=Author PAUL ANTHONY DELA FUENTE DE JESUS, CPA, MBA Faculty, Far Eastern University — Manila Reviewer in Advance Financial Accounting and Reporting (AFAR) ICARE Review Center CPA Review Center of the Philippines (CPAR) CPAR Batangas Center for Training and Development, Incorporated, Makati (CTDI) CPAR Dagupan Former Faculty/Special Lecturer/Reviewer: Far Eastern University — Silang, Cavite Lyceum of the Philippines University - Manila Adamson University Emilio Aguinaldo University - Dasmarinas, Cavite Colegio de San Juan de Letran - Calamba University of the East - Manila University of Santo Tomas AMV College of Accountancy Colegio de San Juan de Letran — Manila Central Colleges of the PhilippinesPhilippine Copyright, 2021 By Paul Anthony Dela Fuente De Jesus No part of this book covered by the copyright hereon may be reproduced, or used in any form or by any means — electronic or mechanical including photocopy without the written permission of the author. Any copy of this book without the corresponding number seal and not bearing the original signature of the author is unauthorized and shall be considered as proceeding from an illegal source. All Rights Reserved Printed and Published by: NEW OMORI PRINTING PRESS 278 C ERMIN GARCIA Avenue, Quezon, City Contact Number +63 (2)4412141PREFACE This book is designed to help the B.S. Accountancy students achieved their dreams to become Certified Public Accountants (CPA). It tackles the subject ‘Advance Financial Accounting & Reporting (AFAR) in the CPA Licensure Examination which deals with the topics Advance Accounting and Cost ‘Accounting. This book contains multiple choice problems and theories with clear and comprehensive solutions. ‘This book is a labor of love which I humbly contribute to the accounting education. Each chapter of this book is designed and planned to explore and significantly understand the different topics covered in AFAR such as Partnership, Corporate Liquidation, Revenue Recognition (under IAS 18 and PFRS 15), Consignment Sales, Home Office and Branch, Business Combination (PFRS 3), Consolidated Financial Statements (PAS 27), Joint Arrangements (PFRS 11), Joint Venture for SME (PFRS for SME Sec. 15), Foreign Currency Transaction and Translation (PAS 11 and 21), Cost Accounting topics, Service Concession Arrangements (IFRIC 12), Insurance Contracts (PFRS 4), Not for Profit Organization and the Government Accounting Manual (for Government Accounting). 1 express my sincerest gratitude to: 1. GOD almighty, who gives me strength, and a bonus life to enjoy my family, friends and this lovely world. 2. My wife (Marie), and my children (lrish, Ivan, Irvin, lvonne and Iram) for always understanding and loving me. 3. To Parents Dante and Soledad and My Siblings Irene, Julius and John 4. My fellow CPAR reviewers (Atty. Conrado Valix, Pedro Guerero, Atty. Chris Llamado, Atty. Jack De Vera, Atty. Tristan Lopez, Atty. Dante Dela Cruz, Atty. Regie Laco, Christian Valix, Ronald Valix, Dean Archimedes Tbay, Rodel Roque, Gerry Roque, ‘Tom Siy, Rodiel Ferrer, Jamil Saripada, and most specially to Brian Lim and Christopher German for their support and encouragement. 5. My students, friends (Joven, Johnson and Jay), professors who gives me inspiration to write this book. 6. My classmates (Rey and Beth Ocampo, Filamer Naguit, Christine Vallejo, Ronald Ricafort, Monette Fabros, Shiela Alcid, Cecille and Roman Reyes, Ronita Casas, Angie Domingo, Kaye Fajilan, Elena Manalungsung Karen Gutierrez, Tet Garcia, Jill Oliveros, Faye Torres, Ryan Mendoza, and Aris Ocania who help me during my dying times in my life. “The third step to achieve your dream is to TRUST GOD” PAUL ANTHONY DELA FUENTE DE JESUSTABLE OF CONTENTS Chapter 1 Partnership Formation Chapter 2 Partnership Operation Chapter 3 Partnership Dissolution Chapter 4 Partnership Liquidation Chapter 5 Corporate Liquidation Chapter 6 Long Term Construction Contracts — PFRS 15 Chapter 7 Franchise / Licenses Chapter 8 Consignment Sales Chapter 9 Home Office and Branch Chapter 10 Business Combination Date of Acquisition Chapter 11 Business Combination Subsequent to Date of Acquisition Chapter 12 Joint Arrangement/Joint Venture SME Chapter 13 Foreign Currency Transaction and Translation Chapter 14 Job Order Costing Chapter 15 Process Costing Chapter 16 Joint and By-Product Costing Chapter 17 Activity Based Costing and Backflush Costing Chapter 18 Standard Costing Chapter 19 Not for Profit Organization Chapter 20 Government Accounting Chapter 21 Insurance Contracts and Service Concession Arrangements Chapter 22: Installment Sales PAS 18 Chapter 23 Simulated Examination 22 53 92 11s 151 216 255 271 309 390 473 544 642 676 719 743 759 790 823 864 892 918Fr prees Pertncrshie Femation 1 PARTNERSHIP FORMATION Partnership - is a contract of two or more’ persons who bind themselves to contribute money, property or industry to a common fund with the intention of dividing the profits among themselves. Valuation of Contributions Money or Cash - Face Value ~ Property or Non-Cash Assets - Agreed value;Fair market value; Book-value Liability Assumed by the partnership ~ Present value Services or Industry - Memorandum entry is made — Capital Contribution|= ‘Capital Interest (Agreed Capital) NetirivestrrenteMethow — if the initial capital contribution is equal to the amount credited to his capital account. Capital Contribution ‘not equal Capital Interest (Agreed Capital) a, Bonus» Method - Transfer of capital from one or more partner to another partner. ‘Rate: Total Contributed capital = Total Agreed capital b. Revaluation method - The asset contributed of the partners are adjusted because it might be over or under valued ‘Rule: Undervaluation: Total Contributed capital < Total Agreed capital Rule: Overvaluation:, Total Contributed capital > Total Agreed capital Loan Accounts This is an additional financing coming from the partners. A Lean from a ¢ tova Partner) is shown as loan payable on the partnership partner (z books. Om the other Hand, a partnership may also lend money to a partner. In this case it will be recorded as a Loan Receivable from a partner (Due from a| Partner). Therefore, it is accounted either as a liability or receivable, it is not considered» as part of the capital. Assumed Liability Any asset contributed with an attached liability that is assumed by the partnership is deducted to the capital contribution of- such partner. If it not assumed, do not add or deduct the amount of assets contributed to determife the capital contribution. YertoREDPartucrshife Formation 2 EXERCISES Problem 1: M and O decide to form a partnership on June 1, 2030. The partnership will take over their assets as well as assume their liabilities. As of June 1, 2030, the net assets of M and O are P220,000 and P309,375 respectively. Liabilities of M are 55% less than the value of its net assets while liabilities of O are 40% more than the value of its net assets. The partners agreed on a 25:75 profit and loss ratio, Furthermore, the partners arrive on the following agreements: M's inventory is undervalued by P11,000. An allowance for doubtful account is to be set up in the books of M and O at 10% of the accounts receivable balances (M P27,500 and O P41,250) accrued salary of 20,250 was not recognized in O's books. Req. 1: How much cash should M invest/(withdraw) so that their capital interest would be equal to their profit and loss ratio? a. P95,000 c. P133,250 ‘b.) P(133,250) . P(95,000) Req. 2: What are the total assets of the partnership immediately after formation if the partners’ capital interest should be equal to their profit and loss ratio through withdrawal and additional investment? a. P912,125 ©, 932,375 b, P934,125 d. P380,000 Answer 1) B 2) C Suggested Solution: Req. 1 M ° Net Assets 220,000 309,375 Inventory ‘ : 11,000 Allowance for doubtful accounts M (27,500 x 10%) (2,750) O (41,250 x 10%) (4,125) Accrued Salary (20,250) Adjusted Capital 228,250 285,000 O's Capital Contribution 285,000 + interest of O 75% Total Partnership capital 380,000 x interest of M = 25% Capital interest of M 95,000 Capital Contribution of M 228,250 Withdrawal of M (133,250)Partucrship Formation 3 Req. 2 Total Partnership Capital 380,000 Add: Total Liabilities M's Liabilities (220,000 x 45%) 99,000 O's Liabilities (309,375 x 140%) 433,125 Accrued Expenses 20,250 Total Assets Problem 2: Paul and Marie formed DF Company. Paul and Rod contributed their business in the partnership. Paul and Marie agreed on 6:4 profit and loss ratio, respectively. Paul Marie Cash 350,000 Accounts Receivable Ise 175,000 Inventory yeh 280,000 Land 175,000 5 Building 420,000 _! Total 805,000 595,000 Notes Payable 210,000 Mortgage Payable - Land 35,000 Paul, capital 595,000 f a Rod, capital 560,000 805,000 595,000 5 * Additional Information: a, The accounts receivable amounting to P25,000 is written-off. b. The partners agreed that inventory will be valued at 270,000. c. The unpaid mortgage of the land is assumed by the partnership. 4, e ‘The building is over-depreciated by P52,500 are ‘The building has an unpaid mortgage of P20,000, the mortgage is assumed 51° by the partnership. = Recognition of discount on note payable amounting to P10,000. 4 > Req, 1: Using the capital balance of partner Paul, how much is the additional + '/' cash contribution/withdrawal of Rod to bring the partners’ capital in -| conformity to their profit and loss ratio? Ac xco 48 a, P(190,000) c.P318,750 ¢e pop © xb. P(212,500) d. P(177,500) ~ Req. 2: Using temusifffethor!, the partners agree to bring the partners’ capital in conformity to their profit and loss ratio, how much is the capital of Paul after formation. a, P442,500 c. P570,000 b. P465,000 d. P697,500Partucrship Formation 4 Answer 1) B 2) D Suggested Solution Req. 1 , Paul Marie Unadjusted Capital 595,000 560,000 AR (25,000) Inventory (10,000) Over-depreciation 52,500 Mortgage payable- building (20,000) Notes Payable (decrease) 10,000 Adjusted capital contribution 570,000 592,500 ae 8 Paul Contributed Capital 570,000 Divide by Profit and loss ratio 60% Total partnership capital 950,000 x PL ratio of Rod 40% Agreed Capital of Rod 380,000 Capital contribution of Rod 592,500 Withdrawal (212,500) Req. 2 Tec TAC Paul 570,000 60% 697,500 127,500 Marie 592,500, 40% 465,000 (127,500) Total 1,162,500 = 1,162,500 Problem 3: On June 30, 2030 GH, the sole proprietor of the GH Company, expands the company and establish a partnership with IJ and KL. The partners plan to share profits and losses as follows: GH, 50%; IJ, 25% and KL, 25%. They also agree that the beginning capital balances of the partnership will reflect this same relationship. GH asked IJ to join the partnership because his many business contacts are expected to be valuable during the expansion. ({J)is also contributing ‘P70,000 cash and a building that has an original cost of P910,000, book. value of P735,000, tax basis of P542,500 and a fair market value of P647,500. The building is subject to a‘P423,500 mortgage that the partnership-will assume. {KL is contributing P115,500)cash and marketable securities costing P441,000 to KL but are currently worth P603,750. GH'’s investment in the partnership is the GH Company. He plans to pay off the notes with his personal assets. The other partners have agreed that Pl Ne eePartocrchip Formation 5S partnership will assume the accounts payable) The balance sheet for the GH Company follows: MN GH Company Statement of Financial Position June 30, 2030 Assets Liabilities and Capital Cash 105,000 Accounts payable 556,500 Accounts receivable, net 504,000 Notes payable 651,000 Inventory ‘ 756,000 GH, capital 892,500) Equipment* \ _735,000 7 Total Assets | 2,100,000_ Total Liabilities and Capital 1,200,000 bm “net of accumulated depreciation of P210,000 The partners agree that the inventory is worth P892,500, and the equipment is worth half its original cost, and the allowance established for doubtful accounts is correct. How much is the agreed capital of GH if the partners agree to use the bonus method to record the formation and if the partners agree to use the revaluation. to record the formation? 8 Bonus Revaluation a P1,417,500 P1,438,500 b. P1,215,375 P1,438,500 ©! c. P1,215,375 P1,417,500 a. P1,417,500 P1,215,375 4 Answer B ‘Suggested Solution IJ Contributions KL Contributions Cash 70,000 Cash 115,500 Building 647,500 Marketable securities 603,750 Mortgage assumed (423,500) Total 719,250 Total 294,000 ‘ GH Contributions Unadjusted Capital 892,500 Add: Notes Payable 651,000, Inventory (892,500 - 756,000) 136,500 Less: PPE (735,000 + 210,000) /2 = 472,500 - 735,000 __ (262,500) Total 1,417,500.Partecrshit Formation 6 Bonus Method TCC TAC Bonus GH 1,417,500 50% 1,215,375.00 (202,125.00) W 294,000 25% 607,687.50 313,687.50 KL 719,250 25% 607,687.50 (111,562.50) Total 2,430,750 Revaluation Method TCC TAC Revaluation GH 1,417,500 50% 1,438,500 21,000.00 Vv 294,000 25% 719,250 425,250.00 KL 719,250 25% 719,250 = Total 2,430,750 2,877,000" 446,250 *Use the capital of KL to compute the total agreed capital 719,250 + 25% = P2,877,000 because it will not result to any reduction of capital to each partner. Problem 4: A business owned by Chary was short of cash and Chary decided to form a partnership with Deli and Ellen, Deli was able to contribute cash thrice the interest of Chary in the partnership while Ellen was able to contribute cash twice the interest of Deli in the partnership. The assets contributed by Chary were as follows: Cash P18,000; Accounts receivable P378,000 with allowance for doubtful account of P12,000 ; Inventory P840,000 ; and store equipment of 300,000 with accumulated depreciation of P30,000 but with current worth of 250,000 and agreed value of P200,000. Chary, Deli and Ellen agreed that the allowance for doubtful accounts was inadequate and should be P20,000. They also agreed that the fair value of the inventory is P920,000. Si The total assets of the partnership are: a. 7,880,000 (©)p 14,960,000 b. P7,092,000 d P15,460,000 Answer C Suggested Solution: Cash 18,000 Accounts Receivables 378,000 (¢ Allowance for doubtful accounts (20,000) ° Inventory 920,000 | jp, Store Equipment 200'000 |e Total adjusted Contribution of Chary —17496,000- Total assets = 1,496,000 + 3 (1,496,000) + 2 (3 x 1,496,000) Total assets = 1,496,000 + 4,488,000 + 8,976,000 Total assets = 14,960,000a Partecrship Formation 7 Problem 5: Allan and Bea agreed the lists of the following assets to be contributed to the partnership. Allan Bea Cash 20,000 | P30,000 Inventory P15,000, Building 40,000 Furniture and fixtures 15,000 ‘The building is subject to a mortgage loan, already past due, in the amount of P10,000. Allan paid this out of-his personal funds aside from his cash contribution listed above. Partners agreed that Allan should be credited for this. Partnership agreement calls for even division of profit and loss. What amounts should be listed as capital for each of the partners? Allan Bea i ¥ a. 35,000 85,000 2 b) P45,000 P75,000 ‘c, P45,000 85,000 j « 4. P60,000 P60,000 ~ ; Answer B Suggested Solution: Allan Best Cash 20,000 30,000 Inventory 15,000 Building 40,000 Furniture and fixtures 15,000 Mortgage-loan 10,000 10,000) Capital Contributions 45,000 75,000 S LIABILITY Problem 6: On December 1, 2030, Anna invited Medy to join him in his business. Medy agreed provided that Anna will adjust the accumulated depreciation of his Equipment account to a certain amount, and will recognize additional accrued expenses of P10,000. After that, Medy is to invest additional pieces of equipment to make her interest equal to.45%. If the capital balances of Anna before and after adjustment were P139,000 and P121,000 respectively, what is the effect in the carrying value of the equipment as a result of the admission of Medy? 91,000 c. 99,000 b. P(8,000) d, (81,000)= Penterlit Forwatinn Answer A Suggested Solution: Capital before adjustments 139,000 Equipment (8,000) Accrued expenses 10,000) Capital after adjustments of Alba ——121,000_ Capital after adjustments of Alba 121,000 + interest of Alba 55% Total Partnership capital : 220,000 x interest of Medy 45% Equipment Contribution of Medy 99,000 Adjustment to Equipment account of Alba (8,000) Equipment Contribution of Medy 99,000 Effect in the Carrying Value of Equipment 91,000 Problem 7: On August 1, 2030, the business accounts of Chris G and Paul DJ appear below: Assets Chris G Paul DJ Cash P_11,000_|P 22,354 Accounts Receivable 84,536_| 217,890 Inventories 100,035 | 240,102 Land 603,000 | 428,267 Buildings + 200,345 | 384,789 Other Assets 22,000 23,600 Liabilities and Capital Accounts Payable P178,940_| P 243,650 Notes payable 200,000 345,000 Chris G., Capital 641,976 Paul DJ., Capital | 728,352 Chris G and Paul DJ agreed to form a partnership contributing their respective assets and liabilities subject to the following adjustments: ‘Accounts Receivable of P20,000 and P35,000 are uncollectible in Chris G and Paul Du’s respective books. 5 Inventories of P5,500 and P6,700 are worthless in Chris G and Paul DJ’s respective books. Other assets of P2,200 and P3,600 in Chris G and Paul DJ's books are written off.Partacrship Formation 9 After five days Brian L was offered to join Chris G and Paul DJ and will contribute for a 20% interest in the firm. They also agreed to divide profits and - losses in the ratio of 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 Req. 1: How much should the cash settlement be between Chris G and Paul DJ? a. P33,602 cc, P32,930 b. P34,388 d. P32,272 Req. 2: How much is the capital contribution of Brian L? a. P324,332 c. P331,257 b. P342,582 d. P342,582 Answer 1) B 2) A Suggested Solution: Req. 1 Chris G Paul DJ Unadjusted Capital 641,976 728,352 a. Accounts Receivables (20,000) (35,000) b. Inventories (5,500) (6,700) cc. Other Assets (2,200) (3,600) Adjusted Capital Contribution 614,276 683,052 TCC TAC Settlement Chris G 614,276 50% 648,664 34,388 Paul DJ 683,052 50% _ 648,664 (34,388) 1,297,328 1,297,328 Req. 2 Chris G 614,276 Paul DJ 683,052 Total Capital Contribution of Old Partners 1,297,328 + Interest of Old Partners 80% Total Partnership Capital 1,621,660 x Interest of Brian L 20% Brian L, capital 324,332 Problem 8: On December 1, 2030, Monique and Cecille agreed to invest equal amounts and share profits equally to form a partnership, Monique investedPartucrshifp Formation 10 P780,000 cash and a piece of equipment. Cecille invested some assets which are shown below: Book Value Accounts Receivable P100,000 Inventory P280,000 Machineries, net P560,000 (intangibles, net 230,000 ‘The assets invésted by Cecille are not properly valued. P8,000 of the accounts receivable are proven uncollectible. Inventories are to be written down to 260,000. Included in the machineries is an obsolete apparatus acquired for 96,000 with an accumulated depreciation balance of P84,000. Part of the intangibles is a patent with a carrying value of P14,000 which was sued upon by a competitor. Cecille unsuccessfully defended the case and the final decision of the court was released on November 29, 2030. What is the fair value of the equipment invested by Moline? a. P336,000 ce. P242,000 b. P350,000 d. P390,000 Answer A Suggested Solution: Aeoninta Receivable 100,000 Inventory 280,000 Machineries, net 560,000 Intangibles, net 230,000 ‘Total Assets of Cecille 1,170,000 Accounts Receivable - uncollectible (8,000) Inventory write down (20,000) Machineries (96,000 - 84,000) - obsolete (12,000) Patent adjustment 14,000) Capital Contribution of Cecille 1,116,000 Capital Interest of Monique - same as Cecille (equally) 1,116,000 Cash investment of Monique 780,000 Equipment investment of Monique 336,000 Problem 9: On December 1, 2030, Criz and Tonio are combining their separate businesses to form a partnership. Cash and noncash assets are to be contributed. The noncash assets to be contributed and the liabilities to be assumed are as follows:Partecrshit Fornation 11 Criz Tonio Book Value | Fair Value | Book Value | Fair Value Accounts Receivable _|P 100,000 | P 105,000 | P 80,000 P_78,000__| Inventory 160,000 180,000. 80,000 83,000, PPE 400,000 365,000 345,000 329,000. ‘Accounts Payable 60,000 60,000, 45,000 45,000 Criz and Tonio are to invest equal amounts of cash such that the contribution of Criz would be 10% more than the investment of Tonio. What is the amount of cash presented in the partnership’s Statement of Financial Position on December 1, 2030? a, P1,105,000 ‘c. P1,005,000 b. P2,210,000 d. P2,010,000 Answer D Tonio Suggested Solution: oes ae Fair Value Fair Value Accounts Receivable 105,000 78,000 Inventory 180,000 83,000 PPE 365,000 329,000 Accounts Payable 45,000) Capital Contribution 590,000 445,000 Criz Tonio (Cash + 445,000} x 110% 110%Cash + 489,500 100,500 = 10% Cash Cash = 100,500 / 10% Cash = 1,005,000 each Total Cash 1,005,000 x 2 = 2,010,000 Problem 10: On January 1, 2030, Moses and Drix form La Gracia Partnership, with firm to take over their business assets and liabilities. The partners’ individual asscts and liabilities before forming the partnership follow: Accounts Moses Drix Assets 262,500 395,500 Liabilities 17,500 120,750 The partners agree on the following adjustments: Drix inventory is to be increased by P14,000; an allowance for doubtful accounts of P3,500 and P5,250 are to be set up in the books of Moses and Drix, respectively; and accounts payable of P14,000 is to be recognized in the books of Moses. The Partners agree to distribute profit and loss 60% and 40% respectively.Oe oe i" Partuershife Formation 12 Req. 1: What is the capital balance of Moses and Drix upon formation, respectively? a. P227,500 and P283,500 c. P360,600 and P204,400 b. P240,625’and P270,375 d. P227,500 and P266,000 Req. 2: Using the information in number 1; assuming the partners agreed to bring their capital balances proportionate to their profit and loss ratio. What is the capital balance of Moses and Drix upon formation, respectively? a. P311,850 and P207,900 c. P306,600 and P204,400 b. P240,625 and P270,375 d, P227,500 and P266,000 Answer 1) A2)C Suggested Solution: Req. 1 Unadjusted Capital Contribution 245,000 274,750 Inventory 14,000 Allowance for doubtful account (3,500) (6,250) Accounts Payable 14,000) —[L4,000) 8 Adjusted Capital Contribution 227,500 283,500 = P511,000 Req. 2 Moses: 60% x P511,000 = P306,600 Drix: 40% x P511,000 = P204,400 Problem 11: Allan and Bea decided to combine their businesses and form a partnership. Below are their Statement of Financial Position before any adjustments: Allan Bea Cash 48,400 98,360 Accounts receivable 1,031,960 2,498,716 Inventories 528,160 1,144,448 Property & Equipment (net) 2,613,380 1,852,224 Other Assets 8,800 15,840 Total Assets 4,230,700 5,609,588 Accounts Payable 787,336 1,072,060 Notes Payable 1,000,000 - - Mortgage Payable - 1,440,000 4 cenit 2,443,364 , Capi 3,097,528 Total Liabilities & Equity 4,230,700 5,609,588 609,Seen cc Partnershie Formation 13 The partners agreed that the property, plant and equipment of Allan is under depreciated by P80,000 and that of Bea is over depreciated by P200,000. Accounts receivable of P108,000 in Allan’s book and P140,000 in Bea’s book are uncollectible. The partnership decided to assume the mortgage liability of Bea. The partnership agreement provides for a profit and loss ratio and capital interest of 60% to A and 40% to Bea. Bea is willing to invest or withdraw cash from the partnership to comply with the agreement. Req. 1: Compute for the capital balances of Allan and Bea right after the formation. a. P6,896,292 ; P4,597,528 c. P2,255,364 ; P1,503,576 b. P6,896,292 ; P3,157,528 d. P2,255,364 ; P3,157,528 Req. 2: Compute for the total assets after the formation a, P5,618,336 c. P6,618,336 b. 8,058,336 d. 9,840,288 Answer 1) C 2)B Suggested Solution: : Req. 1 Allan Bea Unadjusted Cepital 2,443,364.00 3,097,528.00 a. Depreciation (80,000.00) 200,000.00 b. Accounts Receivable - uncollectible (108,000.00) (140,000.00) Adjusted Capital Contribution 2,255,364.00 3,157,528.00 Allan Capital Contribution 2,255,364 + interest of Allan 60% Total Partnership capital 3,758,940 x interest of Bea 40% Capital interest of Bea 1,503,576 Capital Contribution of Bea 3,157,528 Withdrawal of Bea . (1,653,952.00) Req. 2 Total Partnership capital 3,758,940 Add: Total Liabilities Accounts Payable (787,336 + 1,072,060) 1,859,396 Notes Payable 1,000,000 Mortgage payable 1,440,000 Total Assets 8,058,336Partnershie Problem 12: Shcy and Thea decided to form a partnership on May 1, 2030, Assets contributed by the partners are: Foumation 14 T Shey Thea Book Fair Book Fair Value Value Value Value Cash 375,000 | 375,000 | 875,000 | 875,000 Merchandise Inventory 95,000 | 125,000 Furniture and Fixtures 350,000 [312,500 | 872,500 | 937,500. Transportation equipment 3,262,500 | 2,812,500 ‘The transportation equipment is subject to a mortgage loan of P1,125,000, which is to be assumed by the partnership. The partnership agreement provides that Shey and Theo share profits and losses of 30% and 70% respectively. Assuming that the partners agreed to bring their respective capital in proportion to their profit and loss ratio, using Theo capital as a base. How much additional cash is to be (withdrawn) invested by Shey? a. P(687,500) : c. P875,000 b. P(987,500) d. P687,500 Answer D Suggested Solution: Theo Capital Contribution (4,625,000 - 1,125,000) 3,500,000 + interest of Theo 70% Total Partnership Capital 5,000,000 x interest of Shey 30% Capital interest of Shey 1,500,000 Capital Contribution of Shey 812,500 Investment of cash of Shey 687,500 Problem 13: A, B and C formed a partnership on August 1, 2030 with the following assets contributed by each partner measured at fair values: A B c Cash 37,500 45,000 112,500 Merchandise Inventory = 13,125, 9,375, Office Equipment 562,500 | __105,000 5 Furniture and Fixtures 31,875 19,125 Total 631,875 | 182,250 | 121,875 yerPartucrshit Formation 15 The office equipment contributed by A has a mortgage note of P337,5000 and the partnership is to assume responsibility for the loan. The partners agree to equalize their interest. Cash settlements among the partners are to be made outside the partnership using the bonus method as follows: a. -B should pay A P94,875 and C P77,625 b. C should pay A P94,875 and B P17,250 c. Ashould pay Band C 94,875 each d. Band C should pay A P17,250 and P77,625 respectively Answer D Suggested Solution: ies ‘Tec TAC Difference A (631,875 - 337,500) 294,375 «1/3-199,500 (94,875) B 182,250 1/3 199,500 17,250 c 121,875 1/3 199,500 77,625 598,500 598,500 Problem 14: Andres and Bonifacio decided to form a partnership on Oct 1, 2030. Their Statement of Financial Position on this date was: Andres Bonifacio Cash P 65,625 P164,062.50 Accounts Receivable 1,487,500 896,875 Merchandise Inventory 875,000 885,937.50 Equipment 656,250 1,268,750 Total 21 Accounts Payable 459,375 1,159,375 Andres, capital 2,625,000 Bonifacio, Capital 2,056,250 Total 3,084,375 3,215,625, Tag. agreed to have the following adjustments: Equipment of Andres is under-depreciated by P87,500 and that Bonifacio is over-depreciated by P131,250. + Allowance for doubtful accounts is to be set up amounting to P297,500 for Andres and P196,875 for Bonifacio. - Inventories of P21,875 and P15,312.50 are worthless in Andres and Bonifacio books respectively. The partnership agreement provides for a profit and loss ratio and capital interest ratio of 70% to Andres and 30% to Bonifacio.Partacrshife Formation 16 Which of the following statements is wrong? a. Assuming the use of transfer of capital method, Andres’s agreed capital must be P2,935,406.25 to bring the capital balances proportionate to their profit and loss ratio. b. Assuming the use of transfer of capital method, Bonifacio will debit his capital account in the amount of P717,281.25 to bring the capital balances proportionate to their profit and loss ratio. c. Assuming Andres will invest/withdraw cash to bring the capital balances proportionate to their profit and loss ratio, Andres will invest cash in the amount of P2,390,937.50. d. Assuming Bonifacio will invest/withdraw cash to bring the capital balances proportionate to their profit and loss ratio, Bonifacio will invest cash in the amount of P1,024,687.50 Answer D Suggested Solution: Andres Bonifacio Unadjusted Capital 2,625,000.00 2,056,250.00 a. Equipment (87,500.00) 131,250.00 b, Allowance for doubtful accounts (297,500.00) (196,875.00) c. Inventories (21,875.00) 15,312.50) Adjusted Capital 2,218,125.00 _1,975,312.50 Andres, Capital 2,218,125.00 + Interest of Andres 70% Total Partnership capital . x interest of Bonifacio Capital Interest of Bonifacio 950,625.00 Capital Contribution of Bonifacio __1,975,312.50 Withdrawals (1,024,687.50) Choice A and B TCC TAC Difference Andres —.2,218,125.00 70% 2,935,406.25 717,281.25 Bonifacio _1,975,31 0 30% _1,258,031.25_ (717,281.25) Total 4,193,437.50 4,193,437.50 Choice C Bonifacio, capital 1,975,312.50 + Interest of Bonifacio 30% Total Partnership capital 6,584,375.00 x Interest of Andres 70% Capital Interest of Andres 4,609,062.50 2,218,125.00 Capital Contribution of Andres Additional Investment 2,390,937.50Partecrshi Founation 17 Problem 15: On January 1, 2022, AB and QR agreed to form a partnership. ‘The following are their assets and liabilities: Accounts, AB | OR Cash P_136,000_| P 76,000 ‘Accounts Receivable 88,000 |___ 48,000 Inventories 304,000 | 364,000}! Machinery “|= =480,000 | 440,000 ‘Accounts Payable 216,000 | 144,000 Notes Payable 140,000. 60,000 AB decided to pay-off his notes payable from his personal assets. It was also agreed that QR inventories were overstated by P24,000 and AB machinery was over depreciated by P20,000. QR is to invest/withdraw cash in order to receive a capital credit that is 20% more than AB’s total net investment in the partnership. How much cash will be presented in the partnership's statement of financial position? , P486,400 c. P410,400 450,400 d. P274,400 Answer A Suggested Solution: QR's capital interest (AB, capital P812,000 x 120%) P974,400 QR's capital contribution 700,000 Additional cash investment of QR 274,400 - Cash investment of QR 76,000 Cash investment of AB 136,000 Total Cash investment P486,400 ‘Accounts AB QR Cash P136,000 _P76,000 Accounts Receivable 88,000 48,000 Inventories * 304,000 364,000 Machinery 480,000 440,000 Accounts Payable (216,000) (144,000) Notes Payable '140,000) (60,000) Contributed 652,000 724,000 Note Payable 140,000. Inventories (24,000) Machinery 20,000 Adjusted Contribution P812,000__P700,000os Pertnershit, Formation 1g Problem 16: Sheila and Grace(formed’a partnership and agreed to distribute profit and loss 70% to Grace and 30% to Sheila. The following are the trial balance of their respective business prior to.formation of partnership business, Grace Sheila Cash 49,500 100,593 Accounts Receivable 1,055,412 2,555,505 Inventories 540,158 1,170,459 Land 2,713,500 - Building - 1,927,202 Fumiture and Fixtures 235,553 ___172,751 Total 4,594,122 5,926,509 Accounts Payable 805,230 1,096,425 Notes Payable 900,000 1,552,500 Grace, capital 2,888,892 - Sheila, capital 3,277,584 Total 4,594,122 5,926,509 Sheila and Gracc agreed to contribute their respective assets and liabilities in their separate business to the partnership subject to the following adjustments: - The allowance for doubtful accounts is to be set up in the both Grace and Sheila's books amounting to P90,000 and P157,500, respectively. - Inventories are to be written down by P24,750 and P30, 150, respectively. - Other assets of P9,000 and P16,200 are to be written off. Req. 1: How much is the total investiiénit (withdrawal)lof Sheila, assuming they agree to bring their capital balances proportionate to-their profit and loss ratio? a. P(1,888,673) c. P1,888,673 b. P(988,796) d. P988,796 Req. 2: How much is the total assets of the company? a. P10,193,031 - c. P3,950,203 b. P10,520,631 d. P8,304,358 Answer 1) A 2)D Suggested Solution: Req. 1 Grace Sheil . eila Unadjusted capital 2,888,892 3,277,584 Allowance for doubtful account (90,000) (157,500) seventies (24,750) (30,150) Tr assets (9,000) 16,200) +" ssted capital before adjustment 2,765,142 3,073,734Adjusted capital of Grace 2,765,142 Divide by Interest of Grace 70% Total Partnership Capital 3,980,203 x Interest of Sheila 30% Capital of Sheila 1,185,061 _ Capital Contribution of Sheila 3,073,734 withdrawal of Sheila 1,888,673} Req. 2 ~ Total Partnership Capital 3,950,203 Add: Total Liabilities Accounts Payable (805,230 + 1,096,425) 1,901,655 Notes Payable (900,000 +1,552,500) 2,452,500 Total Assets 8,304,358 } Problem 17: The partnership agreement is an express contract among the partners. Such an agreement generally doeé not inidlude ao ofp A limitation on a partner’s liability to creditors The rights and duties of the partners The allocation of income between the partners. The rights and duties of the partners in the event of partnership dissolution. Problem 18: Four individuals who are previously sole proprietors form a P “P Ca. b. c artnership. Each partner contributes inventory and equipment for use by the artnership. What basis should the partnership use toirecord the contributed ) Equipment at fair value : Equipment at each proprietor’s carrying amount » Inventory at the lower of weighted average cost or market d. Inventory at the lower of FIFO cost or market. Problem 19: Which of the following accounts is brad receivable from a partner? ur I CERT a, Loans ¢ollectible fron} partner =i ( c, Loans from Faster L », Loan to partner 4. Due from partner Problem 20: A. partnérship' ) records a partner'ssiavestment of assets in the business at a. The market value of the assets invested b. A special value set by the partners Cu. The partner’s book value of the assets invested . (d.) Any of the above, depending upon the partnership agreementPartuershie Formation 2 Problem 21: At what value will cash contributions of a partner be recorded j the partnership books? 2 ce a. Past value of cash c, Face value of cash b. Future value of cash d. Purchasing value of cash Problem 22: All of the following are true for both general and limite partnership'except: a. Both must have at least one general partner b.) All partners are liable for all debts of the firm c. All partners have the right to participate in the profits of the business d. Both are easily dissolved Problem 23: When property other than cash is invested in a partnership, at what amount should the non-cashl/assets be credited to the contributing partner's capital account? a. Contributing partner’s tax basis b. Assessed valuation for property tax purposes c._ Contributing partner’s original acquisition costs _d.) Fair value of the property at the date of contribution. Problem 24: Which of the following is incorrect? Capital account is: a. Credited for additional investment ~ b. Debited for permanent drawing ; c. Credited for debit balance of the drawing account at the end of the period d. Credited for credit balance of the drawing account at the end of the period Problem 26: What is the valuation if a partner contributes property to the partnership? ¥ a. Fair value of the property b. Acquisition cost of the property cc. Agreed value of the property d. Actual amount of the property H Problem 26: Which of the following statements is incorrect; a. Loan to partners is a liability account’ LOPY Frey =e b. Due to partner isa liability account c. Due from partner is an asset account . d. Receivable from partner is an asset account. Problem 27: The Hion-cashvassets of the contributed by the partners areivaluedy at: a. Fair Value ©. Book Value pared b. Cost (@.In the mannel bree ed in the contract Problem 28: A limited partner may contribute all of the following, except: a. Service c. Non-cash assets b. Money d. All of the above fs agNea aE nnnnEnInnnnnnennnee rene ee eee Partecrshi Formation 21 Problem 29: Which of the following statements is in¢orrect? a. Loan to partners is a liability account ~/ b: Due to partner is a liability account c. Due from a partner is an asset account d. Receivable from partner is an asset account Problem 30: Which of the following is incorrect? The'capital account is:) a. Credited for additional investments b. Debited for permanent drawings > Credited for debit balance of the drawing account at the end of the period “id! Credited for credit balance of the drawing account at the end of the period Problem 31: Which of the following is a characteristic of most partnerships? a. Limited liability 17 ~~) c. Division of profits only 6“ Problem 32: The feature of unlimited liability covers all partners, except: a. General partner c. Capitalist partner Sb. Industrial partner d. Limited partner’ Problem 33: Which of the following is not a characteristic of a business partnership? a. Based on agreement “ ¢. Co-ownership b. Ease of formation ~d. Unlimited life Problem 34: Which of the following statements is incorrect? sa.” Temporary drawing has no effect in the computation of ending capital 'b. Permanent drawing reduces the balance of capital c. Partners share in profits reduces the drawing account d. Partners share in net loss increases the drawing account. For Questions 17~ 34 17 |A 22 |B |27 |D {32 |D 18 [A [23 [D [28 [a [33 [D i9 |c [24 [c [29 [a [34 [a 20 [Dp [25 [c [30 [ce [35 [= ai [c [26 [a [31 [B [36 [-Partecrshis Operating 2 PARTNERSHIP OPERATION Rules for the Distribution of Profits and Losses The losses and profits shall be distributed in conformity with the agreement only the share of each partner in the profits has been agreed upon, the share of each in the losses shall be in the same proportion. In the absence of a stipulation, the share of each partner in the profits ang losses shall be in proportion” to what he may have contributed, but the industrial partner shall not be liable-for the losses. As for profits, the partner shall receive such share as may be just and equitable under the circumstances. If, besides his services he has contributed capital, he shall also receive a share in the profits in proportion to his capital. (Article 1797) A stipulation which excludes one or more partners from any share in the profits or losses is void. (Article 1799) ‘The summary of the above provision of the Civil Code is as follows: A. As to Capitalist Partner Distribution of Profits 1. Profits shall be divided according to the partners’ agreement. j 2. If there is no agreement, the profits shall be based in proportion to their capital contribution. Distribution of Losses 1. Losses shall be distributed according to the partners’ agreement. 2. If there is no agreement as to distribution of losses, but there is_an agreement as to profits, the losses shall be distributed according to the profit sharing ratio. 3. In the absence of agreement, the losses shall be based in proportion to their capital contribution. B. As to Industrial Partner Distribution of Profits Profits shall be divided according to the partners’ agreement. 2. ‘If there is no agreement, industrial partner receives a just and equitable under the circumstances. Industrial partner shall receive such share, which may be satisfied first before the capitalist partners divide the profits. Note: The partners shall determine what equitable share of the industrial partner is, However, in case the parties cannot agree on what is just and aa aesPartecrshit, Operation 23 equitable share, the court will determine the just and equitable share of the industrial partner. Distribution of Losses 1, Losses shall be distributed according to the partners’ agreement. 2, Inthe absence of agreement, industrial partner is not liable for losses. ‘The partners may agree with any of the following schemes of distribution of profits and losses: 1. Bawally 2. APBIEPaFY ratio -any mereeD Reno 3. CapitaliRatior a. Original Capital - °RmIN*t conrmsnurl b.. Beginning capital c. Ending capital d. Average capital I. Simple Average Ow +eH0/2 II. Weighted Average (Peso-Month/ Peso-day Average capital] - ind the balancssonithemencedtatio: . OrdersofepHOrity distribution schemes if profits are not sufficient to cover the salary and interest allowances. roams 5 a & FOR EQUITY OF DISTRIBUTION OF NET INCOME ALLOWANCES ARE GIVEN a, Salary Allowance - it is given to recognize the time rendered by the partners to the entity. b. Interest Allowance - it is given to recognize the difference in the capital contributed to the partnership cc. Bonus allowance - it is given if the partnership realized a profit a profit to give recognition to the managerial skills of the partner. Permanent vs Temporary Withdrawals A, Permanent (capital Withdrawals) - it affects the computation of average capital. It is a withdrawal against the invested capital] B, Temporary (personal withdrawals) ~ it does not affects the computation of average capital. It is a withdrawal in anticipation of profitEXERCISES Problem 1: RONALD, GINO and RIZA are manufacturers’ representative in the wholesale business. Their capital accounts in the AQX Partnership for 2030 were as follows: RONALD | GINO RIZA January 1, Balances 135,000 | 180,000 |" P75,000 March I, withdrawal 36,000 April 1, investment 30,000 ‘May 1, investment 72,000 June 1, investment 27,000 ‘August 1, withdrawal 9,000. October 1, withdrawal 54,000 December 1, investment 18,000 Required: For each of the following independent income-sharing agreements, prepare an income distribution schedule. Monthly salaries are P30,000 to RONALD, P5S0,000 to GINO and P45,000 to RIZA. RONALD receives a bonus of 5% of net income after deducting his bonus. Interest is 12% of ending capital balances. Any remainder is divided by RONALD, GINO and RIZA in a 25:40:35 ratio. The Income Summary account has a credit balance of P2,835,000 before closing. a. Interest is 10% of weighted average capital balances. Annual salaries are P480,000 to RONALD, P630,000 to GINO and P510,000 to RIZA. GINO receives a bonus of 25% of net income after deducting the bonus and his salary. Any remainder is divided in a 2:3:4 ratio by RONALD, GINO and RIZA, respectively. Net income was P1,050,000 before any allocations. = RIZA receives a bonus of 20% of net income after deducting the bonus and the salaries. Annual salaries are P600,000 to RONALD, P540,000 to GINO and P750,000 to RIZA. Interest is 15% of the ending capital in excess of 140,000. Any remainder is to be divided by RONALD, GINO and RIZA in the ratio of their beginning capital balances. Net income was P1,740,000 before any allocations. d. Monthly salaries are P32,000 to RONALD, P40,000 to GINO and P42,000 to RIZA. GINO receives a bonus of 10% of net income after deducting his bonus. Interest is 25% on the excess of the ending capital balances over the beginning capital balances. Any remainder is to be divided by I TT eea Partucrshie Operation 25 RONALD, GINO and RIZA in a 3:2:1 ratio, The Income Summary account has a debit balance of P750,000 before closing. Answers Suggested Solution: Req. A RONALD GINO RIZA Total Salaries 360,000 600,000 540,000 1,500,000 Bonus 135,000 135,000 Interest 18,360 22,680 11,520 52,560 Balance 25:40:35 _286,860__458,976 _401,604_1,147,440 Profit Share 800,220 1,081,656 953,124 2,835,000 Interest Ronald Gino Riza Ending Capital 153,000 189,000 96,000 x Interest 12% 12% 12% Interest Allowance — 18,360 22,680 11,520 B ='5% (N-B) B = 5% (2,835,000 - B) B= 141,750 - 5%B 105% B = 141,750 B= 135,000 Req. B RONALD GINO RIZA Total Interest 10% 16,950 16,725 9,375. 43,050 Salaries 480,000 630,000 510,000 1,620,000 Bonus 84,000 84,000 Balance 2:3:4 154,900) (232,350) (309,800) (697,050) Profit Share 342,050 498,375 209,575 __ 1,050,000 Interest Ronald Gino Riza Weighted Average Capital 169,500 _ 167,250 93,750 x Interest 10% 10% 10% Interest Allowance 16,950 16,725 9,375 Average Capital Ronald Gino Jan. 1 135,000 x 4/12 45,000 Jan. 1 180,000x 2/12 30,000 May 1 207,000 x 5/12 86,250 Mar. 1144,000x3/12 36,000 Oct. 1 153,000 x 3/12 38,250 Jun 1 171,000 x 6/12 85,500 Average Capital 169,500_ Dec. 1 189,000x 1/12 __15,750 Average CapitalPartacrshifp Operation 26 Riza Bonus Jan. 175,000 x 3/12 18,750 B= 25% (1,050,000 - B - 630,000) Apr. 1 105,000 x 4/12 35,000 B= 25% (420,000 - B) Aug. 1 96,000 x 5/12 40,000 B= 105,000 - 25%B Average Capital 93,750 _ 125% B = 105,000 B = 84,000 Req. © RONALD GINO RIZA Total Bonus a. Salaries 600,000 540,000 750,000 1,890,000 Interest 1,950 7,350 2 9,300 Balance ratio of beg. capital (135: 180:75) 55,142) (73,523) _(30,635)_(159,300) Profit Share 546,808 473,827 719,365 1,740,000 A intefest Ronald Gino Riza Ending Capital 153,000 189,000 96,000 140,000 __140,000_140,000 Excess 13,000 49,000 A -) — xinterest 15% 15% 15% . Interest Allowance 950 7,350 ‘Bonus B = 20% (NI-B-S) B = 20% (1,740,000 - B - 1,890,000) B = 20% (-150,000 - B) B = -30,000 - 20%B 120% B = -30,000 B = -25,000 Req. D RONALD GINO RIZA Total Monthly Salaries 384,000 480,000 504,000 —1,368,000 Bonus : : Interest 4,500 2,250 5,250 12,000 Balance ratio (3:2:1) _(1,065,000) (710,000) _ (355,000) _(2,130,000) Profit Share (676,500) _ (227,750) 154,250 __ (750,000) Interest Ronald Gino Riza Ending Capital 153,000 189,000 96,000 Beginning Capital 135,000 180,000. 75,000 ~ Excess 18,000 9,000 21,000 x Interest 25% 25% 25% Interest Allowance 4,500 2,250 3,250 *No Bonus because there is a Net Loss tn se oe tn hae Bln Ml} Partacrshit Operation 27 Problem 2: The capital accounts of Chris and Toper shows the following information for the year 2020: Chris Toper ca: January 1 520,000 | 330.000. |." * March 14 30,000 March 20 (temporary) (15.000) | April 30 24,000 s May 25 (permanent) (22,500) (12,000) July 1 5,000 ‘September 10 (temporary) (15,000) October 1 30,000 ‘The income summary account shows a credit balance of P450,000 on December 31, 2020. The profit and loss of the partnership shall be distributed in the following manner: Salary allowance of P200,000 to Chris and P230,000 to Toper. th svt = Interest allowance of 12% on average capitals Bonus of 10% on net income after salary and interest but beforeibanus to Toper. - Balance divided equally. . Req. 1: What is the ending capital of the Toper? a.) P585,728 c. P584,377 b. P599,377 d. P600,727 Answer A Suggested Solution: Chris Toper Total Salary 200,000 230,000 430,000 Interest ~ 12% of average cap. 64,125 41,580 105,705 Bonus (3) Balance (42,853) (42,853) (85,705 Net Income share 221,273 228,728 450000 Beginning capital 520,000 330,000 Additional Investment, ~ 35,000 54,000 Temporary Drawing (15,000) (15,000) Permanent drawing (22,500) 12,000) Total 738,773 585,728 B = 10% (450,000 - 430,000 - 105,705) B= 10% (-85,705) B = -8,570.Parincretie Operation 28 Average Capital Chris Toper Jan. 1: 520,000 x 2/12 = 86,666.67 Jan, 1:330,000x4 /12= 110,009 Mar 14: 550,000 x 3/12= 137,500.00 Apr 30:354,000x 1/12 29,500 May 25: 527,500x1/12= 43,958.33 May 31: 342,000 x4/12~ 114,000 Jul 1: 532,500x6/12= — 266,250.00 _ Oct 1: 372,000x3/12= — _93,000 Average Capital 534,375.00 x Interest 12% Interest Allowance Average Capital 346,500 x Interest 12% Interest Allowance 41,580 Problem 3: The partnership of Mark, Luke and John was formed on January 1, 2030. The original investments were as follows: Mark, P840,000; Luke, 1,260,000; John, P1,890,000. According to the partnership agreement, net income or loss will be divided among the respective partners as follows: (1) salaries of P126,000 for Mark, P105,000 for Luke, and P84,000 for John. (2) Interest of 8% on the average capital balance during the year to cach partner, (3) The remainder is divided equally. ‘Additional information is as follows: Net income of the partnership for the year ended December 31, 2030 was P735,000. Mark invested an additional 210,000 in the partnership on July 1, 2030. John withdrew P315,000 from the partnership on October 1, 20130. Mark, Luke and John made regular drawings against their shares of net income during 2030 of P105,000 each. [he partner's capital balances as of December 31, 2030 are: Mark Luke John a. P1,179,500 P1,393,700 P1,731,800 b. 1,074,500 1,288,700 1,626,800 c. 966,000 . 1,071,000 1,416,800 d. 1,284,500 1,393,700 1,731,800 Answer A Suggested Solution: Mark Luke John Total Salaries 126,000 105,000 84,000 315,000 Interest ~ 8% 75,600 100,800 144,900 ~—-321,300 Balance 32,900 _ 32,900 32,900 98,700 Share in Net Income (loss) 234,500 238,700 261,800 735,000 - Beginning Capital 840,000 1,260,000 1,890,000 3,990,000 Additional Investment 210,000 210,000 Drawings - Permanent (315,000) (315,000) Drawings -Temporary __(105,000) _(105,000) _(105,000) _(315,000)_ 105,000) _ (315,000) Ending Capital 1,179,500 1,393,700 1,731,800 4,305,000 aia Partucrship Operation 29 Interest Mark Luke John Weighted Average Capital 945,000 1,260,000 1,811,250 x Interest 8% 8% 8% Interest Allowance 75,600 100,800 144,900 Average Capital Mark John Jan 1 840,000 x 6/12 420,000 Jan. | 1,890,000x 9/12 1,417,500 Jul. 1 1,050,000 x6/12 _525,000_ Oct. 1 1,575,000 x 3/12 _ 393,750 Average Capital 945,000_ Average Capital 811,250 Problem 4: FRANCIS, CHINO and APRIL formed a partnership on January 1, 2030, with each partner contributing P600,000 cash. The partnership agreement provided that APRIL receives a salary of P30,000 per month for managing the partnership business. APRIL has never withdrawn any money from the partnership. FRANCIS withdrew P120,000 in each of the years 2030 and 2031, and CHINO invested an additional P240,000 in 2030 and withdrew p240,000 during 2031. Due. to an oversight, the partnership has not maintained formal accounting records, but the following data as of December 31, 2031 is available. Cash P 855,000 Accounts payable P570,000 Accounts receivable 600,000 Notes payable 315,000 Merchandise inventory 1,200,000 Computer equipment, net 1,110,000 Prepaid expenses Total Total Additional data: 1, The partners agree that income for 2031 was about half of the total income for the first two years of operations. 2. The partnership agreement provides that profits, after allowance for APRIL’s salary, are to be divided each year on the basis of the beginning of the year capital balances. For the year ended December 31, 2031, the capital balances of the partners are: f FRANCIS CHINO APRIL = : 600,000 P960,000 P1,080,000 *2 P561,818 P850,909 P1,587,273 » 480,000 P720,000 P1,080,000 P561,818 P720,000 P1,587,273 #9, 24 4Partnership Operation 30 Answer B Suggested Solution: Year 2030 erase iis oe sce oan 360,000 360,000 or —120,000__120,000 120,900 __360,000_ Share in Profit 120,000 120,000. 480,000 _720,000* Begining Sn 600,000 600,000 600,000 —_1,800,000 Drawings (120,000) (120,000) Additional Investments 240,000 240,000. Capital ending 2030 00,500 360.960 7,080,000 2,640,000 Year 2031 Raku ches See saan. 360,000 360,000 Balance: year (e008 81,818.18 130,909 _147,273 _ 360,000 _ Share in Profit 81,818 130,909 507,273 720,000 Beginning Capital of 2031 600,000 960,000 1,080,000 2,640,000 Drawings (120,000) (240,000) (360,000) ‘Additional Investments x Capital ending 2031 561,818 850,909 1,587,273 3,000,000 Computation of Net Income Capital ending - 2031 (Total Asscts 3,885,000 - Total Liab. 885,000) 3,000,000 Total Drawings (120,000 + 120,000 + 240,000) ‘480,000 Total Beginning Capital 2030 (1,800,000) Additional Investment of Chino (240,000) Net Income for years 2030 and 2031 1,440,000 Divide by 2 Net Income for each year 720,000" Problem 5: AB Partnership has net income of P50,000 for the year. Partner A contributed P90,000 and partner B contributed P60,000. The partners agree to share profits and losses as follows: Salary allowance of P15,000 and P30,000 of A and B, respectively. Interest allowance of P 10% based on average capital. Bonus of 10% based on net income to be given to A. - Balance equally. ‘The net income is allocated up to the extent of earning only by giving first , priority to salary, then interest and then to bonus. fi 2 Req. 1: Compute the share of B in the net income @) P32,000 c. P28,500 b. P31,000 d. P36,000Bases Operation 31 Req. 2: Using the information in above, except that the net income is P61, 000, what is the net income share of A? a. P27,550 . P30,100 —— . (b.) P25,000 d. P33,450 : Answer 1) A 2)B pets Suggested Solution: Req. 1 A B Total Salary 15,000 30,000 45,000 Interest (9,000:6,000) 3,000 2,000 »~—-5,000 Bonus Total 18,000 32,000 50,000 - use the interest allowance ratio to distribute the balance Req. 2 A B Total Salary 15,000 30,000 45,000 Interest 9,000 6,000 15,000 1,000 : 1,000 Bonus Total 25,000 36,000 ___ 61,000 B = 10% (61,000) B= 6,100 Bonus is only 1,000 Problem 6: Ely and Marcus are partners engaged in a manufacturing business. Transactions affecting the partners’ capital accounts in 2030 are as follows: Ely Marcus Debit Credit Debit Credit Beg. Balance P 50,000 P70,000 April 1 30,000_| P 20,000 June 30 P.25,000 =| 50,000 Sept. 1 45,000 60,000 Oct. 1 70,000 | 40,000 The income summary has a debit balance of P45,000. ~L.5 Agreement between Ely and Marcus are as follows: © Interest on average capital at 8% © Salaries of P25,000 and P35,000 are given to Ely and Marcus, respectively © Bonus to Marcus at 25% of net income after deducting interest and salaries but before deducting bonus © Balance is to be divided equally. tPantacrships Operation 32 How much is the net increase/decrease in Marcus's capital account during 2015? a./P 33,600 c. P (6,400) ‘b. P(16,400) d.P 1,400 Answer A Solution: Suggested Solutior = ‘aids pai ae §,000 7,200 12,200 st , , * aaaries 25,000 35,000 60,000 lanes Srually (58,600) _ (58,600) __(117,200) Share in Net Loss (28,600) (16,400) (45,000) ‘Additional Investments 100,000 110,000 210,000 Drawings (70,000) (60,000) 130,000) Net increase (Decrease) in capital _1,400_33,600_35,000 * , therefore no bonus Net loss, the Fh aoe Jan. 1 §0,000x3/12 12,500 Jan 1 70,000 x 3/12 17,500 ‘Apr 1 80,000 x 3/12 20,000 Apr 1 50,000 x 3/12 12,500 Jun 30 35,000x 2/12 9,167 Jun 30 100,000 x 2/12 16,667 Sep 1 10,000 x 1/12 833 Set 1 160,000 x 1/12 13,333 Oct 180,000x3/12 __20,000 _ Oct 1 120,000 x 3/12 _30,000__ Average Capital —62,500__ Average Capital sem Interest** Ely Marcus Weighted Average Capital 62,500 90,000 t x Interest 8% 8% j Interest Allowance 5,000 7,200 Problem 7: PLANET GARAPATA was organized and began operations on May 1, 2030. On that date, Buddy invested P1,000,000 cash and Raymond invested land and building with current fair values of 1,750,000 and 850,000, respectively. The average capital balances of Buddy and Raymond were determined to be 1,223,890 and 1,222,090, respectively. The partnership contract includes the ff. Remuneration plan: Buddy Raymond Annual salaries 152,200 151,800 Annual interest on Ave. balance 20% 30% Remainder 60% 40%Pertecrhie Operation 33 During the year ended April 30, 2030, the partnership had net sales of 3,000,000, cost of goods sold amounting to 1,000,000 and operating expenses of 391,090. The partner’s salaries had been recorded as part of the operating expenses. 7 Ww yw much is the total share of Buddy in the net income for the period? (a,)P843,281 c. P995,481 acai b. P795,829 d. P917,429 jus Be HT Answer A ‘Suggested Solution: - Buddy - Raymond Total - Interest 244,778 366,627 611,405 pu? te Balance (6:4) 598,503 _399,002_997,505_. =~ Profit Share 843,281 765,629 _1,608,910 Net Sales 3,000,000 cocs (1,000,000) OPEX (including salaries) (391,090) Net Income 1,608,910 Interest Buddy Raymond Average Capital 1,223,890 1,222,090 x Interest 20% 30% Interest Allowance 244,778 366,627 Note: Do not include the salaries because it is not part of net income (it is recorded as part of operating expenses) Problem 8: On January 2, 2030, Berny and Cyrus formed a partnership. Berny contributed capital of 350,000 and Cyrus P50,000. They agreed to share profits and losses 80% and 20% respectively. Cyrus is given a salary of P10,000 a month; interest of 5% of the beginning capital of both partners and a bonus of 15% of net income before salary, interest and bonus. The income statement of the partnership for the year ended December 31, 2030 is as follows: Revenues ‘ 1,750,000 coGs ho 3 1,400,000 Gross Profit { 350,000 Expenses (including partners salary, interest and bonus) 286,000 Net Income | What is the amount of bonus to Cyrus in 2030? a. P41,400 (c) P36,000 b. P32,912 XV ‘d. P26,800Paxtacrslife Oberation 34 Answer C Suggested Solution: Computation of Bonus B = 15% (NI before S, ! and B) B = 15% (64,000 + 120,000 + 20,000 + B) B = 15% (204,000 + B) B = 30,600 + 15%B B= 30,600 / 85% = 36,000 Berny Cyrus Total Salaries 120,000 120,000 Interest 17,500 2,500 20,000 Interest Berny Cyrus Beginning Capital 50,000 x Interest 5% Interest Allowance 2,500 Problem 9: Irish is trying to decide whether to accept a salary of P120,000 or a salary of P75,000 plus a bonus of 10% of net income after salary and bonus as ‘a means of allocating profit among the partners. Salaries traceable to other partners are estimated to be P300,000. What amount of income would be necessary so that Irish would consider the choices to be equal? a. P795,000 c. P495,000 b. P915,000 d. P870,000 Answer D Suggested Solution: 120,000 = 75,000 + B B= 45,000 B= 10% (NI -S - B) 45,000 = 10% (NI - (300,000 + 75, 000) , , - 45,000) 45,000 = 10% (NI - 420,000) : 45,000 = -42,000 + 10%NI 87,000 = 10%NIPartnership Operation 35 Problem 10; April, Bing, Cris and Deo own a publishing company that they operate as a partnership. The partnership agreement includes the following: April receives a salary of P20,000 and a bonus of 3% of income after all bonuses - Bing receives a salary of P10,000 and a bonus of 2% of income after all bonuses All partners are to receive a 10% interest on their average capital balances ‘The average capital balances are as follows: April P50,000; Bing P45,000; Cris 20,000 and Deo P47,000. Any remaining profits and losses are to be divided equally among the partners Determine how a profit of P105,000 would be allocated among the partners. a. April P39,700; Bing P29,200; Cris P16,700; and Deo P19,400 b. April P41,450; Bing P29,950; Cris P15,450; and Deo P18,150 c. April P28,000; Bing P16,500; Cris P2,000; and Deo P4,700 d. Cannot be determined Answer B ‘Suggested Solution: April Bing Cris Deo Total Salaries 20,000 10,000 - - 30,000 Bonus 3,000 2,000 5,000 Interest, 5,000 4,500 2,000 4,700 16,200 Balance equally 13,450 13,450 __13,450__13,450__ 53,800 41,450 _- 29,950 _15,450_18,150__105,000 B= 5% (NI-B) B = 5% (105,000 - B) B =5,250 - 5%N B=5,000 April 5,000 x 3/5 = 3,000 Bing 5,000 x 2/5 = 2,000 Problem 11: Partners Roman and Net have profit and loss agreement with the following provisions: Salaries of P90,000 and P135,000 for Roman and Net, respective: a bonus to Roman of 10% of net income after salaries; and interest of 10% on average capital balances of P60,000 and P105,000 for Roman andPastucrship Operation 36 Net, respectively. One-third of any remaining profit will be allocated to Romar and the balance to Net. If the partnership had net income of P66,000. How much should be allocated t, Partner Roman, assuming that the profit and loss agreement are ranked py order of priority starting with salaries? a. P26,400 c. P39,600 b. P36,000 d. P37,500 Answer A Suggested Solution: Roman Net Total laries (90:135) 26,400 39,600 66,000 reall Siae 26,400 39,600 66,000 ‘The profit is insufficient to provide all the allowances and based on the agreement the profit and loss are ranked by order of priority starting with Sularies. Therefore, we use the salary ratio since it cannot provide the entire salary allowance of P225,000. Share of Roman 90/225 x 66,000 = 26,400 Share of Net 135/225 x 66,000 = 39,600 If the problem is silent Roman Net Total Salaries 90,000 135,000 225,000 Bonus i‘ = = Interest 6,000 10,500 16,500 Balance (1:2) (58,500) 117,000) 175,500) Total share 37,500 28,500 66,000 Problem 12: A and B formed a partnership on January 2, 2030 by contributing capital of P262,500 and P37,500. They agreed to share profits and losses, 70% and 30%, respectively. B manages the partnership and is given a salary of P5,000 a month and bonus of 20% of net income before salary, interest and bonus. Interest of 5% of the beginning capital is to be given to cach partner and any remainder is to be divided according to their profit and loss ratio. For the year ended December 31, 2030, the partnership generated a net income of P48,000 after salaries, interest and the bonus. Compute for the amount that each partner should receive in the distribution of profit. .Partacrshit Operation 37 A B a. 46,725 P75,275 b. 46,725 P107,025 c. P77475 P76,275 d. P33,600 P105,150 Answer B Suggested Solution: A B Total Salaries 60,000 60,000 Bonus* - 30,750 30,750 Interest 13,125 1,875 15,000 Balance (70:30) 33,600 400___48,000 after ‘Total share eG 728 107,025 1837750, before Interest A B Beginning Capital 262,500 37,500 x Interest 5% 5% Interest Allowance 13,125 875 B = 20% (NI before] B= 20% (NI after +S +1 +B) B = 20% (48,000 + 60,000 + 15,000 + B) B = 20% (123,000 + B) B= 24,600 + 20%B B = 30,750* Problem 13: On Jan 1, 2030, Ana, Yeng, Guzon and Yuri formed Butuan Trading Co., a partnership, with contributions as follows: Ana, P50,000, Yeng 25,000; Guzon Php25,000 and Yuri, Php20,000. ‘The partnership contract provided that each partner shall receive a 5% interest on contributed capital, and that Ana and Yeng shall receive salaries of P5,000 and P3,000, respectively. The contract also provided that Guzon shall receive a minimum of P2,500 per annum, and Yuri a minimum of P6,000 per annum, which is inclusive of amounts representing interest and share of remaining profits. The balance of the profits shall be distributed to Ana, Yeng, Guzon and Yuri in a ratio 3:3; What amount must be earned by the partnership, before any charge for interest and salaries, so that Ana may receive an aggregate of P12,500 including interest, salary and share of profits? a. P16,667 . c. P30,667 b. P30,000 d. P32,333=_ Partacrslie Operation 33 Answer D Suggested Solution: Anna = Yeng Guzon Yuri Tt Interest 2,500 1,250 1,250 1,000 6,000 eae 5,000 3,000 8,000 lance 5,000 5,000 3,333 3,3: 5 ‘Additional profit eer 7. Pas Share in Profit 12,500, 9,250 __4,583_ 6,000 _ 32,333 Minimum share in profit 2,500 6,000 =e Balance share of Anna 5,000 +30% = 16,667 Partner Yuri should receive an amount not lower than the minimu: ‘red profit. So an additional profit is required to satisfy tie shiny red profit share of Yuri. Any partner who receives an amount equal, or ¢ minimum amount does need an additional profit. : requi requi more than thi On Jan 1, 2030, A, B, C and D formed Butuan Trading Co., a parinership, with contributions as follows: A, P50,000, B P25,000; °C, Php25,000 and’ D, Php20,000. The partnership contract provided that each partner shall receive a 5% interest on contributed capital, and that A and D Enall receive salaries of P5,000 and P3,000, respectively. Problem 14: ¢ contract also provided that C shall receive a minimum of P2,500 per annum, and Ba minimum of P6,000 per annum, which is inclusive of amounts fepresenting interest and share of remaining profits. The balance of the profits Shall be distributed to A, B, Cand D in a ratio 3:3:2:2. The What amount must be earned by the partnership, before any change for interest and salaries, so that A may receive an aggregate of P12,500 including jnterest, salary and share of profits? a. P16,667 c. P30,667 b. 30,000 d. P32,333 Answer C ‘Suggested Solution: a A B c D Total Interest 2,500 1,250 1,250 1,000 6,000 Salary 5,000 3,000 8,000 Balance 5,000 4 5,000 3,333 3,334 16,667 Share in Profit 12,500] _6,250__ 4,583 _7,3334 30,667 Minimum share in profit 6,000 2,500 Balance share of A 5,000 +30% = 16,667Partuershife Operation 39 Problem 15: Anthony and Paz share profits and losses in a ratio of 2:3, respectively. Anthony and Paz receive salary allowances of P10,000 and P20,000, respectively, also both partners receive 10% interest based upon the balance in their capital account on January 1. Partners’ drawings are not used in determining the average capital balances. Total net income for 2030 is P60,000. If the net income after deducting the interest and salary allocations is greater than P20,000, Paz receives a bonus of 5% of the original amount of net income: Anthony Paz January | capital balances 200,000 300,000 Yearly drawings (P1,500 a month) 18,000 18,000 What is the total amount of the allocation of interest, salary and bonus, and how much over-allocation is present? a. P60,000 and PO b. P80,000 and P20,000 ¢. P83,000 and PO d. P83,000 and P23,000 Answer B Suggested Solution: Anthony Paz Total lary 10,000 20,000 30,000 Interest 10% 20,000 30,000 50,000 Bonus Total allocation of salary, interest and bonus ~ 30,000 000 80,000 Remainder 2:3 (8,000) 12,000) (20,000) Share in net income 22,000 38,000 __ 60,000 Bonus is zero because the net income after deducting interest and salary allocations is less than P20,000. Problem 16: On January 1, 2030, Mr. P and Ms. M formed a partnership engaged in selling compact discs. Their capital accounts during the year show the following investments and withdrawals: Date Mr. P Ms. M Investments | Withdrawals | Investments | Withdrawals. Beginning Balance | 36,000 24,000 June 1 14,400 14,400, August 1 24,000 2,400 December 1 6,000 ="Pastucrsis Operation 40 ‘The partnership's ‘profit and loss agreement provi provides for an annual sal. 36,000 for each partner, Interest of 10% on average capital balances. Mr. Pi also to receive a bonus of 5% on net income after bonus. ‘Assuming net income of P105,000 before any allocations, how much net income is allocated to Mr. P? a. PS56,125 ¢. P44,710 b. P58,408 & P36,900 Answer B ted Solution: peer Mr. P Ms. M Total 36,000 36,000 72,000 siterest 3,710 1,460 5,170 Bonus 5,000 5,000 :24* a 13,698 9,132 22,830 Profit share 58,408 46,592, 105,000 ~ * The balance shall be divided using the original capital contribution, q Bonus = 5% (Net Income ~ Bonus) Bonus = 5% (105,000 - Bonus) Bonus = 5,250 5% Bonus 105% Bonus = 5,250 Bonus = 5,000 Average Capital Computation Mr. P Ms. M Jan. 1: 36,000x 5 180,000 Jan. 124,000x5 120,000 June 1: 21,600 x 2 43,200 June 1: 9,600 x 2 19,200 Aug 1: 45,600 x 4 182,400 Aug 1: 7,200x5 36,000 Dec. 1: 39,600 x 1 39,600 __Total 175,200 Total 445,200 Divide by 12 Divide by 12 Average Capital 14,600 37,100 Average Capital Problem 17: X, Y and Z are partners sharing profit on a 7:2:1 ratio, respectively. On January 1, 2020, M was admitted into the partnership with a 15% share in profits. The old partners continue to participate in the profits in their original ratios. For the year 2020, the partnership showed profits of P15,000. However, it was discovered that the following items were omitted from the firm's books: legate ea ola Partecrship Operative 41 unrecorded at Year- end 2019 2020 ‘Accrued expense P1,050 ‘Accrued income Beant 875 id expense ee 1,255 Unearned income ‘the share of ¥ in the 2020 profits should be: a. 2,197.50 ¢. P2,637.00 b. P2,495.60 d. P3,149.75, Answer B ‘Suggested Solution: Net income Accrued expense Accrued income Prepaid expense Unearned income Adjusted x Share of old partners Total x share of Y Share of ¥ in profits Problem 18: Mr. J and Mr. O are partners in a construction business located in Makati City. The profit and loss agreement contains the following provisions: - Salaries of P35,000 and P40,000 for J and O, respectively. - A bonus to J equal to 10% of net income after bonus. - Interest on average capital at the rate of 8%. Annual drawings in excess of P20,000 are considered to be a reduction of capital for purposes of this calculation. - Profit and loss ratio of 40:60 for J and O, respectively. ‘The capital and drawing activity of the partners for the year 2030 are as follows: JCapital JDrawing Capital O Drawing Beginning Balance —_ 120,000 60,000 - April 1 20,000 June 1 15,000 20,000 September 1 30,000 November 1 15,000 Ending Balance 170,000 30,000 100,000 20,000Partacrshis Operation 42 Assuming net income for 2030 of P132,000 before any allocations, how much profit should be allocated to Mr. J? a. P69,660 ©. P72,774 b. P69,747 d. P69,774 Answer B ted Solution: aa Mr.J = Mr.0 Total Salas 35,000 40,000 75,000 Bonus 12,000 - 12,000 Interest 11,467 5,333 16,800 Balance 40:60 __11,280__ 16,920 _28,200 Profit share 69,747 62,253 132,000 Bonus = 10% (Net Income ~ Bonus) Bonus = 10% (132,000 ~ Bonus) Bonus ~ 13,200 - 10% Bonus 110% Bonus = 13,200 Bonus = 12,000 Average Capital Computation Mr. J Mr.0 Jan. 1: 120,000x 3 360,000 Jan. 1 60,000 x 10 600,000 Apr. 1; 140,000 x 5 700,000 Nov. 1 100,000 x 2 200,000 Sept. 1:170,000x2 340,000 Total ‘800,000 160,000 x 2 320,000__ Divide by 12 Total 7,720,000 Average Capital 66,667 Divide by 12 Average Capital 143,333 Withdrawals of P20,000 or less is a temporary withdrawal. Temporary withdrawals will not affect the balance of capital on the date of withdrawal. It will be deducted only to capital at the end of the year upon closing entry. Problem 19: CD partnership begins its first year of operations with the following capital balances: Cris, Capital, P224,000; Dwayne, Capital, P112,000. According to the partnership agreement, all profits will be distributed as follows: Cris will be allowed a salary of P268,800 and P134,400 to Dwayne. The partners will be allowed with interest equal to 10% of the beginning capital balance of the year. Cris will be allowed a bonus of 10% of the net income after bonus. The remainder will be divided on the basis of the beginning capital for the first year and equally for the second year. Each partner is allowed to withdraw up to P11,200 per year. Assume that the income summary has &Partucrshit Operation 43 debit balance of P16,800 on the first year and a credit balance of P61,600 on the second year. Assume further that each partner withdraws the maximum amount from the business each period. What is the balance of Dwayne's capital account at the end of the second year? a. P95,200 c. P296,520 b. P39,480 d. P201,600 Answer B Suggested Solution: First Year Cris Dwayne Total Salary 268,800 134,400 403,200 Interest 10% 22,400 11,200 33,600 Bonus - = Balance 224:112 (302,400) (151,200) (453,600) Loss share (11,200) (5,600) (16,800) Beginning capital - Ist year 224,000 112,000 336,000 Drawings 11,200) 11,200) 22,400) Ending capital - 1st year 201,600 95,200 296,800 First Year Bonus is 0 since it is a net loss from operation. Second Year Cris Dwayne Total Salary 268,800 134,400 403,200 Interest 10% 20,160 9,520 29,680 Bonus 5,600 5,600 Balance equally 188,440) (188,440) __(376,880 NI share 106,120 (44,520) 61,600 Beginning capital - 2nd year 201,600 95,200 296,800 Drawings 11,200) 11,200) (22,400) Ending capital - Ist year 296,520 39,480 336,000 Second year Bonus Bonus = 10% (Net Income - Bonus) Bonus = 10% (61,600 - Bonus) Bonus = 6,160 - 10% Bonus 110% Bonus = 6,160 Bonus = 5,600 Problem 20: Jay, Jovs and Johnson are partners with an initial capital contribution of P3,071,250; P1,551,225 and P1,055,275, respectively. The partners agreed to receive 10% interest on their original capital contribution