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 DISSOLUTION/INCORPORATION OF A PARTNERSHIP ADV – 02

A. Admission of a New Partner.
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 goes to the selling partner and therefore not recorded in the books. It is a private or personal transaction
between the buying partner and the selling partner. 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. Investment.
A new partner may be granted an interest in the partnership in exchange for contributed assets and/or goodwill. The
admission of the new partner and contribution of assets may be recorded using the bonus method or the goodwill
method.
a. Bonus Method. Total Agreed Capital (TAC) is equal to Total Contributed Capital (TCC). The bonus may be for
the old partners or new partner(s).

b. Goodwill Method. TAC is greater than the TAC. The goodwill may be attributable to the old partners or to the
new partner(s).
However, in PFRS No. 3, goodwill represents the excess of the cost of the business combination over the fair value
of the identifiable net assets obtained. The standard provides that GOODWILL ATTACHES ONLY TO A BUSINESS
AS A WHOLE AND IS RECOGNIZED ONLY WHEN A BUSINESS IS ACQUIRED. This provision outlawed the use
of the goodwill method in partnership particularly ADMISSION AND RETIREMENT OF A PARTNER because there
is no business involved. Therefore, for CPA board examination purposes, ONLY BONUS METHOD IS ALLOWED.
B. Withdrawal of a Partner.
On the date of retirement of a partner, the following procedures are to be used:

1. Compute and distribute profit or loss to the partners in their P/L ratio.
2. Adjust the assets and liabilities of the partnership to their current (fair) market values.
3. Make the settlement with the retiring partner. And the settlement may be:
 SELLING OF AN INTEREST TO AN OUTSIDER. This is similar to admission by
purchase.
 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.
 SELLING OF AN INTEREST TO THE PARTNERSHIP/PAYMENT FROM
PARTNERSHIP FUND. Under this approach, the withdrawal of a partner may be
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.
C. Incorporation of a Partnership
Two approaches of opening the corporate books are in general use.
1. 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.

2. To close out the partnership books 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.

MULTIPLE CHOICE
1. On October 31, 2006, the balance sheet of the partners Eva and Eda who share profits and losses 3:2, respectively, shows the
following:
Sundry assets 600,000
Eva, capital 360,000
Eda, capital 240,000
They agreed to take Ella as a new partner, with Ella purchasing 1/8 of both partners’ interests for P 100,000 cash. What amount would
be recorded in the partnership’s books as Ella’s capital, if the bonus method is used?
a. 50,000 c. 100,000
b. 75,000 d. 120,000

2. The capital accounts of the partnership of N, V and J on June 01, 2015 are presented below with their respective profit and loss
ratios:
N 139,200 1/2
V 208,800 1/3
J 96,000 1/6
On June 01, 2015, L is admitted to the partnership when L purchased, for P 132,000, a proportionate interest from N and J in the net
assets and profits of the partnership. As a result of a transaction L acquired a one-fifth interest in the net assets and profits of the firm.
What is the combined gain realized by N and J upon the sale of a portion of their interest in the partnership to L?
a. 0 c. 62,400
b. 43,200 d. 82,000
PARTNERSHIP DISSOLUTION page 02

3. The capital account for the partnership of L and M at October 31, 2005 are as follows:
L, capital 80,000
M, capital 40,000
------------------
120,000
===========
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 N as a partner with one-third in the capital and profits and losses upon his investment of P 30,000. Immediately after N’s
admission, what should be the capital balances of L, M and N respectively, assuming goodwill is not to be recognized?
a. 50,000; 50,000; 50,000. c. 66,667; 33,333; 50,000.
b. 60,000; 60,000; 60,000. d. 68,000; 32,000; 50,000.

4. On January 31, 2008, partners of L, M and N, LLP had the following loan and capital account balances (after closing
entries for January):
Loan receivable from L 20,000 dr
Loan payable to N 60,000 cr
L, capital 30,000 dr
M, capital 120,000 cr
N, capital 70,000 cr
The partnership’s income sharing ratio was L, 50%, M, 20% and N, 30%. On January 31, 2008, O was admitted to the
partnership for a 20% interest in total capital of the partnership in exchange for an investment of P 40,000 cash. Prior
to O’s admission, the existing partners agreed to increase the carrying amount of the partnership’s inventories to
current fair value, a P 60,000 increase. The capital account to be credited to O:
a. 60,000 c. 52,000
b. 40,000 d. 46,000

5. A, B and C are partners sharing profits in a 5:3:2 ratio, and with capital balances of P 95,000, P 80,000 and P
60,000, respectively, on December 31, 2015. The partners decided to admit D as a new partner on January 01,
2016. D will contribute cash of P 80,000 to the partnership and also pay P 10,000 for 15% of B’s share. D is to
have a 20% share in profits. After the admission of D, the total capital will be P 330,000 and D’s capital will be P
70,000. After the admission of D, B’s capital balance would be:
a. 72,600 c. 79,100
b. 74,600 d. 81,100

6. P contributed 24,000 and C contributed 48,000 to form a partnership, and they agreed to share profits in the ratio of
their original capital contributions. During the first year of operations, they made a profit of 16,290, P withdrew 5,050 and C
8,000. At the start of the following year, they agreed to admit G into the partnership. He was to receive a one-fourth
interest in the capital and profits upon payment of 30,000 to P and C, whose capital accounts were to be reduced by
tranfers to G’s capital account of amounts sufficient to bring them back to their original capital ratio. How should the 30,000
paid by G be divided between P and C?
P C
a. 9,825 20,175
b. 15,000 15,000
c. 10,000 20,000
d. 9,300 20,700

Use the following information for questions 7 to 9:

In the AD partnership, Allen’s capital is 140,000 and Daniel’s is 40,000 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 40,000 for a
one-fifth interest.
7. What is the amount of inventory written down?
a. 4,000 c. 15,000
b. 10,000 d. 20,000

8. David directly purchases a one-fifth interest by paying Allen 34,000 and Daniel 10,000. The land account is increased
before David is admitted. By what amount is the land account increased?
a. 40,000 c. 20,000
b. 36,000 d. 10,000

9. David invests 40,000 for a one-fifth interest in the total capital of 220,000. The journal to record David’s admission into the
partnership will include:
a. A credit to Cash for 40,000. c. A credit to David, capital for 40,000.
b. A debit to Allen, capital for 3,000. d. A credit to Daniel, capital for 1,000.

10. Andres and Berto are partners in an engineering consulting company sharing profits and losses 40% and 60%, respectively,
and their capital balances are P 110,000 and P 150,000, respectively. The recorded net assets of the company are as follows:
Book value Fair value
Working capital 240,000 220,000
Property and equipment – net 80,000 108,000
Noncurrent liabilities 60,000 60,000
In addition to the recorded assets, the partners feel that the company has goodwill valued at P 40,000 because the company
enjoys a strong client base and has earnings that are consistently above industry average. Carlos is interested in merging his
environmental consulting company with Andres and Berto. Carlos’ net assets to be conveyed to the partnership include the
following:
Book value Fair value
Working capital 50,000 40,000
Equipment – net 60,000 50,000

PARTNERSHIP DISSOLUTION page 03

 In addition to the above recorded assets, Carlos feels that his business contracts and expertise will add value to the
existing partnership. Carlos has valued these intangibles at P 20,000. If Carlos were to acquire a 30% interest in the
new partnership, how much additional cash would Carlos have to contribute to the partnership?
a. 22,000 c. 25,000
b. 20,000 d. 24,000

11. On June 30, 2005, the balance sheet for the partnership of C, M and P, together with their respective profit and loss ratios,
were as follows:
Assets, at cost 180,000
============
C, loan 9,000
C, capital (20%) 42,000
M, capital (20% 39,000
P, capital (60%) 90,000
-----------------------
Total 180,000
=============
C has decided to retire from the partnership. By mutual agreement, the assets are to be adjusted to their fair value of P 216,000
at June 30, 2005. It was agreed that the partnership would pay C P 61,200 cash for C’s partnership interest, including C’s loan
which is to be repaid in full. No goodwill is to be recorded. After C’s retirement, what is the balance of M’s capital account?
a. 36,450 c. 45,450
b. 39,000 d. 46,200

12. The partners’ capital of N, O, P and Q, LLP on May 31, 2008, was as follows:
N (20%) 60,000
O (20%) 80,000
P (20%) 70,000
Q (40%) 40,000
----------------
250,000
=========
On May 31. 2008, with the consent of N, O and Q:
1. P retired from the partnership and was paid P 50,000 cash in full settlement of his interest in the
partnership.
2. R was admitted to the partnership with a P 20,000 cash investment for a 10% interest in the net
assets of N, O, Q and R, LLP. The capital account to be credited to R:
a. 22,000 c. 20,000
b. 27,000 d. 25,000

13. The December 31, 2011, statement of financial position of B, C and D partnership is summarized as follows:
Cash 100,000 C, loan 100,000
Other assets, at cost 500,000 B, capital 100,000
C, capital 200,000
D, capital 200,000
600,000 600,000
======== ==========
The partners share profits and losses as follows: B, 20%, C, 30% and D, 50%. C is retiring from the partnership and the
partners have agreed that “other assets” should be adjusted to their fair value of P 600,000 at December 31, 2011. They
further agree that C will receive P 244,000 cash for his partnership interest exclusive of the loan, which is to be paid in full. No
goodwill implied by C’s payment will be recorded. After C’s retirement, the capital balances of B and D, respectively, will be:
a. 116,000 and 240,000 c. 100,000 and 200,000
b. 101,714 and 254,286 d. 73,143 and 182,857

BUSINESS COMBINATION: Each Partnership Has Undervalued Tangible Assets and Goodwill
Use the following information for questions 14 to 17: 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 50,000 40 28
B 35,000 30 21
C 40,000 20 14
D 25,000 10 7
------------------- ------------ ---------
150,000 100 70
=========== ======= =====
X 60,000 50 15
Y 40,000 50 15
------------------- ------------- ----------
100,000 100 30
=========== ======= =====

A, B, C and D’s partnership has undervalued tangible assets of P 20,000 and X and Y partnership has undervalued tangible
assets of P 8,000. All the partners agree that:
(a) the partnership of A, B, C and D possesses goodwill of P 30,000 and
(b) the partnership of X and Y possesses goodwill of P 10,000.
Combined businesses will continue to use the general ledger of A, B, C and D.

PARTNERSHIP DISSOLUTION page 04

14. Assuming that tangible assets are to be revalued and goodwill is to be recorded, compute the amount of goodwill
recognized in partnership books:
a. 0 c. 40,000
b. 30,000 d. 68,000

15. Compute the capital balances of A and X, respectively:

A X
a. 70,000 69,000
b. 62,000 65,000p
c. 58,000 64,000
d. 50,000 60,000

16. Except that bonus method is to be used with respect to undervalued assets and goodwill. Compute the amount of goodwill
recognized in the books:
a. 0 c. 40,000
b. 30,000 d. 68,000

17. Except that bonus method is to be used with respect to undervalued assets and goodwill. Compute the capital balances of
A and X, respectively:
A X
a. 70,000 69,000
b. 50,000 60,000
c. 58,000 64,000
d. 50,960 58,800

18. J and K partnership’s balance sheet at December 31, 2011, reported the following:
Total assets 100,000
Total liabilities 20,000
J, capital 40,000
K, capital 40,000
On January 02, 2012, J and K dissolved their partnership and transferred all assets and liabilities to a newly-formed corporation.
At the date of incorporation, the fair value of the net assets was P 12,000 more than the carrying amount on the partnership’s
books, of which P 7,000 was assigned to tangible assets and P 5,000 was assigned to goodwill. J and K were each issued
5,000 shares of the corporation’s P 1 par value ordinary share. Immediately following incorporation, share premium/additional
paid capital in excess of par should be credited for:
a. 68,000 c. 77,000
b. 70,000 d. 82,000

19. Pedro and Mario have partner capital balances, at book value, of P 450,000 and P 65,000 as of December 31, 2011. Pedro
is allocated 60% of profits or losses, and Mario is allocated the balance. The partners believe that tangible net assets have a
market value in excess of book value in the amount of P 30,000 net. The P 30,000 is allocated as follows:
Book value Market value
Accounts receivable 120,000 102,000
Inventory 200,000 258,000
Warranty obligations 20,000 30,000
They are considering admitting Warren to the partnership in exchange for total consideration of P 84,000 cash. In exchange for
the consideration, Warren will receive a 30% interest in capital and a 35% interest in profits. If the goodwill suggested by the
admission of Warren proved to be worthless, how much Warren would be harmed?
a. 24,000 c. 16,000
b. 20,000 d. 28,000

20. A and B entered into a partnership on May 31, 2018, contributing cash of P 48,000 and P 32,000, respectively, and
agreeing to divide earnings in the ratio of their initial investments after allowing annual salary allowance of P 12,000 each. On
December 31, 2018, the income summary account had a credit balance of P 34,000, while the drawing accounts showed debit
balances of P 14,000 for A and P 10,000 for B. At the beginning of the next year, C was admitted into the firm as a new partner
with a 33 1/3% interest for a capital credit equal to his cash investment of P 60,000. A and B then effected a private cash
settlement between themselves in order to make the capital balances conform to a new profit sharing ratio of 4:2:3, respectively,
with salary allowances scrapped. How much of the amount of the private cash settlement effected between the old partners?
a. 5,000 c. 12,000
b. 9,000 d. 15,000

21. P, R and S were partners with capital balances as of January 01, 2018 of P 20,000, P 30,000 and P 40,000, respectively,
sharing profit and losses on a 5:3:2 ratio. On July 01, 2018, P withdraw from the partnership. Partners agreed that at the time
of withdrawal, certain inventories had to be revalued at P 14,000 from its cost of P 10,000. For the six-month period ending
June 30, 2018, the partnership generated a net income of P 28,000. Further, partners agreed to pay P, P 39,000 for his interest
and that the remaining partners’ capital accounts would be adjusted for whatever goodwill the settlement would generate. The
payment of P included a goodwill of:
a. 3,000 c. 10,000
b. 5,000 d. 8,500

PARTNERSHIP DISSOLUTION page 05

22. Bong, Gong and Song are partners with capital account balances of P 350,000, P 280,000 and P 200,000, respectively.
Song informed Bong and Gong that she is withdrawing from the partnership. The partners’ share profits and losses 45%, 30%
and 25%, respectively. The partnership agreement states that the goodwill of the partnership will be recognized at the date of
withdrawal. In this instance, the partners determine that the partnership’s goodwill/revaluation of assets P 150,000. Assuming
that Song’s equity is purchased by a new partner (Mong) approved by Bong and Gong, what is the amount of Mong’s initial
capital account?
a. 87,500 c. 350,000
b. 237,500 d. the amount cannot be determined.

23. R and G are partners sharing profits and losses in the ratio of 1:2, respectively. On July 01, 2005, they decided to form the
R & G Corporation by transferring assets and liabilities from the partnership to the corporation in exchange of its stocks. The
following is the post-closing trial balance of the partnership:
Cash 45,000
Accounts receivable (net) 60,000
Inventory 90,000
Fixed assets (net) 174,000
Liabilities 60,000
R, capital 94,800
G, capital 214,200
------------------- --------------------
369,000 369,000
=========== ============
It was agreed that adjustments be made to the following assets to be transferred to the corporation:
Accounts receivable 40,000
Inventory 68,000
Fixed assets 180,600
The R & G Corporation was authorized to issue P 100 par preferred stock and P 10 par common stock. R and G agreed to
receive their equity in the partnership 720 shares of the common stock each, plus even multiples of 10 shares of preferred stock
for their remaining interest. The total number of shares of preferred stock and common stock issued by the corporation in
exchange of the assets and liabilities of the partnership are:
PS CS
a. 2,540 shares 1,500 shares
b. 2,592 shares 1,440 shares
c. 2,642 shares 1,440 shares
d. 2,642 shares 1,550 shares

24. Partners Art and Tart, who share equally in profits and losses, have the following balance sheet as of December 31, 2018:
Cash 120,000 A/P 172,000
A/R 100,000 Accum. Deprn. 8,000
Inventory 140,000 Art, capital 140,000
Equipment 80,000 Tart, capital 120,000
Total 440,000 Total 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 P 10,000, restatement of the inventory at its current fair value of P 160,000 and
recognition of further depreciation on the equipment of P 3,000. The corporation’s capital stock is to have a par value of P 100
and the partners are to be issued 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 Tart was:
a. 260,000 c. 273,000
b. 267,000 d. 280,000

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