's estate. Its original purpose was to inform the bankruptcy court and interested creditors of the accomplishment
of the trustee.
Partnership 96

MULTIPLE CHOICE QUESTIONS

1. Philippine National Bank holds a P500,000 note secured by a building owned by Luigi Software, which has filed
for bankruptcy. If the property has a book value of P600,000 and a fair market value of P450,000, what is the best
way to describe the notes held by Philippine National Bank? The bank has
a. A secured claim of P500,000.
b. An unsecured claim of P500,000.
c. A secured claim of P450,000 and an unsecured claim of P50,000.
d. A secured claim of P50,000 and an unsecured claim of P50,000.
(Adapted)

2. X and Y Inc. owes the Xylo Corporation F60,000 on account, which is secured by accounts receivable with a
book value of P50,000. The unsecured portion is considered a claim under the bankruptcy law, X and Y has filed
for bankruptcy. Its statement of affairs lists the accounts receivable securing Xylo account with an estimated
realizable value of P45,000. If thend tonn -eral unsecured creditors is 80%, how much can Xylo expect?
a. c. P57,000
b. 58.000 d. 48,000
(Adapted)

3. P Corporation is a parent, having purchased 60% of S Company's common stock at par value for P600,000. S
Company is in financial difficulty. The parent granted an unsecured loan of P200,000 to the subsidiary. An
accounting statement of affairs for S Company shows a dividend of 30%. P Corporation can expect to receive on
the loan of appropriately:
a. P120,000 c. P36,000
b. 60,000 d. 0
(Adapted)

4. P Corporation is a parent, having purchased 60% of Company's common stock at par value for P600,000. S
Company is in financial difficulty. The parent granted as unsecured loan of P200,000 to the subsidiary. An
accounting statement of affairs for S Company shows a dividend of 30%. P Corporation can expect to receive
payment for its Investment in s Company of approximately:
a. P600,000 c. P108,000
b. 180.000 d. 0
(Adapted)
Partnership 97
5. Kent, Inc. has forced into bankruptcy and has begun to liquidate. Unsecured Claims will be paid at the rate of 40
cents on the peso. Apex Co. holds a non-interest bearing note receivable from Kent in the amount of P100,000,
collaterialized by machinery with a liquidation value of P25,000. The total amount to be realized by Apex on this
note receivable is:
a. P25.000 c. P55,000
b. 40,000 d. 65,000
(AICPA)
6. Seco Corp. was forced into bankruptcy and is in the process of liquidating assets and paying claims. Unsecured
claims will be paid at the rate of forty cents on the peso. Hale holds a P30,000 noninterest-bearing note receivable
from Seco collateralized by an asset with a book value of P35,000 and a liquidation value of P5,000. The amount
to be realized by Hale on this note is
a. P5,000 c. P15.000
b. 12000 d. 17.000
(AICPA)
7. Blueprint, Inc. signed a note payable to its bank for P10,000. Accrued interest, on the note on February 28, 2004
amounts to P250. The note is secured by inventory with a book value of P12,000. The inventory is sold for P8,000
and unsecured creditors receive 30 percent of their claims. The bank should receive the following amount in
settlement of the note and interest:
P10.250 c. P8,675
b. 10,000 d. 8,000
(Adapted)
8. The trust for Ardolio, Inc. prepares a statement of affairs which shows that unsecured creditors whose claims total
P60,000 may expect to receive approximately P36,000 if assets are sold for the benefit of creditors.
 Michael is an employee who is owed P750.
 Meldcan holds a note for P1,000 on which interest of P50 is accrued; nothing has been pledged on the note.
 Compboy holds a note of P6,000 on which interest of P300 is accrued: securities with a book value of P6,500
and a present market value of P5,000 are pledged on the note.
 Serpor holds a note for P2.500 on which interest of P150 is accrued property with a book value of P2,000 and
a present market value of P3,000 is pledged on the note.
How much may each of the following creditors hope to receive?
Michael Meldcan Campboy Serpoy
a. P 0 P 0 P 0 P 0
b. 90 0 6,300 2,390
c. 350 1,050 5,780 0
d. 750 630 5,780 2,650
(Adapted)
Partnership 98
9. Erap Co. files a voluntary bankruptcy petition of August 15, 2008, and the statement of affairs reflects the following
amounts:

Estimated
Book current
value value
Assets:
Assets pledged with fully secured creditors P 300,000 P 370,000
Assets pledges with partially secured
creditors ……………………………. 180,000 120,000
Free assets ……………………………….. 420,000 320,000
P 900,000 P 810,000
Liabilities:
Liabilities with priority …………………. P 70,000
Fully secured creditors …………………... 260,000
Partially secured creditors ………………. 200,000
Unsecured creditors………………………. 540,000
P1,070,000

Assume that the assets are converted to cash at the estimated current values and the business is liquidated. What amount of
cash will be available to pay unsecured nonpriority claims?

a. P 240,000 c. P 320,000
b. 280,000 d. 360,000
(AICPA)

10. Zamora and Co., Inc. purchased a Cadillac automobile with little cash down and signed a note, secured by the Cadillac,
for 48 easy monthly payments. When the company files for bankruptcy, the balance due on the Cadillac amount to P
6,000,000. The car has a book value of P 8,000,000 and a net realizable value of P 4,000,000. The unsecured creditors of
Zamora and Co. can expect to receive 50 percent of their claims. In the liquidation, the bank that hold the note on the
Cadillac should receive:

a. P 6,000,000 c. P 4,000,000
b. 5,000,000 d. 3,000,000
(AICPA)
Partnership 99
11. The following data are provided by the Troubled Company:

Assets at book value ………………………...……. P 150,000


Assets at net realizable value …………….………. 105,000
Liabilities at book value:
Fully secured mortgage ……………………….. 60,000
Unsecured accounts and notes payable ……….. 70,000
Unrecorded liabilities:
Interest on bank notes ………………………… 500
Estimated cost of administering estate…...……. 6,000
The court has appointed a trustee to liquidate the company.

The journal entry made by the trustee to record the assets and liabilities should include an estate deficit of:

a. P 31,500 c. P 25,500
b. 31,000 d. 25,000
(Adapted)

Using the same information in Number 11, the statement of affairs prepared by the trustee at this time should include an
estimated deficiency to unsecured creditors of:

a. P 45,000 c. P 31,500
b. 39,000 d. 25,000
(Adapted)

13. Nah Luigi Corporation is in bankruptcy and is being liquidated by a court-appointed trustee. The financial report that
follow was prepared by the trustee just before the final cash distribution:

Assets:
Cash ……………………………………….. P 100,000
Approved claims:
Mortgage payable (secured by properly
that was sold for P 50,000) ………….... P 80,000
Accounts payable, unsecure………………. 50,000
Administrative expenses payable
Unsecured ……………………………. 8,000
Salaries payable, unsecured ……………… 2,000
P 140,000
Partnership 100
The administrative expenses are for trustees and other costs of administering the debtor corporation’s estate.

How should the P 100,000 be distributed to the following creditors?

Unsecured Partially Unsecured


Creditors Secured Creditors
With Priority Creditors Without Priority
a. P -- P 80,000 P 20,000
b. 10,000 80,000 10,000
c. 5,000 65,000 25,000
d. 10,000 65,000 25,000

(Adapted)

14. On December 18, 2011, the statement of affairs of Downside Company, which is in bankruptcy liquidation, included
the following:

Assets pledged for fully secured liabilities …...……. P 100,000


Assets pledged for partially secured liabilities …….. 40,000
Free assets …………………………………………. 120,000
Fully secured liabilities ……………………………. 80,000
Partially secured liabilities ………………………… 50,000
Unsecured liabilities with priority …………………. 60,000
Unsecured liabilities without priority ……………... 90,000

Compute the estimated amount to be paid to:

Unsecured
Fully Unsecured Partially
Liabilities
Secured Liabilities Secured
without
Liabilities w/ Priority Liabilities
Priority
a. P 80,000 P 60,000 P 50,000 P 70,000
b. 64,000 60,000 48,000 88,000
c. 80,000 48,000 60,000 72,000
d. 80,000 60,000 48,000 72,000

(Adapted)
Partnership 101
The administrative expenses are for trustees and other costs of administering the debtor corporation’s estate.
How should the P 100,000 be distributed to the following creditors?
Unsecured Partially Unsecured
Creditors Secured Creditors
With Priority Creditors Without Priority
e. P -- P 80,000 P 20,000
f. 10,000 80,000 10,000
g. 5,000 65,000 25,000
h. 10,000 65,000 25,000

(Adapted)
14. On December 18, 2011, the statement of affairs of Downside Company, which is in bankruptcy liquidation, included
the following:
Assets pledged for fully secured liabilities …...……. P 100,000
Assets pledged for partially secured liabilities …….. 40,000
Free assets …………………………………………. 120,000
Fully secured liabilities ……………………………. 80,000
Partially secured liabilities ………………………… 50,000
Unsecured liabilities with priority …………………. 60,000
Unsecured liabilities without priority ……………... 90,000

Compute the estimated amount to be paid to:


Unsecured
Fully Unsecured Partially
Liabilities
Secured Liabilities Secured
without
Liabilities w/ Priority Liabilities
Priority
e. P 80,000 P 60,000 P 50,000 P 70,000
f. 64,000 60,000 48,000 88,000
g. 80,000 48,000 60,000 72,000
h. 80,000 60,000 48,000 72,000

(Adapted)
Partnership 102
15. The following data were taken from the statement of affairs for Liquo Company:

Assets pledged for fully secured liabilities


(fair value, P75,000) ……………………………………………………… P90,000
Assets pledged to partially secured liabilities
(fair value, P52,000) ……………………………………………………… 74,000
Free assets (fair value, P40,000) ………………………………………………….. 70,000
Unsecured liabilities with priority ………………………………………………… 7,000
Fully secured liabilities …………………………………………………………… 30,000
Partially secured liabilities ………………………………………………………... 60,000
Unsecured liabilities without priority …………………………………………….. 112,000

Compute the: (1) total estimated deficiency to unsecured creditors, and (2) the expected recovery per peso of
unsecured claims.

a. (1) 42,000; (2) P.65 c. (1) 0: (2) P1.00


b. (1) 3,000; (2) P.98 d. (1) P42.000; (2) P .70
(Adapted)

16. Katherine, a CPA, has prepared a statement of affairs. Assets which there are no claims or liens are expected to
produce P70,000, which must be allocated to unsecured claims of all classes totaling P105,000. The following are
some of the claims outstanding:

1. Accounting fees for Katherine, P1,500.


2. An unrecorded note for P1,000, on which P60 of interest has accrued, held by Angie.
3. A note for P3,000 secured by P4,000 receivables, estimated to be 605 collectible held by Joy.
4. A P1,500 note, on which P30 of interest has accrued, held by Joyots Property with a book value of P1,000
and a market value of P1.800 is pledged to guarantee payment of principal and interest.
5. Unpaid income taxes of P3,500.

Compute the estimated payment to partially secured creditors:

a. P1,060 c. P2.490
b. 1,950 d. 2.790
Partnership 103

17. The creditors if the Rogerod Corporation agreed to a liquidation based on the statement of affairs, suggested that
unsecured creditors, without priority would receive approximately P.60 on the peso. The unsecured creditors are
interested in determining whether the preliminary estimate still seems appropriate. The trustee was originally
assigned noncash asset of P1,480,000 and creditors claims as follows: fully secured, P670,000; partially secured,
P400,000; unsecured with priority, P200,000, and unsecured without priority, P320,000. Assets with a book value
of P45,000 and unsecured liabilities (without priority) of P35.000 were subsequently discovered. Assets with a total
book value of P740,000 were sold for P715,000 net. Fully secured liabilities of P410,000 and partially secured
liabilities of P280,000 were paid. Remaining liquidation expenses were estimated to be P30,000.

Assume the remaining noncash assets have an estimated net realizable value as follows:

Assets traceable to fully secured creditors …………………………………… P240,000


Assets traceable to partially secured creditors ……………………………….. 110,000
Remaining assets ……………………………………………………………... 380,000

Determining the revised estimate of the dividend to be received by unsecured creditors without priority:

a. 100.00% c. 45.97%
b. 66.17% d. Cannot be determined

18. Palubog Co. is insolvent and its statement of affairs shows the following information:

Estimated gains on realization of assets ………………………………… P1,440,000


Estimated losses on realization of assets ………………………………... 2,000,000
Additional assets ………………………………………………………… 1,280,000
Additional liabilities …………………………………………………….. 960,000
Capital stock …………………………………………………………….. 2,000,000
Deficit …………………………………………………………………… 1,200,000

The pro-rate payment on the peso to stockholders (estimated amount to be recovered by stockholders) is:

a. P.30 c. P.57
b. .45 d. .70
(Adapted)
Partnership 104
19. Zero Na Corp. has been undergoing liquidation since January 1. As of March 31, its condensed statement of
realization and liquidation is presented below:

Assets:
Assets to be realized ………………………………………………. P1,375,000
Assets acquired ……………………………………………………. 750,000
Assets realized …………………………………………………….. 1,200,000
Assets not realized ………………………………………………… 1,375,000

Liabilities:
Liabilities liquidated ………………………………………………. P1,875,000
Liabilities not liquidated …………………………………………... 1,700,000
Liabilities to be liquidated ………………………………………… 2,250,000
Liabilities assumed ………………………………………………... 1,625,000

Revenues and Expenses:


Supplementary charges ………………………………………….... P3,125,000
Supplementary credits ……………………………………………. 2,800,000

The net gain (loss) for the three-month period ending March 31 is:

a. P250,000 c. P425,000
b. (325,000) d. 750,000
(Adapted)

20. Using the same information on No. 19, compute the ending cash balance of cash account assuming that common
stock and deficits are P1,500,000 and P500,000 respectively.

a. P425,000 c. P1,325,000
b. P575,000 d. P1,375,000

Items 21 through 33 are based on the following data:

The Palubog Company has decided to seek liquidation after previous restructuring and quasi-reorganization
attempts failed. The company has the following condensed balance sheet as of May 1, 2011:

Assets Liabilities and Stockholders’ Equity


Cash ……………………… P 12,000 Accrued payroll …………………… P 40,000
Receivables (net) ………… 280,000 Loans from officer ………………… 50,000
Inventory ………………… 70,000 Accounts payable ………………….. 60,000
Prepaid expenses ……….... 1,000 Equipment loan payable ………….... 360,000
Plant assets ………………. 300,000 Business loan payable ……………… 180,000
Goodwill …………………. 39,000 Common stock ……………………… 60,000
Deficit ………………………………. (48,000)

Total ………………… P702,000 Total ……………………….. P702,000


Partnership 105
The equipment loan payable is secured by specific plant assets having a book
value of P300,000 and a realizable value of P350,000. Of the accounts payable,
P40,000 is secured by inventory which has a cost of P40,000 and a liquidation
value of P44,000. The balance of the inventory has a realizable value of P32,000.
Receivables with a book value and market value of P100,000 and P80,000
respectively have been pledged as collateral on the business loan payable. The
balance of the receivables have a realizable value of P150,000.
(Adapted)

21. Assuming trustee expenses of 12,000 in addition to recorded liabilities, which


of the remaining unsecured creditors has the next highest order of priority.

a. Accrued payroll c. Loan from officer


b. Equipment loan payable d. Business loan payable

22. The realizable value of assets pledged with fully secured creditors is:

a. P459,000 c. P40,000
b. 44,000 d. 489,000

23. Of those creditors who are partially secured, their unsecured amounts are:

a. P430,000 c. P540,000
b. 110,000 d. 120,000

24. The total realizable value of free assets to unsecured creditors before
unsecured creditors with priority is:

a. P628,000 c. P220,000
b. 232,000 d. 198,000

25. The dividend to unsecured creditors or the expected recovery percentage


of unsecured creditors (rounded) is:

a. 90%. c. 88%
b. 100%. d. 76%

26. Estimated deficiency to unsecured creditors is:

a. P —0– c. P 2,000
b. 22,000 d. 12,000
Partnership 106

27. Estimated loss on asset disposition is:

a. P51,000 c. P 51,000
b. 89,000 d. 90,000

28. Estimated gain as asset disposition is:

a. P56,000 c. P 52,000
b. 54,000 d. 6,000

29. Estimated amount paid to unsecured creditors with priority is:

a. P10,000 c. P 40,000
b. 30,000 d. 110,000

30. Estimated amount paid to fully secured creditors is:

a. P40,000 c. P470,000
b. 390,000 d. 430,000

31. Estimated amount paid to unsecured creditors without priority is:

a. P70,000 c. P 20,000
b. 61,600 d. 50,000

32. Estimated payment to partially secured creditors is:

a. P358,800 c. P168,000
b. 516,800 d. 430,000

33. Estimated payment to creditors is (discrepancy is expected due to rounding


off).

a. P580,000 c. P571,000
b. 659,600 d. 668,400
Partnership 107

MULTIPLE CHOICE
ANSWERS
1. c 11. c 21. a 31. d
2. c 12. c 22. d
3. b 13. d 23. c
4. d 14. d 24. d
5. c 15. a 25. d
6. c 16. d 26. a
7. c 17. c 27. c
8. d 18. d 28. a
9. d 19. c 29. b
10. b 20. c 30. b

MULTIPLE CHOICE ANSWERS


EXPLAINED eExeEXPLAINED

1. (c)
The P500,000 notes payable to PNB is considered as partially secured liabilities
wherein a property with a fair market value of P450,000 is used as collateral.
Therefore, PNB is secured to receive P450,000 because of the property while
the balance of P50,000 of the notes is unsecured.

2. (c)
The P60,000 owes to Xylo Corp. is considered a partially secured liabilities.
Accounts receivable with a realizable value of P45,000 is pledged to secure
the liability. Therefore, the estimated amount to be paid to Xylo Corp.
would be as follows:

Accounts Receivable at net realizable value .…………………. P45,000


Add: Portion of free assets used to pay the unsecured
amount: (P60,000-P45,000) x .80 ………………………. 12,000
Estimated amount to be paid to partially secured
liabilities ……………………………………………….. P57,000 (c)

3. (b)
Since the P Corp. expect to recover P.30 for every P1 liability. Therefore, the
unsecured liability of S Company that would be paid were as follows:

Unsecured loan …………………………………………………. P200,000


Multiplied by: Expected recovery per peso of
unsecured creditors ……………………………………..... 30%
P 60,000 (b)
Partnership 108
4. (d)
The problem is similar to No. 3, except that the question involves payment for its investment in S Company.
Remember that receivables and payables transacted between parent and subsidiary still exist on their separate
balance sheet. So, when collection or payment is made, it will be journalized in the usual manner, like an ordinary
collection or payment of an account which does not affect at all the investment in subsidiary account.

5. (c)
Apex Co. has a secured claim for the P25,000 liquidation value of the machinery. The remaining P75,000 (P100,000
note –P25,000) is an unsecured claim. Given that unsecured claims will be paid at the rate of P.40 cents on the peso,
therefore, Apex will receive

Machinery at liquidation value __________________ P25,000


Add: Portion of free assets used to pay the unsecured
amount: (P100,000 – P25,000) x 40% ________ 30,000
P55,000 (c)

6. (c)
Claims of secured creditors be satisfied before any unsecured claims are paid. Hale is a secured creditor in the
amount of P5,000 (the liquidation value of the collateral). The remainder of Hale’s claim (P30,000 – P5,000 =
P25,000) is an unsecured claim, because it is not secured by any collateral. Therefore, Hale, will receive a total of
P15,000 on this note:

Asset at liquidation value _______________________ P 5,000


Add: Portion free assets used to pay the unsecured
amount: (P30,000 – P5,000) x .40____________ 10,000
P 15,000 (c)

7. (c)
Inventory, at selling prices ________________________ P8,000
Add: Portion free assets used to pay the unsecured
amount: (P10,250 – P8,000) x 30%_____________ 675
P8,675 (c)

8. (d)
Michael’s salary is an unsecured with priority, therefore he receives the full amount.
Meldcan: P1,050 x (P36,000 / P60,000) = P630
Campboy: P5,000 + (P6,300 – P5,000) x 60% = P5,780
Serpor: Fully secured creditor, receive P2,650 (P2,500 + P150) (d)
Partnership 109
9. (d)
The total cash available to pay all unsecured claims, including priority claims, is the cash obtained from free assets
(P320,000) and any excess cash available from assets pledged with fully secured creditors after they are used to
satisfy those claims (P320,000 – P260,000 = P110,000)

Therfore, the amount of cash to pay unsecured nonpriority claims:

Assets pledged to fully secured creditors,


at current value _________________________ P370,000
Less: Fully secured creditors _________________ 260,000

Excess cash from assets pledged to fully


secured creditors _________________________ P110,000
Add: Free assets, at current value ______________ 320,000

Total free assets ____________________________P430,000


Less: Liabilities with priority __________________ 70,000

Net free assets _____________________________ P360,000 (d)

10. (b)
Car-cardillac, at net realizable value ______________ P4,000,000
Add: Portion of free assets to pay unsecured
amount: (P6,000,000 – P4,000,000) x 50% _____ 1,000,000
P6,000,000 (b)

11. (c)
To compute the estate deficit before the actual realization and liquidation is simply to formulate the basic accounting
equation, i.e, Assets = Liabilities + Stockholders’ equity. Therefore:

Assets, at net realizable value __________________ P105,000


Less: Liabilities
Per books ___________________ P130,000
Add: Unrecorded interest _______ 500 130,000

Estate (deficit) equity before realization and


Liquidation__________________________ P(25,500) (c)
Partnership 110

12. (c)
Total assets at net realizable value _________________ P105,000
Less: Fully secured liabilities _____________________ 60,000

Total0 free assets ______________________________ P 45,000


Less: Unsecured creditors with priority-
Administrative expenses ____________________ 6,000

Net free assets ________________________________ P 39,000


Less: Unsecured creditors without priority
Unsecured accounts and notes payable _ P70,000
Interest on bank notes ______________ 500 70,500
Estimated deficiency to unsecured creditors_________ P(31,500) (c)

13. (d)
Cash available _______________________________ P100,000
Less: Mortgage payable secured by property ________ 50,000
Amount available to unsecured creditors ___________ P 50,000
Less: Unsecured creditors with priority
Administrative expenses ____________ P 8,000
Sales payable_____________________ 2,000 10,000

Net free asseys or amounts available to unsecured


creditors without priority___________________ P 40,000
Expected recovery percentage of unsecured creditors
P40,000 / (P80,000 – P50,000) + P50,000 _____ P .50

Therefore, the cash is distributed as follows:

Unsecured creditors with priority __________ P 10,000


Partially secured creditors:
Property at selling price ______________ P50,000
Add: Portion of free assets used
to pay the unsecured
amount (P80,000 – P50,000) x 50% 15,000 65,000
Unsecured creditors without Priority
P50,000 x .50______________________ 25,000
P100,000 (d)
Partnership 111

14. [d]
Assets pledged to fully secured liabilities ................................................................ P100,000
Less:Fully secured liabilitites...................................................................................... 80,000
Excess of assets pledged to fully secured liabilities
(free assets of fully secured liabilities).................................................................. P 20,000
Add: Free assets ......................................................................................................... 120,000
Total free assets to unsecured liabilities...................................................................... 140,000
Less: Unsecured liabilities with priority..................................................................... 60,000
Net free assets ............................................................................................................ P 80,0000

Unsecured liabilitites:
Partially secured liabilities....................................................... P 50,000
Less: Assets pledged to partially
secured liabilities............................................................ 40,000 P 10,000
Unsecured liabilities without priority ..................................... 90,000
Total unsecured liabilities ....................................................... P100,000

Expected Recovery Percentage of Unsecured liabilities:

Net Free Assets P 80,000


Total unsecured liabilities = P 100,000 = 80%
Therefore, the estimated amount to be paid to each creditors are:

Amount % of Recovery
Fully secured liabilities .............................................................. P 80,000 100% [80/80]
Unsecured liabilities with priority ............................................. 60,000 100% [60/60]
Partially Secured liabilities:
Assets .................................................... P 40,000
Add: Portion of free assets to pay
unsecured creditors
[P50,000-P40,000]x80% 8,000 48,000 96% [48/50]
Unsecured Liabilities without priority:
[P90,000x80%]............................................................. 72,000 80% [72/80]

Total............................................................................................ P 260,000* [d]


Partnership 112
* The total estimated amount to paid to creditors of P 260,000 can be counterchecked by
determining the total assets [at fair value]:

Assets pledged to fully secured liabilities ........................................ P 100,000


Assets pledged to partially secured liabilities .................................. 40,000
Free Assets........................................................................................ 120,000
P 260,000
15.[a]
[1] Estimated deficiency to unsecured creditors:
Assets pledged to fully secured liabilities, at fair value ................ P 75,000
Less: Fully secured liabilities ........................................................ 30,000
Free assets at fully secured liabilities ............................................ 45,000
Add: Free assets, at fair value ...................................................... 40,000
Total free assets to unsecured liabilities ....................................... 85,000
Less: Unsecured liabilities with priority ....................................... 7,000
Net free assets ............................................................................... P 78,000

Less: Unsecured liabilities:


Partially secured liabilities ........................... P 60,000
Less: Assets pledged to partially
secured liabilities, fair value .............. 52,000 P 8,000
Unsecured liabilities without priority........... 112,000
Total unsecured liabilities ..................................... P 120,000
Estimated deficiency to unsecured liabilitites P 42,000 [a]

Or alternatively:
Estimated [gain] loss on realization:
Loss on realization of assets pleadged to
fully secured liabilities [P90,000-P75,000] ............. P 15,000
Loss on realization of assets pledged to partially
secured liabilities [P 74,000-P52,000] ..................... 22,000
Loss or realization of free assets [P70,000-P40,000] .......... 30,000
Add: Administrative expenses ..................................................... 0
Unrecorded expenses/liability ........................................... 0

Total estimated net loss .............................................................. P 67,000


Partnership 113
Less: Loss borne by the owners/stockholders' equity:
Total assets at book value
[P90,000+P74,000+P70,000] ............................ P 234,000
Less: Total liabilities [P7,000+P30,000+
P60,000+P112,000] ........................................... 209,000 25,000
Estimated deficiency to unsecured creditors ........................ P 42,000 [a]
[2] Expected Recovery per peso of unsecured claims:
P 78,000/P120,000 .......................................................... P .65 [a]

16. [d]
Total Free Assets ...................................................................... P 70,000
Less: Unsecured Creditors with priority:
Aministrative expenses- accounting fees ...................... P 1,500
Unpaid income taxes ..................................................... 3,500 5,000

Net Free Assets ....................................................................... P 65,000

Total Unsecured Creditors without Priority :


Total Unsecured Claims of all classes .......................... P 105,000
Less: Unsecured Creditors with Priority....................... 5,000
Total Unsecured Creditors without Priority ................. P 100,000

% of Recovery: P 65,000/ P 100,000= 65%

Estimated payment to partially secured creditors:


Realizable value of A/R [60%XP60,000] .................. P 2,400
Add: Unsecured Portion: 65%[P3,000-P2,000] ......... 390
Total ..................................................................................... P 2,790
Partnership 114
17. (c)
_____Unsecured______
Assets Fully Partially With Without Owners’
_Cash__ _Noncash_ Secured Secured Priority Priority Equity
Original balance…… P 0 P1,480,00 P670,000 P400,000 P200,000 P320,000 P(110,000)
Subsequently
discovered items…. 45,000 35,000 10,000
Sales of assets……… 715,000 (740,000) (25,000)
Payment of
liabilities………... (690,000) (410,000) (280,000)
Estimated liquidation
expense…………… _______ ________ ________ ________ 30,000 ________ (30,000)
Balance to date……. P 25,000 P 785,000 P 260,000 P 120,000 P 230,000 P 355,000 P (155,000)
Anticipated
transactions:
Liquidation of
remaining assets….. 732,000 (785,000) (53,000)
Payment of fully
secured creditors…. (240,000) (240,000)
Payment of partially
secured creditors….. (110,000) (110,000)
Reallocation of
secured amounts.... ________ _________ (20,000) (10,000) __________ 30,000 __________
Anticipated
balance………… P 407,000 P 0 P 0 P 0 P 230,000 P 385,000 P (208,000)
Anticipated dividend to unsecure creditors without priority:
Assets available to unsecured creditors (P 407,000 – P 230,000) …………………..………………….. P 177,000
Claims of unsecured credits without priority …………………………………………………………… P 385,000
Dividend (P 177,000 / P 385,000) ………….…………………………………………………………... 45.97%
18. (d)
Estimated losses on realization of assets…………………………………………...... P 2,000,000
Less: Estimated gains on realization of assets P 1,400,000
Additional assets*……………………………………………………………… 1,280,000 2,720,000
Estimated net (gain) or loss in assets realization P( 720,000)
Add: Additional liabilities**…………………………………….…………..……… 960,000
Estimated net (gain) or loss……………………………………………….……….... P 240,000
Less: Stockholder’s Equity:
Capital stock…………………………………………………………………… P 2,000,000
Deficit………………………………………………………………………….. 1,200,000 800,000
Estimated amount to be recovered by stockholders P 560,000
Therefore, the pro-rate payment on the peso is:
Estimated amount to be recovered by stockholders P 560,000
_______________________________________________________ = __________ = P .70 (d)
Stockholders’ Equity P 800,000
*Additional assets are assets completely written-off in the books in the past year but subsequently have a realizable value.
**Additional liabilities, are liabilities in addition to the recorded liabilities in the balance sheet. In other words, they are
unrecorded liabilities and expenses. Example are liquidation expenses such as administrative and trustee fees, liability on
damage suits, acquired interest on mortgage payable, unbilled creditor’s fees and the like.
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19. (c)
Statement of Realization and Liquidation Credits:

Assets realized …………………………………………………………… P 1,200,000


Assets not realized ………………………………………………………... 1,375,000
Liabilities to be liquidated ………………………………………………... 2,250,000
Liabilities assumed ……………………………………………………….. 1,625,000
Supplementary credits* …………………………………………………… __2,800,000

Total credits ………………………………………………………………. P 9,250,000

Statement of Realization and Liquidation Debits:

Assets to be realized ……………………………………………………... P 1,375,000


Assets acquired …………………………………………………………... 750,000
Liabilities liquidated …………………………………………………….. 1,875,000
Liabilities not liquidated ………………………………………………… 1,700,000
Supplementary charge** ………………………………………………… __3,125,000

Total Debits ……………………………………………………………… P 8,825,000

Net gain for the three month period …………………………………………………… P 425,000 (c)

*Supplementary credits are revenue or income items such sales, interest income, etc.

**Supplementary debits are cost and expense item such as purchases, expenses, etc.

20. (c) – The solution simply utilize the basic accounting equation of Assets = Liabilities = Stockholders’ Equity (SHE),
thus:

Common stock ………………………………………………………….. P 1,500,000


Deficits …………………………………………………………………. ___ (500,000)

Stockholders’ equity (SHE) …………………………………………….. P 1,000,000


Add: Liabilities not liquidated ………………………………………….. ___1,700,000

Total Liabilities and SHE ………………………………………………. P 2,700,000


Less: Assets not realized (or end) ………………………………………. ___1,375,000

Cash balance, ending …………………………………………………… P 1,325,000


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21. (a)
Claims of unsecured creditors must be satisfied to whatever extent possible in the following order of priority:
1. Expenses to administer the estate.
2. Unpaid salaries, etc.

22. (b)
Of all the assets listed only inventory is classified as an asset pledged to fully secured creditors with a realizable
value of P44,000 (book of value of accounts payable is P44,000)

23. (b)
The partially secured creditors are as follows:

Liabilities Realizable Value/Secured Unsecured


Equipment loan payable P360,000 P350,000 P10,000
Business loan payable 180,000 80,000 100,000
P430,000 P110,000 (b)
24. (d)
The realizable value of assets are as follows:

Cast Realizable Value


Cash………………………………………………… P12,000 P12,000
Receivables (net)………………………………… 100,000 80,000
Receivables (net)………………………………… 180,000 150,000
Inventory…………………………………………… 40,000 44,000
Inventory…………………………………………… 30,000 32,000
Plant assets (net)…………………………………. 300,000 350,000
Total…………………………………………………. P662,000 P668,000

Less: Fully secured creditors…………………………………………… 40,000


(accounts payable)
Partially secured creditors………………………………………….. 430,000
(refer to no.23)
Total free assets available to unscured creditors…………………. P198,000

Refer to No. 25 for alternative computation


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25. (c)
Assets pledged to fully secured creditors:
Inventory, at liquidation value …………… P44,000
Less: Accounts payable …………………… 40,000

Free assets of fully secured creditors ……. P 4,000


Add: Free Assets:
Cash …………………………………………… P 12,000
Receivables, realizable value
(book value P280,000 – P100,000)… 150,000
Inventory, realizable value
(book value, P70,000 – P40,000)…… 32,000 194,000
Total free assets to unsecured creditors ……………. P198,000
Less: Unsecured creditors with priority
Accrued payroll ……………………………… 40,000
Net free assets …………………………………………… P158,000

Unsecured Creditors:
Partially secured creditors, (refer to No.23)
Equipment loan payable ……… P360,000
Less: Plant assets, at realizable
Value …………………………… 350,000 P10,000

Business loan payable …………. P180,000


Unsecured creditors without priority:
Loans from officer ……………….. P 50,000
Accounts payable (P60,000 – P40,000) 20,000 70,000

Total unsecured creditors …………………. P180,000

Expected recovery percentage of unsecured creditors (rounded):


P158,000 / 180,000 ………………………... 88%(c)
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26. (b)
Net free assets (No. 25) ………………………………………………………………….. P158,000
Total unsecured creditors (No. 25) ………………………………………………………. P180,000
Estimated deficiency to unsecured creditors …………………………………………….. P 22,000 (b)

or, alternatively:
Estimated losses on realization of assets:
Receivables [(P80,000 + P150,000) – P280,000] ………………………….. P 50,000
Prepaid expenses* ………………………………………………………….. 1,000
Goodwill** …………………………………………………………………. 39,000
P 90,000

Less: Estimated gains on realization of assets:


Inventory [(P44,000 + P32,000) – P70,000] …………… P 6,000
Plant assets (P350,000 – P300,000) ……………………. 50,000 56,000
Estimated net (gains) or loss on realization of assets …………... P 34,000
Add: Unrecorded liabilities/expenses ………………………….. -
Estimated net (gains) or loss …………………………………… P 34,000
Less: loss borne by owners/stockholders’ equity:
Common stock ……………………………………….... P 60,000
Deficit ……………………………………………….… (48,000) 12,000
Estimated deficiency to unsecured creditors P 22,000 (b)
*Normally, no realizable value is assigned to prepaid expenses because the amount is relatively immaterial.
**In the event of liquidation, goodwill is considered worthless.
27. (d)
Refer to No. 26.
28. (a)
Refer to No. 26.
29. (c)
Refer to No. 25. Since assets amounting to P198,000 is available for payment, therefore, creditors of this class should
expect to recover the full amount of P40,000.
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30. (a)
Refer to No. 25. Since assets with a realizable/liquidation value of P44,000 is available to secure this type of creditor,
therefore, creditors of this class should expect to recover the full amount of P40,000.
31. (b)
Unsecured creditors without priority:
P70,000 x 88% ……………………………………………………………………………. P61,600 (b)
32. (b)
Partially secured creditors
Assets at realizable value: (refer to No. 25)
P350,000 = P80,000 ……………………………………………………………… P430,000
Add: Portion of free assets used to pay
Unsecured creditors without priority
[(P360,000 + P180,000) – P430,000] x 88% …………………………… 96,800
P526,800 (b)
33. (d)
Amount % of Recovery
Fully secured creditors (No. 30) ………………………… P 40,000 100% (40/40)
Partially secured creditors (No. 32) ……………………... 526,800 98% (526.8/540)
Unsecured creditors with priority (No. 29) ……………… 40,000 100% (40/40)
Unsecured creditors without priority (No. 30) …………… 61,800 88% (61.6/70)
P668,400* (d)
*Discrepancy of P400 due to rounding-off and this can be proven by adding the total assets at realizable value, i.e.
P668,000 (refer to No. 24)
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