Unit I – Partnership Formation and Operation

Lesson 2 – Partnership Formation

Name: ANDREW L. VALATERO JR. Score:

Section: BSA 3B Date: September 1, 2020

Assignment 1 – THEORY.

1. The net contributions of the partners to the partnership is measured at

a) cost c) discretionary amount determined by partner
b) fair value d) any of these

2. Transactions between and among the partners are:

a) recorded in the partnership books c) either a or b
b) not recorded in the partnership books d) neither a or b

3. Which of the following accounts has a normal credit balance?

a) Loans to partners c) Partner’s drawing
b) Partner’s capital d) Due from partner

4. What is the entry for the acceptance of an industrial partner’s skills as his contribution?
a) General journal through a debit-credit entry
b) General ledger through a debit-credit entry
c) General ledger through a memorandum entry
d) none of the above

5. The partner’s capital account increases in the following cases except when a partner’s transaction in
the partnership involves:
a) initial investment c) additional investment
b) share in net d) personal drawings
income

For items 6 -7:

Dee and Tee agreed to form a partnership. Dee contributed cash of P 50,000 while Tee contributed
cash of P150,000. They agreed to have an equal interest on the initial capital and in partnership
profits and losses.

6. Which of the following statements is false?

a) Tee’s contribution will be debited for P150,000.
b) The partnership capital after recording the investments od Dee and Tee is P 200,000.
c) Dee’s contribution will be debited for P 50,000.
d) None of these

7. Which of the following statements is correct?

a) the contractual agreement is void because Dee’s contribution is less than the agreed interest of
Dee.
b) Tee’s contribution will be debited for P 100,000.
c) Dee will make an additional investment of P 100,000 to make his capital balance equal to Tee’s
capital.
d) Dee and Tee will have capital balances of P 100,000 each after the partnership formation.
8. A and B agreed to form a partnership. A contributed P 300,000 cash while B contributed his
expertise. Partnership agreement stipulates that A and B shall have equal interest in both initial
capital and profits and losses.

Which of the following is correct?

a) Immediately after the formation of the partnership, the balance of A capital account in the
partnership books is P 300,000.
b) Immediately after the formation of the partnership, the balance of B capital account in the
partnership books is zero.
c) A’s contribution will be debited for P 300,000, but the net credit to A’s capital account will be
P150,000.
d) None of these

9. Statement 1. A bonus exists when the capital account of a partner is credited for an amount greater
than of lesser than the fair value of his contribution.
Statement 2: A bonus given to a partner is treated as an adjustment to the capital account of the
other partners.
a) True: True b) False: False c) True: False d) False: True

10. Fay and May agreed to form a partnership. The agreement stipulates that Fay shall contribute a non-
cash assets with a fair value of P 150,000 and while May shall contribute cash of P 150,000.
However, since Fay will be bringing her special skills to the partnership, the partners agreed that Fay
shall be entitled to a 60% interest in partnership profits and losses.

Which of the following is incorrect?

a) Fay’s contribution shall be debited for P 150,000.
b) The total capital of the partnership immediately after the formation of the partnership is P
300,000.
c) Fay’s capital account balance immediately after the formation of the partnership is P 180,000.
d) None of these.
 Unit I – Partnership Formation and Operation
Lesson 2 – Partnership Formation

Name: ANDREW L. VALATERO JR. Score:

Section: BSA 3B Date: September 1, 2020

Assignment 2 – Brief exercises. Instruction: Answer as directed.

1. On August 1, 2020, Eddie and Fred agreed to form a partnership to sell and install office security
systems. The partners decide that Eddie will invest cash, P 500,000; equipment with a cost of P
300,000 but with a current fair value of P250,000.

Fred will contribute a service vehicle with a fair value of P 400,000. The book value of the service
vehicle is P650,000. In addition, Fred is to invest sufficient cash to equal Eddie’s investment.

Journalize the investments of Eddie and Fred.

Date Particulars PR Debit Credit

2. Pepe and Pilar formed a partnership on July 1, 2020. Pepe contributed equipment with a book
value of P300,000 and a fair market value of P400,000 with P100,000 mortgage to be assumed by
the partnership. Pilar invests cash of P100,000 and equipment recorded as P150,000 with
accumulated depreciation of P60,000 and with and agreed valuation of P80,000.

Journalize the investments of Pepe and Pilar.

Date Particulars PR Debit Credit

3. Using the same data in 2 above, except that the mortgage will not be assumed by the partnership.
Record the investment of Pepe.
Date Particulars PR Debit Credit
4. Mark and Nick agreed to form a partnership on July 1, 2020, for the purpose of manufacturing and
selling custom stainless kitchen wares. Both are master crafters and have their own tools and
equipment, which they will invest in the business.
Mark and Nick determined that their tools and equipment have fair values of P180,000 and
P240,000, respectively. They further resolved to invest sufficient cash such that each partner will
have beginning capital balance of P500,000.

How much cash will be presented in the partnership’s statement of financial position?
_____________

5. MM, NN, and LL formed a partnership on July 1, 2020 with the following assets, measured at their
fair market values, contributed by each partner:

MM NN LL
Cash P 20,000 P 22,000 P 40,000
Delivery trucks 250,000 228,000
Computers 48,000 51,000
Office furniture 9,500 22,500
Totals P 318,000 P 310,500 P 62,500

Although LL has contributed the most cash to the partnership, he did not have the full amount of P40,
000 available and was forced to borrow P20, 000. The delivery truck contributed by MM has a
Mortgage of P100,000 and the partnership is to assume responsibility for the loan. The profit and loss
sharing agreement is 40%, 40%, and 20%, respectively, for MM, NN, and LL.

Journalize the investments of MM, NN and LL.

Date Particulars PR Debit Credit

6. Using the same data in number 5: except that the agreement further provides that the partners’
capital must be in conformity with their profit and loss ratio upon formation, the capital balances of
MM, NN and LL in the partnership statement of financial position:

MM NN LL
7. Refer to no. 6: the journal entry to record the transfer of capital (bonus):
Date Particulars PR Debit Credit

End
 Unit I – Partnership Formation and Operation
Lesson 2 – Partnership Formation

Name: ANDREW L. VALATERO JR. Score:

Section: BSA 3B Date: September 1, 2020

Assignment 3 – Use 2-columns journal

1. On October 1, 2020, JC Construction and GB builders decided to form a partnership to be known as

JCGB Construction Company. Their Statement of financial Position on this date were:
JC Construction GB Builders
Cash P P
250,000 260,000
Accounts Receivable 400,000 390,000
Allowance for bad debts (15,000) (13,000)
Inventory 600,000 700,000
Equipment, net 800,00 1,000,00
0 0
Total P P
2,035,000 2,337,000

Accounts Payable 335,000 550,000

Amanda Capital 1,700,000
Diana, Capital ______________ 1,787,00
_ 0
Total P P
2,035,000 2,337,000

They agreed the following adjustments shall be made:

1. Equipment of JC Construction is under depreciated by P 10,000 and that GB Builders is over
depreciated by P 15,000.
2. Allowance for bad debts shall be equal to 10% of Accounts Receivable.
3. The value of Inventories of JC is to be increased by P 8,000 and for GB Builders, P5,000 are
worthless.
4. The assets and liabilities at their adjusted values shall be assumed by the partnership.

REQUIRED:
1. Prepare the necessary journal entries in the books of JC Construction and GB Builders.
2. Prepare the journal entries in the books of JCGB Construction Company
3. Prepare the statement of financial position of the partnership

2. Using the same data in problem 1: except that the partnership provides that JC and GB share profits
and losses 40:60, respectively. The agreement further provides that the partners’ capital must be in
conformity with their profit and loss ratio upon formation.

Q1. Assuming the use of transfer of capital method, how much is the agreed capital of JC to bring
the capital balances proportionate to their profit and loss ratio?
______________________________

Q2. The total assets of the Partnership after the formation is

_________________________________
 Q3. Prepare journal entries to record the formation of the partnership.

3. AB and CD decided to form a partnership on August 1, 2020. Their balance sheets on this date are:

AB CD
Cash P 15,000 P 37,500
Accounts Receivable 340,000 205,000
Merchandise Inventory 200,000 202,500
Equipment 200,000 350,000
Accumulated depreciation (50,000) (60,000)
Total P 705,000 P 735,000
Accounts Payable P 105,000 P 265,000
Capital 600,000 470,000
Total P 705,000 P 735,000

They agreed to have the following adjustments:

1. Equipment of AB is under-depreciated by P 20,000 and that of CD is over-depreciated by
P10,000.
2. Allowance for doubtful accounts is to be set up amounting to P 68,000 for AB and P45,000
for CD.
3. Inventories of P 5,000 and P 15,000 are worthless in AB’s and CD’s books, respectively.
4. The partnership agreement provides for a profit and loss ratio and capital interest of 70% to
AB and 30% to CD.

1. How much cash must AB invests to bring the capital balances proportionate to their profit and
loss ratio?

______________________

2. Prepare journal entries in the books of the sole proprietors and partnership books.
 Unit I – Partnership Formation and Operation
Lesson 2 – Partnership Formation

Name: ANDREW L. VALATERO JR. Score:

Section: BSA 3B Date: September 1, 2020

Assignment 4 – Answers must be supported with computations. Use yellow pad for supporting
computations.

On January 1, 2020, Anne, and Betty decided to form a partnership. The firm is to take over the assets
and assume liabilities and capital are to be based on net assets transferred after the following
adjustments:
a. Anne and Betty’s inventory is to be valued at P 31,000 and P 22,000, respectively.
b. Accounts receivable of P 2,000 in Anne’s books and P 1,000 in Betty’s books are uncollectible.
c. Accrued salaries of P 4,000 to Anne and P 5,000 to Betty are still to be recognized in the books.
d. Unused office supplies of Anne amounted to P 5,000 while that of Betty amounted to P 1,500.
e. Unrecorded patent of P 7,000 and prepaid rent of P 4,500 are to be recognized in the books of
Anne and Betty, respectively.
f. Anne is to invest or withdraw cash necessary to have a 40% interest in the firm.

Balance sheets for Anne and Betty on January 1, 2020, before adjustments are given below:
Anne Betty
Cash P 31,000 P 50,000
Accounts receivable 26,000 20,000
Inventory 32,000 24,000
Office supplies --- 5,000
Equipment 20,000 24,000
Accumulated depreciation – equipment (9,000) (3,000)
Total assets P 100,000 P 120,000

Accounts payable P 28,000 P 20,000

Capitals 72,000 100,000
Total assets P 100,000 P 120,000

1. The net adjustments – capital in the books of Anne and Betty:

a) Anne, P 7,000 net debit, and Betty, P 2,000 net credit
b) Anne, P 5,000 net debit, and Betty, P 7,000 net credit
c) Anne, P 7,000 net credit, and Betty, P 2,000 net debit
d) Anne, P 5,000 net credit, and Betty, P 7,000 net debit

2. The adjusted capital of Anne and Betty in their respective books:

a) Anne, P65,000; Betty, P102,000 c) Anne, P77,000; Betty, P98,000
b) Anne, P63,000; Betty, P107,000 d) Anne, P77,000; Betty, P93,000

3. The additional investment (withdrawal) made by Anne:

a) (P 6,666.50) b) (P 15,000) c) P 3,000 d) P 8,377.50

4. The total assets of the partnership after formation:

a) P 212,000 b) P 220,333.50 c) P 230,000 d) P 235,333.50

5. The total Liabilities of the partnership after formation:

a) P 48,000 b) P 51,000 c) P 54,000 d) P 57,000
6. The total capital of the partnership after formation:
a) P 155,000 b) P 163,333.50 c) P 178,333.50 d) P 180,000

7. The capital balances of Anne and Betty in the partnership balance sheet:
a) Anne, P 81,250; Betty, P 72,000 c) Anne, P 100,000; Betty, P 75,000
b) Anne, P 81,250; Betty, P 75,000 d) Anne, P 62,000; Betty, P 93,000

8. On January 1, 2020 PS and RT agreed to form a partnership. The following are their assets and
liabilities:
Accounts PS RT
Cash P 136,000 P 76,000
Accounts Receivable 88,000 48,000
Inventories 304,000 364,000
Machinery 480,000 440,000
Accounts Payable 216,000 144,000
Notes Payable 140,000 60,000

PS decided to pay-off his notes payable from his personal assets. It was also agreed that RT
inventories were overstated by P24,000 and PS machinery was over-depreciated by P20,000. RT
is to invest/withdraw cash in order to receive a capital credit that is 20% more than PS’ total net
investment in the partnership.

How much cash will be presented in the partnership’s statement of financial position?
a) P 274,400 b) P 410,400 c) P 450,400 d) P 486,400

9. On December 1, 2019, DJ and BF agreed to invest equal amounts and share profits equally to form a
partnership. DJ invested P 3,120,000 cash and a piece of equipment. BF invested some assets which
are shown below:
Book value
Accounts Receivable P 400,000
Inventory 1,120,000
Machineries, net 2,240,000
Intangibles, net 920,000

The assets invested by BF are not properly valued. P 32,000 of the accounts receivable are proven
uncollectible. Inventories are to be written down to P 1,040,000. Included in the machineries is an
obsolete apparatus acquired for P 384,000 with an accumulated depreciation balance of P 336,000.
Part of the intangibles is a patent with a carrying value of P 56,000 which was sued upon by a
competitor. BF unsuccessfully defended the case and the final decision of the court was released on
November 29, 2019.

What is the fair value of the equipment invested by DJ?

a) P 968,000 b) P 1,344,000 c) P 1,400,000 d) P 1,560,000

10. On September 3, 2020, MM admits VV for an interest in his business. On this date MM’s capital
account shows a balance of P452,000. The following were agreed upon before the formation of the
partnership:
1. Prepaid expenses of P 25,750 and accrued expenses of P 17,500 are to be recognized.
2. 8% of the outstanding accounts receivable of MM amounting to P375,000 is to be recognized as
uncollectible.
3. VV invested P 260,000 worth of merchandise and is to be credited with a one-third interest in the
partnership.
4. MM is to invest or withdraw cash to earn his interest.
 Which of the following is not true regarding the partnership formation?
a) The total agreed capital upon formation is P 780,000
b) The total contributed capital of the partnership is P 690,250.
c) MM invest additional cash of P89,750 to earn his interest in the partnership.
d) A net debit adjustment of P 21,750 affected the capital balance of MM upon formation.

11. A and B have just formed a partnership. A contributed cash of P 882,000 and office equipment that
cost P378,000. the equipment had been used in his sole proprietorship and had been 70%
depreciated, the current market value of the equipment is P 252,000. A also contributed a note
payable of P84,000 to be assumed by the partnership. A is to have 60% interest in the partnership. B
contributed only P630,000 merchandise inventory at fair market value. The partner’s capital must be
in conformity with their profit and loss ratio upon formation. Which of the following is true?
a) The agreed capital of A upon formation is P 1,008,000.
b) The capital of B will decrease by P 42,000 as a result of the transfer of capital.
c) The total agreed capital of the partnership is P 1,750,000.
d) There is an investment or withdrawal of asset under the bonus method.

12. On June 1, 2020, AJ the sole proprietor of AJ Company, expands the company and establish a
partnership with DJ and PJ. The partners plan to share profits and losses as follows: AJ, 40%, DJ,
35% and PJ 25%, AJ asked DJ to join the partnership because his image and reputation are
expected to be valuable during the formation. DJ is also contributing P420,000 cash and a building
that was acquired for P4,040,000, with carrying amount of P3,480,000 and a fair market value of
P1,960,000. The building is subject to a P792,000 mortgage that the partnership did not assume. PJ
is contributing P848,000 cash and marketable securities costing P1,344,000 to PJ but are currently
worth P1,900,000 AJ’s investment in the partnership is the AJ Company. The Statement of Financial
Position for the AJ Company follows:

Cash P 1,560,000 Accounts Payable P 1,748,000

Accounts Receivable 1,824,000 Notes Payable 2,368,000
Merchandise Inventory 1,576,000 AJ, Capital 3,316,000
Equipment, net 2,472,000 ___________
P 7,432,000 P 7,432,000

The partners agree that 35% of the inventory is considered worthless, the equipment is worth ¾ of its
carrying amount, and 85% of the accounts receivable is collectible. AJ plans to pay off the accounts
payable with his personal assets. The other partners have agreed that partnership will assume the
notes payable. The partners agreed that their capital balances upon formation will be in conformity
with their profit and loss ratio.

Which of the following statements is false?

a) Assuming the partners will either invest or withdraw cash, using AJ as the base, DJ will invest
cash of P788,200and PJ will withdraw cash of P485,000.
b) Assuming the partners will either invest or withdraw cash, using DJ as the base, AJ and PJ will
both withdraw cash with a total amount of P1,948,800.
c) Assuming the partners will either invest or withdraw cash, using PJ as the base, AJ and DJ will
both invest cash with a total amount of P2,243,200.
d) If the transfer of capital method is used, the capital accounts of AJ and PJ will be debited in the
amount of P560,800 and P121,280, respectively.

13. On June 1, 2020, AD invited MP to join him in his business. MP agreed provided that AD will adjust
the accumulated depreciation of his Equipment account to a certain amount and will recognize
additional accrued expenses of P40,000. After that, MP is to invest additional pieces of equipment
to make her interest equal to 45%. If the capital balances od AD before and after adjustments were
 P556,000 and P484,000, respectively, what is the effect in the carrying value of the equipment as a
result of the admission of MP?
a) P 364,000 b) P 32,000 c) P 396,000 d) (P 324,000)

14. Net assets of DD, EE and CC before formation are P135,000, P165,000 and P251,000,
respectively. The partners agreed that certain assets and liabilities had to be adjusted. DD’s note
payable of P15,000 bearing an interest of 12% should be included in the partnership books and
other assets undervalued by P24,000. The interest is personally paid by DD. EE’s prepaid expenses
should be P5,000 less than what is stated in the financial statements. CC’s liabilities were
understated by P14,500.

How much is the capital of DD after the formation?

a) P 174,000 b) P 144,000 c) P 142,200 d) P 127,800

15. On June 1, 2020, MM and AA are combining their separate businesses to form a partnership. Cash
and non-cash assets are to be contributed. The noncash to be contributed and the liabilities to be
assumed are:
MM AA
Book value Fair Value Book Value Fair value
Accounts Receivable P 25,000 P 26,250 P 20,000 P 19,000
Inventory 40,000 45,000 20,000 20,750
Property, Plant and Equipment 100,000 90,700 86,250 82,250
Accounts Payable 15,000 15,000 11,250 11,250

MM and AA are to invest equal amounts of cash such that the contribution of MM would be 10% more
than the investment of AA. What is the amount of cash presented on the partnership’s Statement of
Financial Position on June 1, 2020?
a) P 251,250 b) P 276,250 c) P 502,500 d) P 552,500