ARTS CPA REVIEW

3rd Floor, Ala Moana Commercial Complex, Santiago City

0917-5723900
e-mail address: jonathandeveyra_ARTS@yahoo.com.ph
31ST BATCH
ADVANCED FINANCIAL ACCOUNTING & REPORTING ACCT. SAMUEL U. ITCHON, JR.

PARTNERSHIP FORMATION & OPERATION ADV – 01

DEFINITION OF PARTNERSHIP
According to Article 1767 of the Partnership Law, “by the contract of partnership, two or more persons bind themselves to
contribute money, property or industry to a common fund with the intention of dividing the profits among themselves.”
CHARACTERISTICS OF A PARTNERSHIP
1. Mutual Agency.
2. Unlimited Liability.
3. Limited Life.
4. Mutual Participation in Profits.
5. Legal Entity.
6. Co-ownership of Contributed Assets.
7. Ease of Formation.

CLASSES OF PARTNERS
1. As to Contribution
a. Capitalist Partner – one who contributes capital in money or property.
b. Industrial Partner – one who contributes industry, labor, skill or service.
c. Capitalist Industrial Partner – one who contributes money, property, and industry.
2. As to Liability
a. General Partner – one whose liability to third persons extends to his separate (private) property.
b. Limited Partner – one whose liability to third persons is limited only to the extent of his capital contribution to
the partnership.
3. As to Management
a. Managing Partner – one who manages actively the business of the partnership.
b. Silent Partner – one who does not participate in the management of the partnership affairs.
4. Other Classifications
a. Liquidating Partner
b. Nominal Partner
c. Ostensible Partner
d. Secret Partner
e. Dormant Partner

PARTNERSHIP FORMATION
1. Formation of a partnership for the first time.
2. Conversion of a sole proprietorship to a partnership.
a. A sole proprietor allows another individual, who has no business of his own to join his business.
b. Two or more sole proprietors form a partnership.
3. Admission of a new partner.

RULES IN THE DIVISION OF PROFITS AND LOSSES

1. Profits and losses of the partnership are to be divided in accordance with the partners agreement.
2. If no agreement, profits and losses are to be divided according to their original capital contributions.
3. Should the partners agree to divide the profits only, losses, if any are to be divided in the same manner as that of
dividing profits.
4. However, should the partners agree to divide losses only, profits, if any shall be divided by the partners according to
their original contributions.

PARTNERSHIP FORMATION
1. On March 1, 2006, A and B formed a partnership with each contributing the following assets:
A B
Cash 30,000 70,000
Machinery & equipment 25,000 75,000
Building - 225,000
Furniture & fixtures 10,000 -
The building is subject to mortgage loan of P 80,000, which is to be assumed by the partnership agreement provides
that A and B share profits and losses 30% and 70%, respectively. On March 01, 2006, the balance in B’s capital
account should be:
a. 290,000 c. 314,000
b. 305,000 d. 370,000

2. On August 01, A and B pooled their assets to form a partnership, with the firm to take over their business and assume the
liabilities. Partners capitals are to be based on net assets transferred after the following adjustments. (Profit and loss are
allocated equally). B’s inventory is to be increased by P 4,000; an allowance for doubtful accounts of P 1,000 and P 1,500 are
to be set up in the books of A and B, respectively; and accounts payable of P 4,000 is to be recognized in A’s books.
PARTNERSHIP FORMATION & OPERATION page 02

The individual trial balances on August, before adjustments, follow:

A B
Assets 75,000 113,000
Liabilities 5,000 34,500
What is the capital of A and B after the above adjustments?
a. A, 68,750; B, 77,250 c. A, 65,000; B, 76,000
b. A, 75,000; B, 81,000 d. A, 65,000; B, 81,000

3. On March 01, 2008, I and J formed a partnership with each contributing the following assets:
I J
Cash 300,000 700,000
Machinery & equipment 250,000 750,000
Building - 2,250,000
Furniture & fixtures 100,000 -
The building is subject to mortgage loan of P 800,000, which is to be assumed by the partnership agreement provides that I and
J share profits and losses 30% and 70% respectively. On March 01, 2008, the balance in J’s capital account should be:
a. 3,700,000 c. 3,050,000
b. 3,140,000 d. 2,900,000

4. The same information in item 3, except that the mortgage loan is not assumed by the partnership. On March 01, 2008, the
balance in J’s capital account should be:
a. 3,700,000 c. 3,050,000
b. 3,140,000 d. 2,900,000

5. C admits D as a partner in business. Accounts in the ledger for C on November 30, 2006, just before the admission of D.
show the following balances:
Cash 6,800
Accounts receivable 14,200
Merchandise inventory 20,000
Accounts payable 8,000
C, capital 33,000
It is agreed that for purposes of establishing C’s interest the following adjustments shall be made:
a. An allowance for doubtful accounts of 3% of accounts receivable is to be established.
b. The merchandise inventory is to be valued at P 23,000.
c. Prepaid salary expenses of P 600 and accrued rent expense of P 800 are to be recognized.
D is to invest sufficient cash to obtain a 1/3 interest in the partnership. C’s adjusted capital balance before the admission of C
and the amount of cash investment by D, respectively, are:
a. 35,347; 11,971. c. 35,374; 17,687
b. 36,374; 18,487 d. 28,174; 14,087.

6. R, W and B form a partnership on May 01, 2006. They agree that R will contribute office equipment with a total fair value
of P 40,000. W will contribute delivery equipment with a fair value of P 80,000 and B will contribute cash. If B wants a one-
third interest in the capital and profits, he should contribute cash of:
a. 40,000 c. 60,000
b. 120,000 d. 180,000

7. Donna and Edna are forming a partnership by combining their businesses. Their books show the following:
DONNA EDNA
Cash 36,000 15,000
Accounts receivable 75,000 54,000
Merchandise inventory 120,000 78,000
Furniture and fixtures 165,000 51,000
Prepaid expenses 31,500 10,500
Accounts payable 183,000 72,000
Donna, capital 244,500
Edna, capital 136,500
It has been agreed to provide for doubtful accounts equal to 5% of the receivables of each party and that the furniture and
fixtures of Edna are overdepreciated by P 4,500.
If each partner’s share in equity is to be equal to the net assets invested, the capital accounts of Donna and Edna would be:
a. 244,500 and 136,500, respectively. c. 240,750 and 129,300, respectively.
b. 240,750 and 138,300, respectively. d. 427,500 and 208,500, respectively.

8. Villar and Roxas sole proprietorships formed a partnership. Villar contributed cash of P 2,205,000 and office equipment that
cost P 945,000. The equipment had been used and had been 70% depreciated, the fair value of the equipment is P 630,000.
Villar also contributed a note payable of P 210,000 to be assumed by the partnership. Villar is to have 60% interest in the
partnership. Roxas contributed only P 1,575,000 merchandise inventory at fair value. The partners’ capital should be in
conformity with their interest in the partnership. After the formation, the partners agreed to share profits and losses equally.
Assuming the use of the bonus method, which of the following statements is true?
a. The agreed capital of Villar is P 2,625,000.
b. The total agreed capital of the partnership is P 4,375,000.
c. The capital of Roxas will increase by P 105,000 as a result of the transfer of capital.
d. There is either an investment or withdrawal of asset.
PARTNERSHIP FORMATION & OPERATION page 03

9. Loren and Jamby decide to combine their businesses and form a partnership on July 01, 2011. The following are their
assets and liabilities on July 01, 2011 before formation:
Loren Jamby
Assets 210,750 103,000
Liabilities 91,500 36,000
The following agreements are made to adjust assets and liabilities:
 Both partners will provide P 5,000 allowance for doubtful accounts.
 Loren’s fixed assets were over-depreciated by P 1,000 and Jamby’s fixed assets were under-depreciated by P 500.
 Accrued expenses are to be recognized in the books of Loren and Jamby in the amount of P 1,00 and P 1,000,
respectively.
 Obsolete inventory to be written off by Loren amounts to P 3,500.
 Loren and Jamby also agreed to share profits and losses equally.
What is the total asset of the partnership after the formation?
a. 297,550 c. 303,550
b. 300,750 d. 298,550

10. As of July 01, 2015, F and G decided to form a partnership. Their balance sheets on this date are:
F G
Cash 15,000 37,500
Accounts receivable 540,000 225,000
Merchandise inventory - 202,500
Machinery and equipment 150,000 270,000
Total 705,000 735,000

Accounts payable 135,000 240,000

F, capital 570,000
G, capital 495,000
Total 705,000 735,000

The partners agreed that the machinery and equipment of F is underdepreciated by P 15,000 and that of G by P 45,000.
Allowance for doubtful accounts is to be set up amounting to P 120,000 for F and P 45,000 for G. The partnership agreement
provides for a profit and loss ratio and capital interest of 60% to F and 40% to G. How much cash must F invest to bring the
partners’ capital balances proportionate to their profit and loss ratio?
a. 142,500 c. 172,500
b. 52,500 d. 102,500

11. Jones and Simon formed a partnership with each partner contributing the following items:
Jones Simon
Cash 80,000 40,000
Building – cost to Jones 300,000
- fair value 400,000
Inventory – cost to Simon 200,000
- fair value 280,000
Mortgage payable 120,000
Accounts payable 60,000

Assume that for tax purposes, Jones and Simon agree to share equally in the liabilities assumed by the Jones and Simon
partnership. What is the balance in each partner’s capital account for financial accounting purposes?
Jones Simon
A. 350,000 270,000
B. 260,000 180,000
C. 360,000 260,000
D. 500,000 300,000

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

Use the following information for questions 12 to 14:

On March 01, 2018, P and Q decide to combine their businesses and form a partnership. Their balance sheets on March 01,
before adjustments, showed the following:
P Q
Cash 9,000 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 105,375 51,500

Accounts payable 45,750 18,000

Capital 59,625 33,500
Total 105,375 51,500
PARTNERSHIP FORMATION & OPERATION page 04

They agreed to have the following items recorded in their books:

 Provide 2% allowance for doubtful accounts.
 P’s furniture and fixtures should be P 31,000, while Q’s office equipment is under-depreciated by P 250.
 Rent expense incurred previously by P was not yet recorded amounting to P 1,000, while salary expense incurred by Q
was not also recorded amounting to P 800.
 The FMV of inventory amounted to:
For P 29,500
For Q 21,000

12. Compute the net (debit) credit adjustment for P and Q:

P Q
a. 2,870 2,820
b. (2,870) (2,820)
c. (870) 180
d. 870 (180)

13. Compute the total liabilities after formation:

a. 61,950 c. 65,550
b. 63,750 d. 63,950

14. Compute the total assets after formation:

a. 157,985 c. 160,765
b. 156,875 d. 152,985

PARTNERSHIP OPERATION
1. DD and EE was organized and began operations on March 01, 2006. On that date, DD invested P 300,000 and EE invested
land and building with current fair value of P 160,000 and P 200,000, respectively. EE also invested P 120,000 in the
partnership on November 01, 2006 because of its shortage of cash. The partnership contract includes the following
remuneration plan:
DD EE
Annual salary P 36,000 P 48,000
Annual interest on average capital account balances 10% 10%
Remainder 60% 40%
The annual salary was to be withdrawn by each partner in 12 monthly installments. During the fiscal year ended, February 28,
2007, DD and EE had net sales of P 1,000,000, cost of goods sold of P 560,000, and total operating expenses of P 200,000
(excluding partners’ salaries and interest on average capital account balances).
Each partner made monthly cash drawings in accordance with partnership contract. The capital balance of each partner on
March 01, 2007 should be:
a. DD, P 381,600; EE, P 554,400. c. DD, P 432,000; EE, P 588,000.
b. DD, P 264,000; EE, P 328,000. d. DD, P 396,000; EE, P 540,000.

2. On January 01, 2006, D and E decided to form a partnership. At the end of the year, the partnership made a net income of P
120,000. The capital accounts of the partnership show the following transactions:
D, capital E, capital
Dr. Cr. Dr. Cr.
January 01 - 40,000 - 25,000
April 01 5,000 - - -
June 01 - - - 10,000
August 01 - 10,000 - -
September 01 - - 3,000 -
October 01 - 5,000 1,000 -
December 01 - 4,000 - 5,000
Assuming that an interest of 20% per annum is given on average capital and the balance of the profits is divided equally, the
sharing of the profits shall be:
D E
a. 60,000 59,400
b. 61,200 58,800
c. 67,200 52,800
d. 68,800 51,200

3. On January 01, 2008, A, B, C and D formed Batok Trading, a partnership with capital contributions as follows: A, P 50,000;
B, P 25,000; C, P 25,000; and D, P 20,000. The partnership contract provided that each partner shall receive a 5% interest on
contributed capital, and that A and B shall receive salaries of P 5,000 and P 3,000, respectively. The contract also provided that
C shall receive a minimum of P 2,500 per annum, and D a minimum of P 6,000 per annum, which is inclusive of amounts
representing interest and share of remaining profits. The balance of the profits shall be distributed to A, B, C and D in a 3:3:2:2
ratio. What amount must be earned by the partnership, before any charge for interest and salaries, so that A may receive an
aggregate of P 12,500 including interest, salary and share of profits?
a. 16,667 c. 30,667
b. 30,000 d. 32,333

4. J and K are partners who share profits and losses in the ratio of 60% and 40%, respectively. J’s salary is P 60,000 and P
30,000 for K. The partners are also paid interest on their average capital balances. In 2006, J received P 30,000 of interest and
K, P 12,000. The profit and loss allocation is determined after deductions for the salary and interest payments. If K’s share in
the residual income (income after deducting salaries and interest) was P 60,000 in 2006, what was the total partnership income?
a. 192,000 c. 282,000
b. 345,000 d. 387,000
PARTNERSHIP FORMATION & OPERATION page 05

5. A and D created a partnership to own and operate a fast-food store. The partnership agreement provided that A receive a
salary of P 10,000 and D a salary of P 5,000 to recognize their relative time spent in operating the store. Remaining profits and
losses were divided 60:40 to A and D, respectively. Income for 2002, the first year of operations, of P 13,000 was allocated P
8,800 to A and P 4,200 to D. On January 01, 2006, the partnership agreement was changed to reflect the fact that D could no
longer devote any time to the store’s operations. The new agreement allows A a salary of P 18,000 and the remaining profits
and losses are divided equally. In 2006, an error was discovered such that the 2005 reported income was understated by P
4,000. The partnership income of P 25,000 for 2005 included the P 4,000 related to year 2005.

In the reported net income of P 25,000 for the year 2006, A and D would have:
A D
a. 21,900 3,100
b. 17,100 17,100
c. 0 0
d. 12,500 12,500

6. On January 02, 2008, Bueno and Perez formed a partnership with capital contributions of P 175,000 and P 200,000,
respectively. They agreed to share profits and losses 80% and 20%, respectively. Perez is the general manager and works in
the partnership full time. Perez is given salary of P 5,000 a month, an interest of 5% on starting capital and a bonus of 15% of
net profit before the salary, interest and bonus. The condensed profit and loss statement of the partnership, for the year ended
December 31, 2008 is as follows:
Net sales 875,000
Cost of sales 700,000
Gross profit 175,000
Expenses (including salary, interest and bonus) 143,000
Net profit 32,000
The bonus in 2008 is:
a. 13,304.35 c. 15,300.00
b. 18,000.00 d. 20,700.00

7. Dulce Martin, a partner in a partnership that carries the name of the The Sweet Shop, has a 30% participation in partnership
profits. Her capital account has a net decrease of P 48,000 during 2008. In the same year, she withdrew P 104,000 (charged
against her capital account) and contributed property valued at P 20,000 to the partnership.
The net income of the partnership for 2008 was:
a. 36,000 c. 132,000
b. 120,000 d. 440,000

8. X, Y and Z, a partnership formed on January 01, 2008 had the following initial investment:
X 100,000
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: P 60,000 for X, P 48,000 for Y and 36,000 for Z.
* Average partner’s capital balances during the year shall be allowed 10%.
Additional information:
* On June 30, 2008, X invested an additional P 60,000.
* Z withdrew P 70,000 from the partnership on Sept. 30, 2008.
* Share on the remaining partnership profit was P 5,000 for each partner.
The total partnership capital on December 31, 2008 was:
a. 405,000 c. 480,000
b. 671,500 d. 672,750

9. J and K 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 J and K, after
adjusting the profits for the following items omitted as follows:
Omissions at year-end 2004 2005
Prepaid expense 1,600
Accrued expense 1,200
Deferred income 1,400
Accrued income 1,000
Other pertinent information are as follows:
2004 2005
Net income of partnership 14,400 13,600
Capital accounts, end of the year:
J 45,400 54,000
K 45,000 55,000
The aggregate capital of J and K after capitalizing the average profits at 20% per annum is:
a. 67,765 c. 69,000
b. 72,105 d. 71,000
PARTNERSHIP FORMATION & OPERATION page 06

10. Tim and Tom entered into a partnership on March 01, 2005 by investing P 125,000 and P 75,000 respectively. They
agreed that Tim, as the managing partner, is to receive a salary of P 30,000 per year and a bonus computed at 10% of the
net profit after adjustment for the salary, the balance of the profit was to be distributed in the ratio of their original capital
balances. On December 31, 2005, account balances were as follows:
Cash 70,000 Accounts payable 60,000
Accounts receivable 67,000 Tim, capital 125,000
Furniture and fixtures 45,000 Tom, capital 75,000
Sales returns and allowances 5,000 Tim, drawing ( 20,000 )
Net purchases 196,000 Tom, drawing ( 30,000 )
Operating expenses 60,000 Sales 233,000
Inventories on December 31, 2006 were as follows: supplies, P 2,500; merchandise, P 73,000. Prepaid insurance was P 950
while accrued expenses were P 1,550. Depreciation rate was 20% per year.

The partner’s capital balances on December 31, 2005, after closing the net profit and drawing accounts, were:
Tim Tom
a. 142,350 47,670
b. 135,940 47,960
c. 139,540 49,860
d. 139,680 48,680

11. Ken, Len and Mon formed a partnership on January 01, 2010, with each partner contributing P 100,000 cash. Although the
partnership agreement provided that Mon receive a salary of P 5,000 per month for managing the partnership business. Mon
has never withdrawn any money from the partnership. Ken withdrew P 20,000 in each of the years 2010 and 2011, and Len
invested an additional P 40,000 in 2010 and withdrew P 40,000 during 2011. Due to an oversight, the partnership has not
maintained formal accounting records, but the following data as of December 31, 2011 is available:
Cash 142,500
Accounts receivable 100,000
Merchandise inventory, at cost 200,000
Computer equipment, net 185,000
Prepaid expenses 20,000
Total assets 647,500
=========
Accounts payable 95,000
Notes payable 52,500
Total liabilities 147,500
==========
Additional data:
(1) The partners agree that income for 2011 was about half of the total income for the first two years of
operations.
(2) Although profits were not divided in 2011, the partnership agreement provides that profits, after allowance for
Mon’s salary, are to be divided each year on the basis of beginning of the year capital balances.
For the year ended December 31, 2011, the capital balances of the partners are:
Ken Len Mon
a. 93,636 141,818 264,546
b. 80,000 120,000 180,000
c. 100,000 160,000 180,000
d. 93,636 120,000 264,546

12. On January 02, 2010, JT Partnership begins its operations with the following investments:
Joe 80,000
Tom 40,000
According to the partnership agreement, all profits will be distributed as follows:
 Joe will be allowed a monthly salary of P 8,000 with P 4,000 assigned to Tom.
 The partners will be allowed with interest equal to 10% of the capital balances as of the first day of the year.
 Joe will be allowed a bonus of 10% of the net income after bonus.
 The remainder will be divided on the basis of the beginning capital for the first year and equally for the second year.
 Each partner is allowed to withdraw up to P 4,000 a year.
Partnership’s operation results in a net loss of P 6,000 in 2010 and a profit of P 22,000 in 2011. Each partner withdraws the
maximum amount each year. What is the capital balance of Joe on December 31, 2011?
a. 105,900 c. 113,900
b. 73,900 d. 72,000

13. Cris, Paul and Bryan, have allocated profits of the partnership as follows:
* Salaries of P 80,000, P 60,000 and P 60,000 to Cris, Paul and Bryan, respectively.
* All remaining profit is allocated equally among the partners.

As of January 01, 2011, the partners have agreed to reallocated 2009 and 2010 profits among the partners. The reallocation of
profits will follow the existing profit sharing agreement with the addition of a provision that interest will be allocated to the
partners based on 10% of the weighted average capital balance including the withdrawals, but excluding current year profits.
Net income for 2009 and 2010 was P 500,000 and P 410,000, respectively.
PARTNERSHIP FORMATION & OPERATION page 07

Capital balances and withdrawals are as follows:

Cris Paul Bryan
Capital balance, December 31, 2008 180,000 250,000 60,000
March 31, 2009, withdrawal 150,000 170,000 -
September 30, 2009 withdrawal 20,000 50,000 50,000
January 31, 2010, withdrawal 170,000 190,000 150,000
In the reallocation of profits on January 01, 2011, the capital of Paul should be increased (decreased) by:
a. (3,528) c. 2,872
b. 3,528 d. 656

14. The Statement of Comprehensive Income of King and Queen Partnership for the year ended December 31, 2011 show a
net income of P 80,000. The capital accounts of the partners for 2011 shows the following:
(1) King began the year with a capital balance of P 40,000.
(2) Queen began the year with a capital balance of P 100,000.
(3) On April 01, King invested an additional P 15,000 into the partnership.
(4) On August 01, Queen invested an additional P 30,000 into the partnership.
(5) Throughout 2011, each partner withdrew P 400 per week in anticipation of partnership net income. The partners agreed
that these withdrawals are not to be included in the computation of average capital balances for purposes of income
distributions.

King and Queen have agreed to distribute partnership net income according to the following plan:
King Queen
Interest on average capital balances 10% 10%
Bonuses on net income before salaries, but after interest and bonuses 25% None
Salaries 25,000 30,000
Residual (if positive) 70% 30%
Residual (if negative) 50% 50%
What are the capital balances of the partners on December 31, 2011?
King Queen
a. 94,800 168,200
b. 43,800 117,200
c. 95,800 169,200
d. 75,000 148,400

Use the following information for questions 15 & 16:

The partnership of Gabby and Grace began business on January 02, 2012 with the following investments at their agreed values:
Gabby Grace
Cash 100,000 200,000
Merchandise 80,000
Office Furniture, Fixtures & Equipment 75,000
Store Furniture & Equipment 50,000
Land 500,000
The land was subject to P 250,000 mortgage which the partnership assumed on January 02, 2012. The articles of co-
partnership disclosed the following agreement:
* Profit and loss sharing ratio, 60:40 for Gabby and Grace, respectively after crediting 10% interest on beginning capital and
salaries of P 25,000 each to the partners, in the 1st year of operation.

Below is a summary of the firm’s transactions for 2012:

(1) Total purchases of merchandise all on cash basis, P 850,000. The FIFO method of costing is followed. At the end of the
year, P 75,000 are on hand.
(2) Sales for the year amounted to P 1,425,000.
(3) Selling and general expenses, P 225,000.
(4) Principal of P 50,000 was paid on the mortgage plus interest of P 25,000.
(5) Withdrawal of the partners in anticipation of profit, P 50,000 for Gabbv and P 80,000 for Grace.
(6) The accountant distributed 2012 net income and closed the books.

15. The share of Gabby and Grace on the 2012 net income assuming 30% tax rate:
a. 192,000; 128,000 c. 127,100; 96,900
b. 240,000; 160,000 d. 184,700; 135,300

16. The capital balances of Gabby and Grace on December 31, 2012 are:
a. 622,000; 453,000 c. 507,100; 341,900
b. 564,700; 380,300 d. 662,700; 492,300

Use the following information for questions 17 & 18:

The partnership agreement of Ernie, Chito and Belle provides for the following provision on division of profits and losses:
* Ernie, the managing partner, gets 10% of net income up to P 50,000 and 20% over P 50,000 as salary.
* Chito and Belle get 10% of net income over P 100,000 as salary.
* 10% interest on their beginning capital and the balance, equally.
At the beginning of 2012, Ernie, Chito and Belle has capital balances of P 150,000, P 175,000 and P 200,000, respectively.
Ernie made P 50,000 additional investment and P 20,000 withdrawal during the last quarter. Belle also made additional
investment of P 40,000 and withdrawal of P 10,000. During the year, the company reported a net income of P 160,000.
PARTNERSHIP FORMATION & OPERATION page 08

17. The share of Ernie from the net income is:

a. 46,333 c. 64,833
b. 56,833 d. 48,333

18. The capital balances of Ernie, Chito and Belle at the end of the year are:
a. 180,000; 175,000; 230,000 c. 244,833; 221,333; 278,833
b. 214,822; 221,333; 248,333 d. 264,833; 175,000; 248,333

19. The following balances and P/L ratio were available from the records of RRR Partnership on January 01, 2012:
Capital balances P/L ratio
Rona 250,000 25%
Rossy 300,000 35%
Rolly 400,000 40%
RRR reported net income of P 150,000 for the year 2012. The newly hired bookkeeper distributed the net income equally to the
partners. One week after the books are closed, the partners discovered the following errors: (1) inventories did not include
merchandise in transit costing P 25,000; (2) utilities payable to Meralco was not recorded, P 5,600; and (3) depreciation of
office equipment was understated by P 2,000. Assume 30% tax rate. The adjustment to the capital of Rona requires a:
a. Credit to Rona capital for P 3,045. c. Debit Rona capital for P 17,400.
b. Credit Rona capital for P 4,350. d. Credit Rona capital for P 12,180.

20. Thea and Caloy are partners. Their current profit and loss ratios (70/30) are being changed to (60/40). The partners decide
to adjust their capital accounts at the date of the change in the profit and loss ratios to reflect the difference between market
value and book value of assets and liabilities. At the date of the change, land has a market value of P 250,000 and a book value
of P 120,000. How much will Caloy’s capital account be adjusted at the date of the change in the profit and loss ratios?
a. 52,000 increase c. 52,000 decrease
b. 13,000 increase d. 13,000 decrease

Use the following information for questions 21 & 22:

James and Boy are partners. They have shared profits and losses 70/30 for several years. The partnership profit allocation
agreement is currently being modified to 60/40. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is a building with a book value of P 370,000 and a market value of P
520,000. One year after the profit and loss ratio is changed the building is sold for P 650,000.

21. What is the amount of change to Boy’s account at the date the building is revalued?
a. 105,000 c. 45,000
b. 91,000 d. 39,000

22. What is the amount of change to Boy’s capital account at the date the building is sold?
a. 91,00 0 c. 39,000
b. 78,000 d. 52,000

23. Partner A first contributed P 50,000 of capital into an existing partnership on March 01, 2015. On June 01, 2015, the
partner contributed another P 20,000. On September 01, 2015, the partner withdrew P 15,000 from the partnership.
Withdrawals in excess of P 10,000 are charged to the partner’s capital account. The annual weighted average capital balance
is:
a. 62,000 c. 60,000
b. 51,667 d. 48,333

24. Peter and Ronnie are partners. They have shared profits and losses 65/35 for a number of years. Peter has indicated that
he is going to reduce the involvement in the partnership so the profit and loss ratio is being modified to 45/55. At the date of the
change in the profit and loss ratio, the partnership own vacant land with a market value of P 300,000 and a book value of P
100,000. Peter and Ronnie compile a list of assets with market and book value differences. Two years after the change in the
profit and loss ratios, the land is sold for P 450,000. How much of the gain is allocated to Peter?
a. 157,500 c. 227,500
b. 197,500 d. 287,500

25. Che is the manager of a local store. She is also a partner in the company and she receives a bonus as part of the profit and
loss allocation. Che’s bonus is based on the increase in revenues recorded during the period. The bonus arrangement is that
Che receives 1% of net income for every full percentage point growth for revenues in excess of a 5% revenue growth. During
the most recent period, revenues grew from P 500,000 to P 540,000 and net income grew from P 98,000 to P 120,000. How
much bonus does Che receive for this period?
a. 2,000 c. 3,600
b. 1,100 d. 6,000

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