School of Accountancy & Management

Accounting for Special Transaction

Midterm Examination

1. 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. C. Assessed valuation for property tax purposes
b. Contributing partner’s original cost d. Contributing partner’s tax basis.

2. Under the bonus method, any increase or decrease in the capital credit of a partner is
a. deducted from or added to the capital credits of the other partners.
b. recognized as goodwill.
c. recognized as expense.
d. deferred and amortized to profit or loss.

3. A and B agreed to form a partnership. The contributions of the partners are as follows:

A B
600,00
Cash
0
Inventory 20,000
Land 400,000
Equipment 50,000

Additional information:
 Half of the inventory is unpaid. The partnership agreed to assume the related accounts payable.
 The land has a fair value of ₱700,000 and is subject to a mortgage of ₱100,000. However, B agreed to settle
the mortgage personally.

How much are the adjusted capital contributions of A and B, respectively?

a. 670,000; 690,000 c. 660,000; 700,000
b. 670,000; 700,000 d. 670,000; 600,000

4. Mr. A, a partner in ABC Co., is deciding on whether to accept a salary of ₱16,000 or a salary of ₱10,000 plus
a bonus of 10% of profit. The bonus shall be computed on profit after salaries and bonus. Salaries of the
other partners amount to ₱40,000. What amount of profit would be necessary so that Mr. A would be
indifferent between the choices?
a. 60,000 b. 116,000 c. 110,000 d. 106,000

5. The partnership agreement of A, B and C stipulates the following:

 A, the managing partner, shall receive a bonus of 10% of profit.
 Each partner shall receive a 6% interest on average capital investments.
 Any remaining profit or loss shall be shared equally.

The average capital investments of the partners during the year were ₱80,000 for A, ₱50,000 for B, and ₱30,000
for C. The partnership incurred loss of ₱20,000 during the period. How much was A’s share?
a. 3,607 b. 5,067 c. 6,867 d. 8,067
6. A and B formed a partnership on January 1, 20x1. Their contributions were credited to their respective
capital accounts as follows:
Capital accounts
A, Capital 150,000
B, Capital 250,000
400,000

During the year, the partnership earned profit of ₱1,000,000. There was no contractual stipulation on how
profits are to be shared by the partners. How much is the share of B in the profit?
a. 375,000 b. 425,000 c. 565,000 d. 625,000

Use the following information for the next four questions:

The partners’ capital accounts in AB Partnership before the admission of a new partner are as follows:

Capital accounts P/L ratio

A, Capital 200,000 60%
B, Capital 120,000 40%
320,000

7. C purchases 20% interest in the partnership from A and B for ₱280,000. How much is the total equity of the
partnership after the admission of C?
a. 320,000 b. 240,000 c. 440,000 d. 200,000

8. C invests ₱120,000 cash for a 20% interest in the net assets and profits of the partnership. Under the bonus
method, how much is the initial capital credit of C?
a. 88,000 b. 240,000 c. 264,000 d. 0

9. Before the admission of C, B decides to retire. A acquires B’s interest for ₱180,000. How much is the capital
balance of A after the retirement of B but before the admission of C?
a. 200,000 b. 280,000 c. 264,000 d. 320,000

10. Before the admission of C, B decides to retire. The partnership pays B ₱180,000 as settlement of his
partnership interest. How much is the capital balance of A after the retirement of B but before the
admission of C?
a. 140,000 b. 200,000 c. 260,000 d. 320,000

11. The partnership of A, B and C is undergoing liquidation. Information on the financial position of the
partnership follows:
Cash 150,000
Other assets 450,000
Total 600,000

Liabilities 225,000
A, capital (40%) 60,000
B, capital (30%) 270,000
C, capital (30%) 45,000
Total 600,000
 The other assets were realized at ₱300,000. None of the partners is solvent. How much cash did the
partners receive?
A B C A B C
a. 15,000 205,000 5,000 c. 25,000 185,000 15,000
b. 5,000 225,000 0 d. 0 225,000 0

12. A and B decided to liquidate their partnership. The partnership’s records show the following information:

Non-cash assets 120,000

Liabilities 15,000
A, capital (50%) 60,000
B, capital (50%) 45,000
Total liabilities and equity 120,000

The assets were sold for ₱32,000 and A received ₱16,000 in the cash distribution to the partners. How much did
B receive?
a. 17,000 b. 16,000 c. 1,000 d. 0

13. ABC Partnership decided to liquidate. Information before the start of liquidation is as follows:
Cash 50,000 Liabilities 375,000
Noncash assets 900,000 B, Loan 80,000
C, Loan 25,000
A, Capital (50%) 312,500
B, Capital (30%) 107,500
C, Capital (20%) 50,000
Total 950,000 Total Liab. & Equity 950,000

The noncash assets were sold for ₱400,000. C is the only solvent partner. How much did B receive on the cash
distribution to the partners?
a. 37,500 b. 28,125 c. 31,675 d. 0

14. The accounts of AB Partnership after its noncash assets were realized are as follows:
Debit Credit
Cash 34,000
Accounts payable 25,000
Loan payable to
A 9,000
A, Capital 8,000
B, Capital 8,000

In the settlement of the partners’ interest in the partnership, how much total cash did the two partners receive?
a. 0 b. 1,000 c. 8,000 d. 9,000

15. A, B and C are partners. Their respective personal assets, personal liabilities and partnership capital
balances are as follows:

A B C
Personal assets 90,000 240,000 180,000
 Personal
liabilities 75,000 150,000 216,000
Capital balances 150,000 (96,000) 210,000

Which of the partners is personally insolvent?

a. A b. B c. C d. B & C

16. Farewell Partnership is undergoing liquidation. Information on Farewell follows:

Cash 40,000
Accounts
180,000
receivable
Receivable from B 10,000
Inventory 160,000
Equipment 310,000
Total 700,000

Accrued liabilities 250,000

Payable to A 20,000
A, Capital (60%) 240,000
B, Capital (40%) 190,000
Total 700,000

Information on the conversion of non-cash assets is as follows:

 Only 60% of the accounts receivable was collected; the balance is uncollectible.
 ₱50,000 was received for the entire inventory.
 The equipment was sold at its carrying amount.
 ₱10,000 Liquidation expenses were paid.

How much was the loss allocated to B in the determination of cash distributions to the partners?
a. 76,800 b. 87,600 c. 115,200 d. 192,000

17. ABC Co. is undergoing liquidation. Information before the start of the liquidation process is as follows:
Cash 10,000 Accounts payable 80,000
Accounts receivable 80,000 Payable to B 20,000
Receivable from A 10,000 A, Capital (50%) 250,000
Inventory 180,000 B, Capital (30%) 150,000
Equipment, net 320,000 C, Capital (20%) 100,000
Total Liab. &
Total 600,000 600,000
Equity

Which partner has the highest maximum loss absorption capacity?

a. Partner A b. Partner B c. Partner C d. Partner D

18. These are liabilities that, although not secured by any asset, are mandated by law to be paid first before any
other unsecured liabilities.
a. Unsecured liabilities with priority c. Partially secured creditors
b. Fully secured creditors d. Unsecured liabilities without priority
19. Which of the following is excluded when computing for the total free assets?
a. excess of realizable value of assets pledged to fully secured creditors over the expected net settlement
amount of the fully secured liabilities.
b. total realizable value of assets not pledged as collateral security
c. realizable value of assets pledged to partially secured creditors
d. all of the above items are included

20. “Assets to be realized” is placed on which side of a statement of realization and liquidation?
a. debit side, measured at realizable value c. debit side, measured at book value
b. credit side, measured at book value d. no side

21. The statement of affairs of Darrell Putix Co. indicates that unsecured creditors without priority with total
claims of ₱720,000 may expect to recover only ₱288,000 after all the assets were sold. Among the creditors
of Darrell Putix Co. are the following:
 Government – taxes payable of ₱400,000, inclusive of ₱80,000 assessments and surcharges.
 XYZ bank – loan payable of ₱4,000,000 and accrued interest of ₱200,000, backed by collateral security
with realizable value of ₱4,800,000.
 Alpha Financing Co. – loan payable of ₱3,200,000 backed by collateral security with realizable value of
₱2,000,000.
 Mr. Bombay – loan payable of ₱1,000,000 and accrued interest of ₱200,000. No collateral security.

How much is the expected recovery of partially secured creditors?

a. 2,480,000 b. 2,160,000 c. 1,280,000 d. 0

Use the following information for the next two questions:

Rex Toothpix Co. is undergoing liquidation. Information on Rex Toothpix Co.’s assets and liabilities is shown
below:

ASSETS Book value Realizable value

Assets pledged to fully secured creditors 360,000 480,000
Assets pledged to partially secured creditors 208,000 192,000
Free assets 600,000 576,000
1,168,000 1,248,000
LIABILITIES
Unsecured liabilities with priority 288,000 288,000
Fully secured creditors 384,000 384,000
Partially secured creditors 240,000 240,000
Unsecured creditors without priority 432,000 432,000
1,344,000 1,344,000

22. If the assets are sold at realizable values, how much cash is available to pay unsecured creditors without
priority?
a. 336,000 b. 384,000 c. 624,000 d. 288,000

23. How much can the partially secured creditors expect to recover from their claims?
a. 384,000 b. 234,000 c. 230,400 d. 276,000
24. The following information was taken from the statement of realization and liquidation of Jury and John
Bombastix Co. which is undergoing liquidation:
ASSETS:
Assets to be realized 8,000,000
Assets acquired 60,000
Assets realized 4,720,000
Assets not realized 880,000

LIABILITIES:
Liabilities liquidated 8,520,000
Liabilities not liquidated 4,760,000
Liabilities to be liquidated 11,480,000
Liabilities assumed 128,000

SUPPLEMENTARY ITEMS:
Supplementary expenses 100,000
Supplementary income 72,000

How much is the net gain (loss) for the period?

a. (4,132,000) b. (28,000) c. 4,160,000 d. (4,160,000)

Use the information below for the next four questions:

Community Co. filed a voluntary bankruptcy petition during the year. Relevant information follows:

Carrying
ASSETS amount Realizable value
Assets pledged with fully secured creditors 300,000 370,000
Assets pledged with partially secured
creditors 180,000 120,000
Free assets 420,000 320,000
900,000 810,000
LIABILITIES
Liabilities with priority 70,000
Fully secured creditors 260,000
Partially secured creditors 200,000
Unsecured creditors 540,000
1,070,000

The assets are converted to cash at the estimated realizable values and the business is liquidated.

25. What amount of cash will be available to pay unsecured non-priority claims?
a. 360,000 b. 380,000 c. 430,000 d. 470,000

26. What is the estimated recovery percentage of unsecured creditors without priority?
a. 52.00% b. 54.08% c. 56.56% d. 58.06%

27. How much is the total amount paid to the partially secured creditors?
a. 161,773 b. 163,552 c. 166,448 d. 168,992
28. How much is the total amount paid to the unsecured creditors?
a. 313,524 b. 342,349 c. 294,823 d. 285,231

Use the following information for the next three questions:

Partners A, B and C decided to liquidate their partnership. A summary of the partnership’s statement of financial
position is shown below:

Assets Liabilities Equity

Cash Noncash A (20%) B (30%) C (50%)
160,00
480,000
0 ? 90,000 200,000 370,000

All the noncash assets were sold for ₱870,000. The partnership paid ₱12,000 liquidation expenses.

29. How much is the carrying amount of the noncash assets?

a. 740,000 b. 980,000 c. 860,000 d. 1,020,000

30. How much is the loss on the sale of noncash assets, including the effect of liquidation expenses?
a. 98,000 b. 120,000 c. 112,000 d. 122,000

31. How much cash did A receive from the settlement of the partners’ interests?
a. 175,600 b. 149,600 c. 183,400 d. 128,400

Use the following information for the next two questions:

Partners A, B and C decided to liquidate their partnership. A summary of the partnership’s statement of financial
position is shown below:

Cash 50,000
Noncash assets 1,200,000
Total 1,250,000

Accounts payable 100,000

Payable to A 50,000
A, Capital (50%) 540,000
B, Capital (30%) 360,000
C, Capital (20%) 200,000
Total 1,250,000

32. If a cash priority program is prepared, which partner is paid first and how much is the total payments to that
partner before all partners will share on the available cash based on their profit and loss ratios?
a. A, ₱20,000 b. B, ₱60,000 c. B, ₱90,000 d. B, ₱96,000

33. Three-fourths (3/4) of the noncash assets were sold for ₱920,000. The partnership paid ₱5,000 transaction costs
on the sale. How much cash did A receive from the settlement of the partners’ interests under the cash priority
program?
 a. 493,500 b. 447,500 c. 386,500 d. 306,500

Use the following information for the next four independent cases:
The capital balances and profit and loss ratios of the partners in ABC Co. are as follows:
Capital P/L
A 40,000 40%
B 60,000 30%
C 80,000 30%
Total 180,000

34. D purchases one-half of C’s interest for ₱50,000. The ‘book value method’ is to be used. Which of the following
statements is most likely to be incorrect?
a. D’s capital is credited for one-half of C’s capital balance.
b. C’s capital balance is reduced for the equity transfer to D.
c. The cash payment of D to C is not reflected in the partnership’s accounting records.
d. The partnership equity is increased by D’s payment.

35. D purchases 25% of A’s, B’s and C’s capital interests for ₱60,000. The partners used the ‘book value method’ to
record D’s admission. Which of the following statements is most likely to be correct?
a. The partnership’s total equity increases after recording D’s admission.
b. The admission of D is accounted for as a transaction between D and the partnership.
c. Goodwill of ₱15,000 must be recorded, according to the PFRSs.
d. An equity transfer of ₱45,000 will be made from the selling partners to D.

36. The carrying amount of the net assets approximates fair value. D invests ₱80,000 cash for a 25% interest in the
partnership’s net assets and profits. Under the bonus method, how much is the capital balance of A after D’s
admission?
a. 46,000 b. 64,500 c. 84,500 d. 65,000

37. The carrying amount of the net assets approximates fair value. D invests ₱52,000 cash for a 25% interest in the
partnership’s net assets and profits. Under the bonus method, how much is the capital balance of B after D’s
admission?
a. 37,600 b. 48,700 c. 58,200 d. 78,200

Use the following information for the next two questions:

The statement of financial position of the partnership of A and B as of December 31, 20x1 is shown below:
Cash 33,354
Accounts receivable 802,426
Inventory 380,137
Land 603,000
Building 428,267
Equipment 85,134
Other assets 5,600
Total assets 2,337,918

Accounts payable 422,590

Notes payable 545,000
A, capital 641,976
B, capital 728,352
 Total liabilities and equity 2,337,918

 A and B share in profits and losses equally.

 On January 1, 20x2, C informed A and B of his intention to invest in the partnership for a 20% interest. The
partners agreed on the following adjustments prior to C’s admission:
o Accounts receivable of ₱55,000 should be written-off.
o Inventories of ₱12,200 are obsolete and have no resale value.
o The ‘Other assets’ should be written off.

38. If no bonus is allowed, how much is C’s required investment?

a. 234,167 b. 324,382 c. 236,347 d. 341,367

39. After C’s admission, the partners agreed to adjust their capital balances to reflect their’ respective interests in the
partnership’s net assets. Cash settlement is to be made between the partners. How much is the cash settlement?
a. ₱43,188 payment of A to B c. ₱34,288 payment of C to A and B
b. ₱43,188 payment of B to A d. There would be no cash settlement between the partners.

Use the following information for the next two independent cases:
The capital account balances of the partners in ABC Partnership on June 30, 20x1 before any necessary adjustments
are as follows:

Capital accounts
A, Capital (20%) 600,000
B, Capital (30%) 1,000,000
C, Capital (50%) 400,000
Total 2,000,000

The partnership reported profit of ₱3,600,000 for the six months ended June 30, 20x1.

40. C dies from a broken heart on July 1, 20x1. It was agreed that C’s estate shall receive cash of ₱2,000,000 and
equipment with carrying amount of ₱400,000 and fair value of ₱1,200,000 as settlement of C’s interest in the
partnership. The assets will be transferred as soon as the legal proceedings on C’s estate are finalized. The entry
in the partnership’s books on July 1, 20x1 to reflect the separation of C includes
a. a debit to C’s capital for ₱400,000.
b. a debit to C’s capital for ₱2,200,000.
c. a credit to liability for ₱3,200,000.
d. Not recorded in partnership’s books

41. C withdraws on July 1, 20x1. It was agreed that C shall receive cash of ₱2,000,000 and fully depreciated
equipment with fair value of ₱1,200,000 in settlement of his interest in the partnership. How much is the capital
balance of A right after the withdrawal of C?
a. 1,240,000 b. 1,400,000 c. 1,580,000 d. 2,200,000

42. The statement of financial position of ABC Co. as of December 31, 20x1 shows the following information:
Cash 448,000
Receivable from A 32,000
Equipment 1,560,000
Totals 2,040,000
Payable to C 40,000
A, Capital (20%) 600,000
 B, Capital (30%) 1,000,000
C, Capital (50%) 400,000
Totals 2,040,000

On December 31, 20x1, C decided to retire from the partnership. The partnership’s net assets approximate their fair
values except for the equipment which has a fair value of ₱1,800,000. It was agreed that the partnership would pay
C ₱560,000 cash for his partnership interest, excluding C’s loan which is to be repaid in full. What is the balance of
B’s capital account after the retirement of C?
a. 1,720,000 b. 1,072,000 c. 632,000 d. 1,048,000

Use the following information for the next three questions:

On January 1, 20x1, the partners in ABC Co. decided to admit other investors and convert the partnership into a
corporation. Relevant information follows:
Carrying amounts Fair values
Cash 80,000 80,000
Receivables 240,000 160,000
Inventory 320,000 280,000
Equipment 2,160,000 2,680,000
Payables 200,000 200,000
A, Capital
600,000
(20%) N/A
B, Capital (30%) 800,000 N/A
C, Capital (50%) 1,200,000 N/A

The corporation has an authorized capitalization of ₱8,000,000 divided into 200,000 ordinary shares with par value
of ₱40 per share.

43. Assume that the adjusted capital balances of the partners are used in determining the number of shares to be
issued to each partner. What is the aggregate par value of the total shares issued to the partners?
a. 3,000,000 b. 2,600,000 c. 2,800,000 d. 3,200,000

44. Assume that partners A, B and C agreed to be issued 14,000, 21,000 and 35,000 shares, respectively. How much
is the credit to the share premium account?
a. 50,000 b. 200,000 c. 400,000 d. 0

45. Assume that the corporation was authorized to issue ₱400 par preference shares and ₱40 par ordinary shares.
The partners agreed to receive 1,000 ordinary shares each, plus even multiples of preference shares for their
remaining interests. How many ordinary shares (OS) and preference shares (PS) did A receive?
a. 1,600 OS and 1,000 PS
b. 2,200 OS and 1,000 PS
c. 1,000 OS and 2,200 PS
d. 1,000 OS and 1,600 PS

The End!
 ANSWER SHEET

1. 11. 21. 31. 41.

2. 12. 22. 32. 42.

3. 13. 23. 33. 43.

4. 14. 24. 34. 44.

5. 15. 25. 35. 45.

6. 16. 26. 36.

7. 17. 27. 37.

8. 18. 28. 38.

9. 19. 29. 39.

10. 20. 30. 40.