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Problem #9

Two Sole Proprietorship Form a Partnership

Medina and Loqueloque are fierce competitors who sell hunting equipment. They finally decided to join forces in order
to increase their business and reduce costs. An agreement is reached between two to begin operations as a partnership
on Mar 1, 2018.

Medina and Loqueloque have decided to share profits and losses in the ratio of 60:40, respectively.

The statements of financial position of Medina and Loqueloque as at Mar 1, 2018 are as follows:

Medina Loqueloque
Cash P42000 P30000
Accounts Receivable 389200 169200
Allowance for Uncollectible Accounts (22400) (14400)
Merchandise Inventory 461600 300800
Prepaid Rent - 6000
Office Supplies 30400 4000
Land 40000 -
Building 128000 -
Accumulated Depreciation (32000) -
Office Equipment 24000 62000
Accumulated Depreciation (6000) (13200)
Repair Equipment 172000 -
Accumulated Depreciation (68000) -
Total Assets P1158800 P544400
Notes Payable P120000 -
Accounts Payable 170000 P111600
Mortgage Payable 200000 -
Medina, Capital 668800 -
Loqueloque, Capital - 432800
Total Liabilities and Owner’s Equity P1158800 P544400
The name of the partnership will be Medina and Loqueloque Hunting Gears. The partners have agreed to effect the
following adjustment:
a. Medina’s merchandise Inventory is to be reduced by P105200. The inventory of Loqueloque will be increased by
P7200.
b. The following are fair market values of the various assets:
Medina Loqueloque
Land P108000 -
Building 192000 -
Office Equipment 16000 P40000
Repair Equipment 124000 -
c. One-half of the notes payable of Medina are personal notes. All other liabilities of the partners are assumed by
the partnership.
d. The prepaid rent in the books of Loqueloque will be consumed by the partnership.
Required:
Prepare the journal entries to record the formation of the partnership.
Adjustments
a.
Medina, Capital 105200
Merchandise Inventory, Beginning 105200
Merchandise Inventory, Ending 356400
Merchandise Inventory, Beginning 356400
Merchandise Inventory, Ending 7200
Loqueloque, Capital 7200
b.
Land 68000
Medina, Capital 68000
Building 64000
Medina, Capital 64000
Medina, Capital 8000
Office Equipment 8000
Repair Equipment 48000
Medina, Capital 48000
Loqueloque, Capital 22000
Office Equipment 22000
c.
Medina, Capital 60000
Notes Payable 60000
*Medina
Cash 42000
Accounts Receivable 389200
Merchandise Inventory 356400
Office Supplies 30400
Land 108000
Building 192000
Office Equipment 16000
Repair Equipment 124000
Allowance for Uncollectible Accounts 22400
Notes Payable 60000
Accounts Payable 170000
Mortgage Payable 200000
Medina, Capital 805600
*Loqueloque
Cash 30000
Accounts Receivable 169200
Merchandise Inventory 308000
Prepaid Rent 6000
Office Supplies 4000
Office Equipment 40000
Allowance for Uncollectible Accounts 14400
Accounts Payable 111600
Loqueloque, Capital 431200