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Solution Manual-Module 1: Acc 311 - Acctg For Special Transactions and Business Combinations
Solution Manual-Module 1: Acc 311 - Acctg For Special Transactions and Business Combinations
ANSWERS:
1.
2.
Partnershi
A B p
Cash 500,000 - 500,000
Accounts
receivable
(100K – 20K) 80,000 - 80,000
Building (700K + 50K) 750,000 750,000
Mortgage payable (100,000) (100,000)
Capital credits 580,000 650,000 1,230,000
3.
Actual Bonus
contributions method
A 40,000 (140,000 x 50%) 70,000
B 100,000 (140,000 x 50%) 70,000
Total 140,000 140,000
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Solution:
A B C Total
Amount being allocated 100,000
Allocation:
1. Salaries 12,000 8,000 20,000
2. Bonus (100K - 20K) x 10% 8,000 8,000
3. Interest on cap.
(100K x 10%);(60K x 10%);(120K x 10%) 10,000 6,000 12,000 28,000
4. Allocation of remainder:
(100K - 20K - 8K - 28K) = 44K;
(44K x 40%); (44K x 30%); (44K x 30%) 17,600 13,200 13,200 44,000
As allocated 47,600 19,200 33,200 100,000
CASE #2:
Solution:
A B C Total
Amount being allocated 10,000
Allocation:
1. Salaries 12,000 8,000 20,000
2. Bonus (N/A) - -
2. Interest on cap.
(100K x 10%);(60K x 10%);(120K x 10%) 10,000 6,000 12,000 28,000
3. Allocation of remainder
(10K - 20K - 28K) = -38K
(-38K x 40%); (-38K x 30%); (-38K x 30%) (15,200) (11,400) (11,400) (38,000)
As allocated 6,800 (5,400) 8,600 10,000
CASE #3:
Solution:
A B C Total
Amount being allocated (20,000)
Allocation:
1. Salaries 12,000 8,000 20,000
2. Bonus (N/A) - -
2. Interest on cap.
(100K x 10%);(60K x 10%);(120K x 10%) 10,000 6,000 12,000 28,000
3. Allocation of remainder
(-20K - 20K - 28K) = -68K
(-68K x 40%); (-68K x 30%); (-68K x 30%) (27,200) (20,400) (20,400) (68,000)
As allocated (5,200) (14,400) (400) (20,000)
CASE #1
Requirement (a):
The capital balances of the existing partners are adjusted as follows:
Carrying Increase
Fair values
amts. (Decrease)
Cash 30,000 30,000 -
Accounts receivable 140,000 120,000 (20,000)
Inventory 200,000 160,000 (40,000)
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Equipment 500,000 450,000 (50,000)
Accounts payable (80,000) (80,000) -
Accrued liabilities (20,000) (20,000)
Net assets 790,000 660,000 (130,000)
Requirement (b):
Before
Admission of C After admission
admission
A, Capital 437,000 437,000
B, Capital 223,000 (111,500) 111,500
C, Capital - 111,500 111,500
660,000 - 660,000
Requirement (c):
Before
Partner admission Admission of C After admission
A 60% 60%
B 40% -20% 20%
C 20% 20%
100% 100%
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CASE #2
Solutions:
Requirement (a):
The fair value of the 20% interest acquired by C is computed as follows:
Adjusted net assets before admission of C 660,000
Divide by: Interest of old partners (100% - 20%) 80%
Grossed-up fair value 825,000
Multiply by: Interest of C 20%
Fair value of C's interest 165,000
Requirement (b):
Before
Admission of C After admission
admission
A, Capital 437,000 437,000
B, Capital 223,000 223,000
C, Capital - 165,000 165,000
660,000 165,000 825,000
Requirement (c):
Before
Partner admission Admission of C After admission
(100% - 20%) x
A 60% 60% 48%
(100% - 20%) x
B 40% 40% 32%
C 20% 20%
100% 100%
CASE #3:
Solution:
Adjusted net assets 660,000
Divide by: Existing partners' interest 3/5
Total net assets after investment by Carrots 1,100,000
Multiply by: Carrots’ interest 2/5
Amt. of contribution by Carrots 440,000
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SOLUTIONS TO QUIZ 1:
CASE #1
Solution:
Net cash proceeds 50,000
Carrying amount of non-cash
(80,000)
assets
Total loss on sale (30,000)
CASE #2
Solution:
Net cash proceeds - first sale 45,000
Carrying amount of all non-cash
(80,000)
assets
Loss (35,000)
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2. Which of the following is not a characteristic of the proprietary theory that influences
accounting for partnerships?
a. Partners’ salaries are viewed as a distribution of income rather than a component of net
income.
b. A partnership is not viewed as separate entity, distinct, taxable entity.
c. A partnership is characterized by limited liability.
d. Changes in the ownership structure of a partnership result in the dissolution .
5. When property other than cash is invested in a partnership, at what amount should
the noncash property be credited to the contributing partner’s capital account?
a. Fair value at the date of contribution.
b. Contributing partner’s original cost.
c. Assessed valuation for property tax purposes.
d. Contributing partner’s tax basis.
6. Partnership capital and drawings accounts are similar to the corporate
a. Paid in capital, retained earnings, and dividends accounts.
b. Retained earnings account.
c. Paid in capital and retained earnings accounts.
d. Preferred and common stock accounts.
7. If the partnership agreement does not specify how income is to be allocated, profits
and loss should be allocated
a. Equally.
b. In proportion to the weighted average of capital invested during the period.
c. Equitably so that partners are compensated for the time and effort expended on
behalf of the partnership.
d. In accordance with their capital contribution.
8. Which of the following is not a component of the formula used to distribute income?
a. Salary allocation to those partners working.
b. After all other allocation, the remainder divided according to the profit and loss
sharing ratio.
c. Interest on the average capital investments.
d. Interest on notes to partners.
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a. Interest paid to partners based on the amount of invested capital.
b. Depreciation on assets contributed to the partnership by partners.
c. Salaries for management hired to run the business.
d. Supplies used in the partners’ offices.
10. The fact that salaries paid to partners are not a component of partnership income is
indicative of
a. A departure from generally accepted accounting principles.
b. Being characteristic of the entity theory.
c. Being characteristic of the proprietary theory.
d. Why partnerships are characterized by unlimited liability
12. When a new partner is admitted to a partnership, an original partner’s capital account may
be adjusted
for
a. A proportionate share of the incoming partner’s investment.
b. His or her share of previously unrecorded intangible assets traceable to the
original partners.
c. His or her share of previously unrecorded intangible assets traceable to the
incoming partner.
d. None of the above.
13. Which of the following best characterizes the bonus method of recording a new partner’s
investment in a partnership?
a. Net assets of the previous partnership are not revalued.
b. The new partner’s initial capital balance is equal to his or her investment.
c. Assuming that recorded assets are properly valued, the book value of the new
partnership is equal to the book value of the previous partnership and the
investment of the new partner.
d. The bonus always results in an increase to the previous partners’ capital balances.
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15. The goodwill and the bonus methods are two means of adjusting for differences
between the net book value and the fair market value of partnership when new
partners are admitted. Which of the following statements about these methods is
correct?
a. The bonus method does not revalue assets to market values.
b. The bonus method revalues assets to market values.
c. Both methods result in the same balances in the partner capital accounts.
d. Both methods result in the same total value of partner capital account, but the
individual capital account vary.
PROBLEM 1: On May 1, 2021, the business assets of John and Paul appear below:
John Paul
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 & fixtures 50,345 34,789
Other assets 2,000 3,600
Total P1,020,916 P1,317,002
John and Paul agreed to form a partnership contributing their respective assets and
equities subject to the following adjustments:
1. Accounts receivable of P20,000 in John’s books and P350,000 in Paul’s are
uncollectible.
2. Inventories of P5,500 and P6,700 are worthless in John’s and Paul’s respective
books.
3. Other assets of P2,000 and P3,600 in John’s and Paul’s respective books are to be
written off.
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John’s
Paul’s 712,345
d. John’s 613,576
Paul’s 683,350
3. Peter offered to join for a 20% interest in the firm. How much cash should be
contributed?
a. 330,879
b. 337,487
c. 344,237
d. 324,382
4. After Peter’s admission, the profit and loss sharing ratio was agreed to be 40:40:20,
based on capital credits. How much should the cash settlement be between John and Paul?
a. 33,602
b. 32,930
c. 32,272
d. 34,288
PROBLEM 2: As of December 31, the books of AME Partnership showed capital balances
of A – P40,000; M – P25,000; and E – P5,000. The partners’ profit and loss ratio were
3:2:1, respectively. The partners decided to dissolve and liquidate. They sold all the non-
cash assets for P37,000 cash. After settlement of all liabilities amounting to P12,000, they
still have P28,000 cash left for distribution.
2. Assuming that any partner’s capital debit balance is uncollectible, the share of A in
the P28,000 cash for distribution would be
a. 19,000
b. 18,000
c. 17,800
d. 40,000
PROBLEM 3: The Grey and Redd Partnership was formed on January 2, 2021. Under the
partnership agreement, each partner has an equal initial capital balance. Partnership net
income or loss is allocated 60% to Grey and 40% to Redd. To form the partnership, Grey
originally contributed assets costing P30,000 with a fair value of P60,000 on January 2,
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2021, and Redd contributed P20,000 cash. Drawings by the parties during 2021 totaled
P3,000 by Grey and P9,000 by Redd. The partnership net income in 2021 was P25,000.
1. Under the goodwill method, what is Redd’s initial capital balance in the
partnership? A. 20,000
b. 25,000
c. 40,000
d. 60,000
PROBLEM. 4 : The partnership agreement of Reid and Simm 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 Simm’s capital account for the year-ended December 31, 2021, is
as follows:
PROBLEM 5: The following condensed balance sheet is presented for the partnership of
Alfa and Beda, who share profits and losses in the ratio of 60:40, respectively:
Cash 45,000
Other assets 625,000
Beda, loan 30,000
700,000
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1. The assets and liabilities are fairly valued on the balance sheet. Alfa and Beda
decide to admit Capp as a new partner with a 20% interest. No goodwill or bonus is
to be recorded. What amount should Capp contribute in cash or other assets?
a. 110,000
b. 116,000
c. 140,000
d. 145,000
2. Instead of admitting a new partner, Alfa and Beda decide to liquidate the
partnership. If the other assets are sold for P500,000, what amount of the available
cash should be distributed to Alfa?
a. 255,000 c. 327,000
b. 273,000 d. 348,000
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