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Afar-01: Partnership Formation & Operations: - T R S A
Afar-01: Partnership Formation & Operations: - T R S A
CPA Review Batch 41 May 2021 CPA Licensure Examination Weeks 1-2
60%, respectively and partners agreed to bring their capital balances in proportion to the
profit and loss ratio and using the capital balance of BB as the basis. The additional cash
investment made by AA should be:
a. P18,000.00 c. P134,100.00
b. P85,500.00 d. P166,250.00
III
CC and DD are joining their separate business to form a partnership. Cash and non-cash assets
are to be contributed for a total capital of P150,000. The non-cash assets to be contributed
and liabilities to be assumed are:
CC DD
Book Value Fair Value Book Value Fair Value
Accounts Receivable….. P11,250.00 P11,250.00
Inventories……………….. 11,250.00 16,875.00 P30,000.00 P33,750.00
Equipment……………….. 18,750.00 15,000.00 33,750.00 35,625.00
Accounts Payable……… 5,637.50 5,625.00 3,750.00 3,750.00
The partner’s capital accounts are to be equal after all contributions of assets and
assumptions of liabilities.
Determine:
1. The total assets of the partnership.
a. P159,375.00 c. P140,625.00
b. P150,000.00 d. P112,500.00
2. The amount of cash that each partner must contribute:
a. CC – P37,500; DD – P9,375 c. CC – P80,625; DD – P78,750
b. CC – P37,500; DD – P5,625 d. CC – P63,750; DD – P5,625
IV – With Solution
OO and PP are partners sharing profits in this proportion – 60:40. A balance sheet prepared for
the partners on April 1, 20x4 shows the following:
Cash . . . . . . . . . . . . . . . . . . . . P48,000 Accounts payable . . . . . . . . . P 89,000
Accounts Receivable . . . . . . . 92,000 OO, capital . . . . . . . . . . . . . . 133,000
Inventories . . . . . . . . . . . . . . . . 165,000 PP, capital. . . . . . . . . . . . . . . 108,000
Equipment . . . . . . . . . . . . 70,000
Less: Acc. depreciation . . . . . . . 45,000 25,000
Total Assets . . . . . . . . . . . . . . . . P330,000 Total Liabilities & Capital . . . . P 330,000
On this date, the partners agree to admit RR as a partner. The terms of the agreement are summarized
below. Assets and liabilities are to be restated as follows:
• An allowance for possible uncollectible of P4,500 is to be established.
• Inventories are to be restated at their present replacement value of P170,000.
• Accrued expenses of P4,000 are to be Recognized.
OO, PP and RR will divide profits in the ratio of 5:3:2. Capital balances of the partners after the formation
of the new partnership are to be in the aforementioned ratio, with OO and PP making cash settlement
between them outside of the partnership to adjust their capitals, and RR investing cash in the partnership
for his interest.
1. The cash to be invested by RR is:
a. P60,250 c. P50,000
b. P47,500 d. P59,375
2. The total capital of the partnership after the admission of RR is:
a. P296,875 c. P237,500
b. P301,250 d. P286,850
3. Cash settlement between OO and PP is:
a. OO will pay PP P17,537.50 c. OO will invest P17,537.50
b. PP will pay OO P17,537.50 d. PP will withdraw P17,537.50
Answers/Solutions:
1. (d)
Total capital of the new partnership (refer to No. 2) P 296,875
Multiply by RR’s interest 20%
Cash to be invested by RR P 59,375
2. (a) OO PP Total
(60%) (40%)
Unadjusted capital balances P133,000 P108,000 P241,000
Adjustments:
Allowance for bad debts ( 2,700) ( 1,800) ( 4,500)
Inventories 3,000 2,000 5,000
Accrued expenses ( 2,400) ( 1,600) ( 4,000)
Adjusted capital balances P130,900 P106,600 P237,500
Total capital before the formation of the new partnership (see above) P 237,500
Divide by the total percentage share of OO and PP (50% + 30%) 80%
Total capital of the partnership after the admission of RR P 296,875
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AFAR-01
Weeks 1-2: PARTNERSHIP FORMATION & OPERATIONS
3. (a)
Contributed Capital Contributed Capital Settlement
OO P 130,900 P148,437.50 (50% x P296,875) P 17,537.50
PP 106,600 89,062.50 (30% x P296,875) (17,537.50)
Therefore, OO will pay PP P17,537.50
Partnership Operations
V
Left and Right are partners. Their capital accounts during 2019 were as follows:
Left, Capital Right, Capital
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AFAR-01
Weeks 1-2: PARTNERSHIP FORMATION & OPERATIONS
Don’t do nothing because you feel you can only do little, do what you can.
Courage isn’t having the strength to go on; it’s going on when you don’t have the strength.
When all else is lost, the future still remains.
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AFAR-01
Weeks 1-2: PARTNERSHIP FORMATION & OPERATIONS
Solution to Problem X: 1. c; 2. b; 3. c; 4. b
Allocation/Distribution of Net Income – Requirement 1
AA BB CC TOTAL
Salaries P 7,200 P 6,000 P 6,800 P 20,000
Interest-12% of Ave. Cap 6,480 8,640 12,420 27,540
Balance/Remainder (4:3:3) (600) (450) (450) (1,500)
Share in Net Income P13,080 P14,190 P18,770 P46,040
Statement of Partners’ Capital – Requirement 2
AA BB CC TOTAL
Capital, January 2, 2019 P48,000 P72,000 P108,000 P228,000
Additional Investments (withdrawals) 12,000 (18,000) ( 6,000)
Net Income 13,080 14,190 18,770 46,040
Personal Withdrawals (4,500) (4,500) (4,500) ( 13,500)
Capital, December 31, 2019 P68,580 P81,690 P104,270 P254,540
Allocation/Distribution of Net Income – Requirement 3
AA BB CC TOTAL
Interest-12% of Ave. Cap P6,480 P8,640 P12,420 P 27,540
Balance/Remainder (4:3:3) ( 600) ( 450) ( 450) ( 1,500)
Share in Net Income P5,880 P8,190 P11,970 P26,040*
*Net income before partners’ salaries and interests…………………………P 46,040
Less: Operating expenses (including salaries)………………………… 20,000
Net Income after partners’ salaries but before interests…………… .P 26,040
Incidentally, the entry to record the salaries would be:
Operating expenses (for salaries) ……………………............ 20,000
AA, Capital …………………………………………….. 7,200
BB, Capital ……………………………………………… 6,000
CC, Capital …………………………………………… . 6,800
Statement of Partners’ Capital – Requirement 4
AA BB CC TOTAL
Capital, January 2, 2019 P48,000 P72,000 P108,000 P228,000
Addit’l. Inv. (Withdrawals) 12,000 (18,000) ( 6,000)
Net Income 5,880 8,190 11,970 26,040
Sal. (refer to entry above) 7,200 6,000 6,800 20,000
Personal Withdrawals (4,500) (4,500) (4,500) ( 13,500)
Capital. December 31, 2019 P68,580 P81,690 P104,270 P 254,540
XI – With Solution
DD and EE was organized and began operations of March 1, 2019. On that date, DD invested
P75,000 and EE invested land and building with current fair value of P40,000 and P50,000,
respectively. EE also invested P30,000 in the partnership on November 1, 2019 because of its
shortage of cash. The partnership contract includes the following remuneration plan:
DD EE
Annual Salary ……………………………………………………... P9,000 P12,000
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, 2020, DD and EE had net sales of P250,000, cost of goods sold
of P140,000 and total operating expenses of P50,000 (excluding partners’ salaries and interest
on average capital account balances). Each partner made monthly cash drawings in
accordance with partnership contract.
Determine:
1. The share of partner DD in the net income:
a. P29,400.00 c. P36,000.00
b. P33,000.00 d. P23,400.00
2. The capital balance of each partner on March 1, 2020 should be:
a. DD, P95,400; EE, P138,600 c. DD, P108,000; EE, P147,000
b. DD, P66,000; EE, P82,000 d. DD, P99,000; EE, P135,000
3. Assuming that the annual salary are to recognized as operating expenses and the total
operating expenses of P50,000 includes the partners’ salaries expenses but excluding
interest on partners’ average capital account balances. The share of partner DD in the net
income in 2020?
a. P29,400.00 c. P36,000.00
b. P33,000.00 d. P23,400.00
4. Using the same information in No. 3, the capital balance of each partner on March 1,
2020:
a. DD, P95,400; EE, P138,600 c. DD, P108,000; EE, P147,000
b. DD, P66,000; EE, P82,000 d. DD, P99,000; EE, P135,000
***Great passions, can elevate us to the things that we want to deliver.***
***Nothing great was ever achieved without determination.***
***Don’t be discouraged; everyone who got where he is, started where he was.***
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AFAR-01
Weeks 1-2: PARTNERSHIP FORMATION & OPERATIONS
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