Partnership Formation and Operations

1. Mary is trying to decide whether to accept a salary of P40,000 or a salary of

P25,000 plus a bonus of 10% of net income after salary and bonus as a means
of allocating profit among the partners. Salaries traceable to the other partners
are estimated to be P100,000. What amount of income would be necessary so
that Mary would consider the choices to be equal?

Answer: P290,000
Solution:

P40,000 = 25,000 + .10 (NI – salaries – bonus)

P40,000 = 25,000 + .10 (NI – (P100,000 + 25,000) – 15,000)
P29,000 = .10 NI
NI = P290,000

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2. XX,YY,ZZ are partners with average capital balances during 2012 at P360,000,

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P180,000 and P120,000, respectively. Partners receive 10% interest on their

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average capital balances. After deducting salaries of P90,000 to XX and P60,000
to CC the residual profit or loss is divided equally. In 2012, the partnership

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sustained a P99,000 loss before interest and salaries to partners. By what
amount should XX’s capital account changed?
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Answer: 21,000 increase
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Solution:
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Interest on XX’s Average capital 36,000

Salaries 90,000
Balances: Equally (105,000)
Increase (Decrease) 21,000
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3. Partner A first contributed 50,000 of capital into an existing partnership on

March 1, 2012. On June 1, 2012 the partner contributed another 20,000. On
September 1, 2012, the partner withdrew 15,000 from the partnership.
Withdrawals in excess of 10,000 are charged to the partner’s capital account.
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The annual weighted average capital balance is __________.

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Answer: P51,667
Solution:

March 1: P50,000 x 3 150,000

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June 1: P70,000 x 3 210,000

September 1: P65,000 x 4 260,000

620,000
Divided by: monthly per annum 12 months
P51,667

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Advanced Accounting I

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 4. Lady and Gaga decided to form a partnership on June 1, 2013. The partnership
will take over their assets as well as assume their liabilities. As of June 1, 2013,
the net assets of Lady and Gaga are P220,000 and P309,375 respectively.
Liabilities of Lady are 55% less than the value of its net assets while liabilities of
Gaga are 40% more than the value of its assets. The partners agreed on a 25:75
profit and loss ratio. Furthermore, the partners arrive on the following
agreements: they will provide an allowance for doubtful accounts of 10% of the
accounts receivable balance (Lady, 27,500 ; Gaga, 41,500). Accrued Salary of
20,250 was not recognized in Gaga’s books. They also determined that Lady’s
Inventory has original cost of 35,000, book value of 31,000 tax basis of 32,000
and Fair market value of 41,000.

How much cash should Lady invest/withdraw so that their capital interest
would be equal to their profit and loss ratio?

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Answer: 132,250

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Solution:

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Lady Gaga
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Net Assets or Capital 220,000 309,375
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Allowance for DAccounts (2,750) (4,125)
Adjustments 10,000* (20,250)
227,250 285,000
(squeeze) (132,000) Divided by 75%
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95,000 380,000
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* Fair market value – Book value

41,000 – 31,000
10,000
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5. On August 1, 2014, the business accounts of A and B appear below:

Assets A B
Cash 11,000 22,354
Accounts Receivable 84,536 217,890
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Inventories 100,035 240,102

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Land 603,000 428,267

Buildings 200,345 384,789
Other Assets 22,000 23,600
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Liabilities and Capital

Accounts Payable 178,940 243,650
Notes Payable 200,000 345,000
A, Capital 641,976
B, Capital 728,352

BS in Accounting Technology III

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Advanced Accounting I

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 A and B agreed to form a partnership contributing their respective assets and
liabilities subject to the following adjustments:
 Accounts receivable of 20,000 and 35,000 are uncollectible in A and B’s
respective books.
 Inventories of 5,500 and 6,700 are worthless in A and B’s respective
books.
 Other assets of 2,200 and 3,600 in A and B’s books are written off.
After five days, C was offered to join them and will contribute for a 20% interest
in the firm. They also agreed to divide profit and loss in the ratio 40:40:20,
same ratio based on their capital credit as agreed upon formation. As a result of
the said agreement, as a personal transaction, how much should the cash
settlement between A and B?

Answer: P 34,388
Solution:
A B
Interest before adjustment 641,976 728,352

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Allow. For Doubtful Accts. (20,000) (35,000)
Worthless Inventories (5,500) (6,700)

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Other assets written off (2,200) (3,600)
Interest after adjustment 614,276 683,052

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Total Interest, old rs e 1,297,328
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Divided by 80%
Total interest, new 1,621,660
Times 20%
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Interest, C 324,332
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A B C
Old 614,276 683,052 -
New 648,664 648,664 324,332
34,388 (34,388) -
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The total interest should be adjusted first according to their agreements. Then
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divide the adjusted interests of the old partners by 80% because the interest of
the new partner will be 20%.
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6. On May 1, 2014, the capital accounts of S, T and C are 1,260,000; 787,500;

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472,500, respectively. At this time, I is admitted to the firm, he purchased a

1/6 interest in the firm for 228,750. The old partners equalized their capital
investments. Afterwards, all the partners agree to divide profits and losses
equally. The new partnership closes its books on June 30, 2014 reporting profit
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of 44,100 for two months. Each partner made the following withdrawals: S and
C 2,625 per month while T and I 3,500 per month. On June 30, 2014, I invest
enough cash to increase his capital to a 1/3 interest in the partnership. How
much capital is to be invested by I?

Answer: P633,762.50

BS in Accounting Technology III

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Advanced Accounting I

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 Solution:

S T C I Total
1,260,000 787,500 472,500 - 2,520,000
1/6 interest 1,050,000 656,250 393,750 420,000 2,520,000
Profit 11,025 11,025 11,025 11,025 44,100
Withdrawal (5,250) (5,250) (7,000) (7,000) (24,500)
Total 1,055,775 662,025 397,775 424,025 2,539,600

424,025 + x = (2,539,600 + x) 1/3

x = 633,762.50

Since the admission is by purchase, the total interest of the partnership will not
be affected. Multiply the interest of the partners by 5/6 and the 1/6 of the total
interest of the partners will be charged to I.

The total interest of the partnership after the distribution of profits and

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withdrawals is 2,539,600. The problem asks for the cash investment of I so the
existing interest plus the cash investment divided by 3 will be the total interest

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of I. Deduct 424,025 to get the cash investment.

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7. A business owned by C was short of cash and C decided to form a partnership
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with D and E, D was able to contribute cash thrice the interest of C in the
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partnership while E was able to contribute cash twice the interest of D in the
partnership. The assets contributed by C were as follows: Cash- 18,000;
Accounts receivable- 378,000 with allowance for doubtful accounts of 12,000;
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inventory-840,000; and store equipment of 300,000 with accumulated

depreciation of 30,000 but with current worth of 250,000 and agreed value of
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200,000.
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C, D and E agreed that the allowance for doubtful accounts was inadequate and
should be 20,000. They also agreed that the fair value of the inventory is
920,000. The total assets of the partnership would be:
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Answer: 14,960,000
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Solution:

C- x 1,496,000
D- 3x 4,488,000
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E- 2(3x) 8,976,000
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Total 14,960,000

The agreed value of the equipment should be used.

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“Sometimes the questions are complicated and the answers are simple.”

BS in Accounting Technology III

This study source was downloaded by 100000810998411 from CourseHero.com on 06-07-2021 03:15:57 GMT -05:00
Advanced Accounting I

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