ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 42  October 2021 CPA Licensure Exam  Week No. 1

A. Dayag  G. Caiga  M. Ngina

ADVANCED FINANCIAL ACCOUNTING & REPORTING

AFAR-01: PARTNERSHIP FORMATION & OPERATIONS

I - Partnership Formation - Sole Proprietor versus Sole Proprietor

On October 1, 20x4, J and K decided to pool their assets and form a partnership. They allocate profit and loss in the ratio of 44:56 for J and
K, respectively. The firm is to take over business assets and assume business liabilities, and capitals are to be based on net assets transferred
after the following adjustments:
a. J’s inventory amounting to P12,000 is worthless, while K’s agreed value of inventory amounted to P150,000.
b. Additional uncollectible accounts of P7,200 for J is to be provided; a 5% allowance is to be recognized in the books of
K.
c. Accrued rent income of P12,000 on J, and accrued salaries of P9,600 on K should be recognized on their respective
books.
d. Interest at 16% on Notes Receivable dated August 17, 20x4 should be accrued.
e. The office supplies unused amounted to P24,000.
f. The equipment’s agreed value amounted to P60,000.
g. The furniture and fixtures has a fair market value of P108,000.
h. Interest at 12% on Notes Payable dated July 1, 20x4 should be accrued.
i. K has an unrecorded patent amounting to P48,000 and is to invest the additional cash necessary to have a 60% interest
in the new firm.

In cases, wherein days are considered, use 360 days as the basis.

Balance sheets for J and K on October 1, 20x4 before adjustments are given below:

Accounts J K
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 90,000 P 54,000
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216,000 180,000
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . ( 4,800) ( 6,000)
Notes Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Merchandise Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192,000 144,000
Office Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,400
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000
Accumulated depreciation – equipment . . . . . . . . . . . . ( 54,000)
Furniture and Fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,000
Accumulated depreciation – furniture and fixtures . . . . _________ ( 24,000)
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 591,600 P 552,000

Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 159,600 P 120,000

Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 -0-
Capitals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __372,000 __432,000
Total Liabilities and Capital . . . . . . . . . . . . . . . . . . . . . . . . P 591,600 P 552,000

Determine:
1. The net adjustments – capital in the books of:
a. J, P23,400 net debit; K, P30,600 net credit
b. J, P23,400 net credit; K, P30,600 net debit
c. J, P23,400 net debit; K, P2,000 net credit
d. J, P18,600 net debit; K, P30,600 net debit 2. The adjusted capital of J and K in their respective books.
a. J – P348,600; K – P462,600 c. J – P372,000; K – P432,000

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AFAR-01
Week 1: PARTNERSHIP FORMATION & OPERATIONS
b. J – P353,800; K – P462,600 d. J – P348,600; K – P522,900 3. The additional investment
(withdrawal) made by K:
a. None c. (P60,300)
b. (P 54,000) d. P 60,300
4. The total assets of the partnership after formation:
a. P1,143,600 c. P1,220,100
b. P1,162,000 d. P1,222,500
5. The total liabilities of the partnership after formation:
a. P279,600 c. P339,600
b. P281,400 d. P351,000
6. The total capital of the partnership after formation:
a. P804,000 c. P811,200
b. P806,400 d. P871,500
7. The capital balances of J and K in the combined balance sheet:
a. J – P348,600; K – P462,600 c. J – P372,000; K – P432,000
b. J – P353,800; K – P462,600 d. J – P348,600; K – P522,900

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II
On December 1, 2021, AA and BB formed a partnership with contributing the following assets at fair market values:
AA BB
Cash ………………………………… P 9,000 P18,000
Machinery and equipment…….. 13,500 -
Land ………………………………... - 90,000
Building …………………………….. - 27,000
Office Furniture ………………….... 13,500 -

The land and building are subject to a mortgage loan of P54,000 that the partnership will assume. The partnership agreement
provides that AA and BB share profits and losses, 40% and 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
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

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AFAR-01
Week 1: PARTNERSHIP FORMATION & OPERATIONS
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

Partnership Operations
IV – Allocation of Net Income
Olsen and Katch organized the OK Partnership on 1/1/2021. The following entries were made into their capital accounts during 2021:
Olsen
Debits Credits
1/1 P20,000
4/1 5,000
10/1 5,000
Katch
Debits Credits
1/1 P40,000
3/1 P10,000
9/1 10,000
11/1 10,000

The partnership agreement called for the following in the allocation of partnership profits and losses:
• Salaries of P48,000 and P36,000 would be allocated to Olsen and Katch, respectively.
• Interest of 8% on average capital balances.
• Katch will receive a bonus of 10% on all partnership billings in excess of P300,000.
• Any remaining profits/losses will be allocated 60/40 to Olsen and Katch, respectively.

Required: (Account for each situation independently)

1. Determine the distribution of partnership net income. Assume the partnership income of P85,000; partnership billings amounted to
P400,000.
2. Determine the distribution of partnership net income of P165,000 on billings of P400,000.

V – Multiple Bases: Allocation of Net Income

Durand, Price and Russell are partners in a business which manufactures garden tools. Their profit and loss agreement has the following
provisions:
• Salaries of P40,000, P20,000, and P45,000 for Durand, Price, and Russell, respectively.
• Price will receive a bonus equal to 5% of sales in excess of P1,000,000.
• All partners will receive a bonus of 10% of net income in excess of P150,000 after the total of all such bonuses.
• Partners will be allocated interest on their weighted-average capital balance. Drawings in excess of annual salaries will be considered
reduction in capital. Interest is computed at the rate of 10%.
• Remaining profits and losses will be allocated 35%, 25%, and 40% to Durand, Price, and Russell, respectively.
• Gains and losses from the sale of depreciable assets will be excluded from the above provisions and will be equally allocated among the
partners.

Activity in the partners’ capital and drawing accounts during the year was as follows:
Durand, Durand, Price, capital Price, Russell, Russell,
capital drawings drawings capital drawings
Beginning
balance P 75,000 P 0 P125,000 P 0 P 40,000 P 0
February 1 15,000 25,000 30,000
March 31 10,000 5,000 15,000
June 1 10,000
June 30 10,000 5,000 15,000
August 1
September 30 _______ __10,000 ________ ________ ________ __15,000
Ending bal. P 85,000 P 45,000 P125,000 P 35,000 P 70,000 P 45,000

Required: Determine how annual net income of P200,000 (including a gain on the sale of equipment of P15,000) should be allocated among
partners. Annual sales revenue was P1,100,000.

VI

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AFAR-01
Week 1: PARTNERSHIP FORMATION & OPERATIONS
PP and QQ are partners operating a chain of retail stores. The partnership agreement provides for the following:
PP QQ
Salaries……………………………………………. P5,000 P2,500
Interest on average capital balances……… 10% 10%
Bonus……………………….................................. 20% of net income before
interest but after bonus & salaries

Remainder……………………………………….. 30% 70%

The income summary account for year 2021 shows a credit balance of P25,500 before any deductions. Average capital balances
for PP and QQ are P25,000 and P37,500, respectively. The share of PP and QQ in the P25,500 net income would be:
a. PP, P12,031.25; QQ, P13,468.75 c. PP, P11,750; QQ, P13,750
b. PP, P13,270.75; QQ, P12,229.25 d. PP, P13,125; QQ, P12,375

VII – Profit Allocation

The Trading Company, a partnership, was formed on January 1, 2021, with four partners, DD, EE, FF, and GG. Capital contributions were as
follows: DD, P25,000; EE, P12,500; FF, P12,500; GG, P10,000. The partnership agreement provides that partners shall receive 5% interest in
the amounts of their capital contributions. In addition, DD is to receive a salary of P2,500 and EE a salary of P1,500. The agreement further
provides that FF shall receive a minimum of P1,250 per annum from the partnership and GG a minimum of P3,000 per annum, both including
amounts allowed as interest on capital and their respective shares of profits. The balance of the profit is to be shared in the following
proportions: DD, 30%; EE, 30%; FF, 20% and GG, 20%. Calculate the amount that must be earned by the partnership during 2021, before
any charges for interest on capital or partners’ salaries, in order that DD may receive an aggregate of P6,250 including interest, salary and
share of profits.
a. P 8,333.33 c. P15,333,33
b. P15,000.00 d. P16,166.67

Statement of Partners’ Capital

VIII – Allocation of Net Income with Personal and Capital Withdrawals Effect on
Average Capital - With Solution
The AA, BB, and CC Partnership was formed on January 2, 2019. The original cash investments were as follows:
AA …………………………………………………….. P
48,000 BB ……………………………………………………..
72,000
CC ………………………………………………… ... 108,000
According to the general partnership contract, the partners were to be remunerated as follows:
a. Salaries of P7,200 for AA, P6,000 for BB, and P6,800 for CC.
b. Interest at 12% on the average capital account balances during the year.
c. Remainder divided 40% to AA, 30% to BB, and 30% for CC.

Income before partners’ salaries for the year ended December 31, 2019, was P46,040. AA invested an additional P12,000, in the partnership
on July 1; CC withdrew P18,000 from the partnership on October 1, and, as authorized by the partnership contract, AA, BB, and CC each
withdrew P375 monthly against their shares of net income for the year.

Determine:
1. The share of partner AA in the net income
a. P18,416.00 c. P13,080.00
b. P17,616.00 d. P 5,880.00
2. The capital balance of partner CC on December 31, 2019:
a. P108,770.00 c. P100,112.00
b. P104,270.00 d. P 99,312.00

3. If the salaries to partners’ are to be recognized as operating expenses by the partnership, the share of partner BB in the net income?
a. P18,416.00 c. P8,190.00
b. P14,190.00 d. P7,812.00

4. Using the same information in No. 3, the capital balance of partner CC on December 31, 2019?
a. P108,770.00 c. P100,112.00
b. P104,270.00 d. P 99,312.00

Solution to Problem VIII: 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

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AFAR-01
Week 1: PARTNERSHIP FORMATION & OPERATIONS
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

IX – 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

Solution to Problem IX: 1. a; 2. a; 3. b; 4. c

Allocation/Distribution of Net Income – Requirement 1
DD EE Total

Salaries P 9,000 P12,000 P 21,000

Interest (10% of Ave. Cap.) 7,500 10,000 17,500
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AFAR-01
Week 1: PARTNERSHIP FORMATION & OPERATIONS
Balance/Remainder (60%:40%) 12,900 8,600 21,500
Share in Net Income P29,400 P30,600 P60,000*
*P 250,000 – P50,000 (excluding salaries and int. – P50,000)
Statement of Partners’ Capital – Requirement 2
DD EE Total

Capital, March 1, 2019 P75,000 P90,000 P165,000

Additional Investments 30,000 30,000

Net Income 29,400 30,600 60,000

Personal Withdrawals (9,000) (12,000) (21,000)
Capital, March 1, 2020 P95,400 P138,600 P234,000
Allocation/Distribution of Net Income – Requirement 3
DD EE Total

Interest on Average Capital – 10% P 7,500 P10,000 P17,500

Balance/Remainder – 60%:40% P25,500 P17,000 P42,500
Share in Net Income P33,000 P27,000 P60,000
Statement of Partners’ Capital – Requirement 4
DD EE Total

Capital balance, March 1, 2019 P75,000 P 90,000 P 165,000

Additional Investment 30,000 30,000

Share in Net Income 33,000 27,000 60,000

Salaries 9,000 12,000 21,000
Salary withdrawals (9,000) (12,000) ( 21,000)
Capital balance, March 1, 2020 P108,000 P147,000 P 255,000
X
FF and GG are partners in merchandising business. During 2019, the withdrew their salary allowances of P40,000 and P60,000,
respectively. Profits and losses are shared in the ratio of 3:2. The income summary account has a credit balance of P120,000
before any income allocation. Their capital accounts reflect the following:
FF GG

Beginning balance………………………………………. P50,000 P30,000

Additional investments………………………………….. P30,000 P40,000

Withdrawals other than for salary allowances……... (P10,000) (P15,000)

Ending Capital……………………………………………. P70,000 P55,000

Determine:

1. The share of partner FF in the net income: a. P72,000.00 c. P40,000.00 b.

P52,000.00 d. P12,000.00

2. The capital balance of each partner on December 31, 2018 after closing the income summary and withdrawals
accounts.
a. FF, P82,000; GG, P63,000 c. FF, P70,000; GG, P55,000 b
FF, P122,000; GG, P123,000 d. FF, P82,000; GG, P123,000

XI – With Solution (with Correction of Error)

NN and OO created a partnership to own and operate a health-food store. The partnership agreement provided that NN receive a salary of
P100,000 and OO a salary of P50,000 to recognize their relative time spent in operating the store. Remaining profits and losses were divided
60:40 to NN and OO, respectively. Income for 20x4, the first year of operations, P130,000 was allocated P88,000 to NN and P42,000 to OO.
On January 1, 20x5, the partnership agreement was changed to reflect the fact that OO could no longer devote any time to the store’s
operations. The new agreement allows NN a salary of P180,000, and the remaining profits and losses are allocated equally. In 20x5, an error
was discovered such that the 20x4 reported income was understated by P40,000. The partnership income of P250,000 for 20x5 including the
P40,000 related to 20x4. The P250,000 should be allocated between NN and OO as follows:

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AFAR-01
Week 1: PARTNERSHIP FORMATION & OPERATIONS
a. NN, P219,000; OO, P 31,000 d. NN, P -0- ; OO, P -0-
b. NN, P171,000; OO, P171,000 e. NN, P125,000; OO, P125,000
Answer: a - Any adjustments related to a particular year, the profit and loss ratio existing on that year should be used as a basis for
allocating the required adjustments.
NN OO Total

Salary allowances P180,000 P - P180,000

Balance/Remainder: Equally 15,000 15,000 30,000
Net Income for 20x5 P195,000 P 15,000 P 210,000
Adjustment of net income for 20x4 – 60% : 40% 24,000 16,000 40,000
Total P219,000 P31,000 P250,000

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.

***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.***
*** I ask not for a larger garden, but for a finer seeds. ***
*** I ask not for a lighter burden, but for a broader shoulder. ***
*** I swear to you there are divine things more beautiful than words can tell. ***
**Don’t think that there’s so much darkness, that it’s no use to have a small light, because even
one candle can be seen a mile away when it’s dark.**
**When all else is lost, the future still remains.**
**The greatest mistake you can make is to continually fear making mistakes.**
We are never given guarantees in life. We are only given the opportunities and it is up to us to
make the BEST out of it.

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