ADVANCED FINANCIAL ACCOUNTING

SPECIAL TRANSACTION ON ACCOUNTING

MIDTERM EXAMINATION
Name: _______________________
Section: ______________________
TEST 1: OPERATIONS
1. H and I formed a partnership agreeing to share profits equally. H contributed P10,000 cash
and P400,000 newly purchased equipment. I contributed P15,000 cash and a parcel of land
acquired 5 years ago for P100,000. Three hours after formation, the land was sold for
P200,000. How much is the capital balance of I?
a. P50,000 b. P215,000 c. P150,000 d. P165,000

2. The following transactions and agreements relates to the formation of the ABC Partnership:
● Andrea contributed a delivery truck which cost her P300,000 but now has a second
hand value half of its cost.
● Brenda has P500,000 personal assets but she contributed only P80,000 cash.

● Carlene contributed P150,000 cash. P120,000 of these were borrowed money from
Brenda.
● The partners agreed to share in profit equally despite differences in capital
contribution.

What should be the correct capital balances of partners Andrea, Brenda and Carlene?
a. P150,000; P80,000; P30,000 c. P150,000; P80,000; P120,000
b. P150,000; P80,000; P150,000 d. P300,000; P500,000; P150,000

3. Partner Y and Z agreed to form ZY Partnership sharing profit 40% and 60%. The partnership
also assumed the separate liabilities of the partners: Y, P200,000 and Z, P300,000. Cash of
P150,000 and P250,000 were also contributed by Y and Z. Immediately after formation, the
partners were credited with P500,000 and P400,000 capital. How much is the agreed value of
non-cash assets contributed by Z?
a. P450,000 c. P1,000,000
b. P550,000 d. P700,000

4. Goodwill or bonus?
H, I and J contributed P650,000, P550,000 and P600,000 but agreed to share equal interest
while maintaining their total capital balance. Which is incorrect?
a. H will be debited for a P50,000 bonus. c. J will be debited for a P50,000 bonus.
b. I will be credited for a P50,000 bonus. d. J will not receive any bonus.

5. Bonus method
A, Q and W contributed a total of P600,000 cash to form WAQ Partnership. Only W possess
the technical expertise required by the business so A and Q agreed to provide 10% of their
contributed capital as bonus to W. A and W contributed P240,000 and P120,000,
respectively. How much is Q’s adjusted capital balance after formation?

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ADVANCED FINANCIAL ACCOUNTING

a. P200,000 b. P240,000 c. P120,000 d. P168,000

The total bonus to W is

a. P18,000 b. P24,000 c. P36,000 d. P48,000

6. Goodwill method
A, B and C formed a partnership and contributed P100,000, P50,000 and P80,000 cash,
respectively. A and C further contributed non-cash assets with agreed values of P50,000 and
P20,000, respectively. Owing to the business expertise of B and C, A concurred that they will
be credited with 20% goodwill based on their contributed capital. How much is the total
goodwill to be recognized upon formation?
a. P26,000 b. P60,000 c. P30,000 d. P50,000

How much is the adjusted capital of C after formation?

a. P80,000 b. P100,000 c. P96,000 d. P120,000

7. A, B and C formed a partnership whereby A shall be credited for P120,000 by contributing

P100,000. B and C shall contribute enough cash for their 20% and 30% interest in the
partnership, respectively and to cover their respective share in the bonus to A. What is B’s
cash contribution?
a. P56,000 c. P48,000
b. P52,000 d. P40,000

8. Zeus and Raymund formed a partnership agreeing to share profits 40:60, respectively. Zeus
contributed special equipments which cost him P200,000. Raymund contributed a parcel of
land which he purchased for P300,000 three years ago. The equipment and the land have
current fair market value of P150,000 and P400,000, respectively, but the partners agreed
that the equipment and the land will be booked at cost. The bonus method shall be used for
whatever fair value adjustments. What is Zeus’ adjusted capital after the formation?
a. P200,000 c. P130,000
b. P150,000 d. P110,000

9. Benson is a proprietor with adjusted capital balance of P120,000. In need of additional

financing, he sold 40% of his capital to Candy for P60,000. Any goodwill implied by
Candy’s purchase is to be recorded prior to Candy’s admission. What is Benson’s capital
immediately after formation?
a. P120,000 c. P84,000
b. P90,000 d. P72,000

10. Personal cash settlement

Partner Alex and Becky agreed to form a partnership by contributing the assets of their
separate businesses. The partners agreed to an equal capital credit on the total contributed
capital. Cash settlements will be made among them to even out the difference. The abridged
balance sheets of Alex and Becky is are follows:
Alex Becky

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ADVANCED FINANCIAL ACCOUNTING

Total assets P 120,000 P 80,000

Total liabilities 40,000 20,000

The partnership formation results in

a. P10,000 bonus to Becky. c. P10,000 cash settlement to Becky.
b. P10,000 goodwill to Becky. d. P10,000 cash settlement from Becky.

11. Drawings or Investments

Bob and Bitz contributed P10,000 and P20,000 cash, respectively. Bob further contributed
used equipment which cost him P50,000. Bitz contributed his delivery truck which also cost
him P120,000. Bob and Bitz agreed to share profit equally but to share capital on the ratio of
40:60, respectively. A valuation report rendered by Pal Appraisal Company indicates that the
truck and equipment has fair values of P70,000 and P40,000, respectively. If the partners
agreed to adjust their capital by cash reinvestment, which is true?
a. Bob shall contribute P15,000. c. Bitz shall contribute P15,000.
b. Bob shall contribute P10,000. d. Bitz shall contribute P10,000.

12. If the partners agreed to adjust their capital by cash withdrawal, which is true?
a. Bob shall withdraw P15,000. c. Bitz shall withdraw P15,000.
b. Bob shall withdraw P10,000. d. Bitz shall withdraw P10,000.

13. Helen has a proprietorship business with net assets of P500,000. In need of cash financing,
Helen admitted Teddy and Rod for a 30% and 20% interest in the business, respectively. The
partners also agreed to recognize goodwill for Helen and to be credited with their capital
contribution. Rod contributed P220,000 for his capital interest. How much is the goodwill for
Helen?
a. P100,000 b. P50,000 c. P0 d. P25,000

14. C had 220,000 net assets in his business before formation. C admitted A, B into his business.
The partners agreed to a total partnership capital of P600,000 and that no intangibles will be
recognized. A, B and C will have 20%, 40% and 40% capital interest. If in pursuant to their
agreement, A and B contributed P100,000 and P280,000 for their respective capital interest,
which statement is correct?
a. A will be credited for P20,000 bonus.
b. B will be debited for a P32,000 goodwill.
c. C will be debited for a bonus of P8,000.
d. A and C will be credited for a P24,000 and P8,000 bonus, respectively.

15. ZY Partnership was formed on March 1, 2010 with the following asset contributed by
partners Zen and Yu:
Yu Zen
Cash P 262,500 P 187,500
Merchandise 412,500
Building 750,000
Furniture and fixtures - 112,500

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The partnership agreement provides for the following:

1. The partnership assumed the P225,000 mortgage on the building.
2. Zen and Yu shall share profits or losses 1:3, respectively.
3. Zen and Yu shall have initially equal capital. No intangible asset is to be recognized.

Yu’s capital would be:

a. P1,500,000 c. P750,000
b. P862,500 d. P543,750

16. Cash investment

The December 31, 2010 balance sheet of Reynante’s proprietorship business showed the
following:
Cash P 20,000
Accounts receivable 35,000
Inventory 40,000
Equipment, net (10 year-useful life) 36,000
Accounts payable 42,000

An audit was required in pursuant to the partnership agreement before the admission of
Herbo and Primo.
The audit disclosed the following:
● The cash includes equity investments with a fair value in excess of its recorded cost by
P3,000.
● The receivable includes P5,000 uncollectible items.

● A P10,000 prepayments and P8,000 accrued expense were omitted from the records.

Per agreement:
● The equipment was depreciated for 2 years but is to be depreciated by additional two
years.
● Reynante shall receive a goodwill equivalent to 10% of his initial capital credit. Herbo
and Primo shall contribute cash for their ¼ and 1/5 interest respectively.

Compute the goodwill based on the agreement.

a. P7,600 c. P8,400
b. P8,000 d. P9,200

17. Compute the total cash investment of the incoming partners.

a. P32,000 c. P65,455
b. P64,000 d. P72,000

18. Partners A and B agreed to share profits in the following order of distribution:
a. Interest of 10% on weighted average capital
b. Salaries of P60,000 to A and P40,000 to B

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ADVANCED FINANCIAL ACCOUNTING

c. Residual profit, equally

OPERATION:
1. At the end of the year of operation, the profit or loss summary has a debit balance of
P60,000. Partners A, B and C contributed P100,000, P200,000 and P300,000 and shared
profit 20:30:50, respectively. In closing the profit or loss summary, which statement is
correct?
a. A’s capital, P10,000 debit c. B’s capital, P18,000 debit
b. A’s capital, P10,000 credit d. C’s capital, P30,000 credit

2. As of December 31, 2008, D, E and F had adjusted capital balances of P100,000, P250,000
and P150,000, respectively, and shared profit equally. At the start of 2009, the partners
admitted G for a 10% interest in profit and capital by contributing P100,000. The partnership
earned P120,000 net income in 2009. How much is E’s share in the partnership profit?
a. P24,000 b. P36,000 c. P54,000 d. P40,000

3. D and E agreed to share profits and losses 40:60, respectively after providing E 17% bonuses
on partnership net income after tax and after bonus. D received P36,000 as final profit
distribution. The share of the partners on partnership profit is subject to 10% withholding tax.
The partnership is also subject to 35% income tax. Compute the partnership operating
income assuming that it equals taxable income.
a. P117,000 b. P150,000 c. P180,000 d. P160,000

4. Darrel, Rhad and Bal are partners. The partners agreed to share profit 40:30:20. Darrel sold
½ o his interest to Rhad for P100,000. Subsequently, the partnership admitted Andrix for a
10% interest. What is Rhad’s profit sharing after Andrix’ admission?
a. 27% c. 50%
b. 45% d. 54%

5. The partnership reports profits of P80,000, net of P20,000 salaries and P30,000 interest and a
bonus. The bonus is computed as 20% of profits after salaries and interest. Compute the
amount of the bonus.
a. P16,000 c. P26,000
b. P20,000 d. P32,500

6. The partnership of Alec and Boy reported profits of P120,000 in 2009 and divided the same
to their profit sharing ratio of 40:60, respectively. An examination conducted on the books
revealed the following:
● An equipment costing P30,000 which should have depreciated for 4 years was expensed
on January 2, 2009.
● Supplies of P5,000 were omitted on the records.

● An inventory costing P15,000 was omitted from the records. The purchase was not
recorded because the invoice was in transit as of the balance sheet date.

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ADVANCED FINANCIAL ACCOUNTING

What is the net adjustment to the Capital account of Alec?

a. P11,000 increase c. P17,000 increase
b. P11,000 decrease d. P17,000 decrease

7. Katrina and Horace formed a partnership. They agreed to divide profits 40:30, respectively,
after providing for salaries of P10,000 to Katrina and P20,000, to Horace and an interest on
beginning capital. Interest traceable to Katrina and Horace were P4,000 and P2,000,
respectively. If Horace received total profit sharing of P28,000, compute the partnership
profit during the year.
a. P46,200 c. P56,000
b. P48,000 d. P50,000

8. Elvie and Lito are partners sharing profits as follows:

● P10,000 and P20,000 salaries to Elvie and Lito, respectively. The salary provision shall
be increased by 50% each when profit exceeds P50,000.
● Residual profit is shared equally.
If Elvie received P25,000 profit sharing, what is the partnership profit?
a. P75,000 b. P65,000 c. P60,000 d. P50,000
9. Cabrera, Mateo and Ampil agreed to the following profit sharing:
● Salary of P20,000 and P30,000 to Mateo and Ampil, respectively.

● Residual profit sharing of 50:30:20 to Cabrera, Mateo and Ampil, respectively.

● Guaranteed minimum profit sharing of P40,000 to Cabrera and P30,000 to Mateo,

respectively.

Compute the partnership profits if Ampil received P40,000 profit sharing.

a. P115,000 b. P120,000 c. P135,000 d. P150,000

10. As of February 1, 2010, A, B and C have beginning capital balances of P100,000, P200,000
and P200,000, respectively. They agreed to share any losses in the ratio of 30:30:40,
respectively. The partnership profit was reported as P50,000. Ending capital balances of A, B
and C was properly determined as P120,000, P220,000 and P180,000, respectively, based on
the reported profit.
An evaluation of the books as of December 31, 2010 disclosed that the correct partnership
income was only P30,000. Based on the above facts, compute the net drawings or additional
investments made by partners A, B and C during the year, respectively.
a. P5,000, P5,000; (P40,000) c. P10,000; P0; (40,000)
b. P5,000, P5,000; (P20,000) d. P14,000; P8,000; (P32,000)
11. Loss is shared by A and B 40:60. Details of the capital accounts of A and B is shown as
follows:
A B
Debit Credit Debit Credit

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ADVANCED FINANCIAL ACCOUNTING

January 1 - P 240,000 - P 360,000

March 30 - 40,000 P 20,000 -
April 30 - - - 18,000
July 1 P 20,000 - 21,000 -
September 30 - 80,000 - 60,000
November 1 30,000 - - -
December 30 - - 30,000 -
The partnership made P180,000 net income. B’s share in the profit is
a. P95,675 b. P95,550 c. P84,450 d. P84,325

What is A’s ending capital balance?

a. P394,325 b. P394,450 c. P394,450 d. P405,675

DISSOLUTION:
ADMISSION OF A NEW PARTNER
1. Blue and Rubi are partners who share profits and losses in the ratio of 6:4, respectively. On
May 1, 2009, their respective capital accounts were as follows:
Blue P60,000
Rubi 50,000

On that date, Lind was admitted as a partner with a one-third interest in capital and profits for
an investment of P40,000. The new partnership began with total capital of P150,000.
Immediately after Lind’s admission, Blue’s capital should be
a. P50,000 c. P56,667
b. P54,000 d. P60,000

2. Western and Pate are partners with capital balances of P60,000 and P20,000, respectively.
Profits and losses are divided in the ratio of 60:40. Western and Pate decided to form a new
partnership with Grant, who invested land valued at P15,000 for a 20% capital interest in the
new partnership. Grant’s cost of the land was P12,000. The partnership elected to use the
bonus method to record the admission of Grant into the partnership. Grant’s capital account
should be credited for
a. P12,000 c. P16,000
b. P15,000 d. P19,000

3. Dunn and Grey are partners with capital account balances of P60,000 and P90,000,
respectively. They agree to admit Zorn as a partner with a one-third interest in capital and
profits, for an investment of P100,000, after revaluing the assets of Dunn and Grey. Goodwill
to the original partners should be
a. P0 c. P50,000
b. P33,333 d. P66,667

4. The following condensed balance sheet is presented for the partnership of Alfa and Beda,
who share profits and losses in the ratio of 60:40, respectively:
Cash P 45,000
Other assets 625,000

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ADVANCED FINANCIAL ACCOUNTING

Beda, loan 30,000

P 700,000
Accounts payable P 120,000
Alfa, capital 348,000
Beda, capital 232,000
P 700,000

The assets and liabilities are fairly valued on the balance sheet. Alfa and Beda decide to
admit Capp as a new partner with 20% interest. No goodwill or bonus is to be recorded.
What amount should Capp contribute in cash or other assets?
a. P110,000 c. P140,000
b. P116,000 d. P145,000

5. A and B contributed the net assets of their respective proprietorship business amounting to
P50,000 and P80,000, respectively. A is to invest additional cash into the partnership and
shall have 60% interest in the partnership. How much cash shall A invest?
a. P3,333 b. P20,000 c. P70,000 d. P120,000

6. A, K and O formed a partnership. They agreed that their capital contributions shall be aligned
with their profit or loss agreement of 40%, 25% and 35% respectively. A, K and O
contributed non-cash assets at agreed values of P20,000, P30,000 and P85,000,respectively.
K first contributed P40,000 cash for his capital, compute the total cash contributions of the
other partners?
a. P160,000 b. P105,000 c. P145,000 d. P120,000

7. MacDo will invest in the partnership of Jabili and Pitsa Hat for a 40% interest. Jabili and
Pitsa Hat have capital of P40,000 and P30,000 and shares profit 60:40, respectively. MacDo
is to invest P20,000 into the partnership and to purchase 1/2 of Jabili’s interest for P30,000.
Compute the capital interest of MacDo, Jabili and Pitsa Hat, respectively, under the bonus
method.
a. P 50,000, P20,000; P20,000 c. P 40,000, P20,000; P20,000
b. P 36,000, P22,400; P31,600 d. P 20,000, P20,000; P20,000

RETIREMENT/WITHDRAWAL
1. On June 30, 2009, the condensed balance sheet for the partnership of Eddy, Fox, and Grimm,
together with their respective profit and loss sharing percentages was as follows:
Assets, net of liabilities P320,000
Eddy, capital (50%) P160,000
Fox, capital (30%) 96,000
Grimm, capital (20%) 64,000
P320,000

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ADVANCED FINANCIAL ACCOUNTING

Eddy decided to retire from the partnership and by mutual agreement is to be paid P180,000
out of partnership funds for his interest. Total goodwill implicit in the agreement is to be
recorded. After Eddy’s retirement, what are the capital balances of the other partners?
Fox Grimm Fox Grimm
a. P 84,000 P56,000 c. P108,000 P72,000
b. P102,000 P68,000 d. P120,000 P80,000

2. Assume instead that Eddy remains in the partnership and that Hamm is admitted as a new
partner with a 25% interest in the capital of the new partnership for a cash payment of
P140,000. Total goodwill implicit in the transaction is to be recorded. Immediately after
admission of Hamm, Eddy’s capital account balance should be
a. P280,000 b. P210,000 c. P160,000 d. P140,000

3. As of December 31, 2009, A, B and C shares profit equally and have unadjusted capital
balances of P120,000, P180,000 and P200,000, respectively. Also as of this date, the income
summary account has a credit balance of P60,000. Both A and B made drawings of P40,0000
each during the year which were charged directly to their capital. On December 31, 2009, A
retired and was paid P110,000. Compute the capital balances of B and C, respectively, after
A’s retirement.
a. P160,000; P215,000 b. P155,000; P215,000 c. P155,000; P235,000 d. P215,000;
P235,000

4. On June 30, 2009, the balance sheet for the partnership of Coll, Boy, and Rei, together with
their respective profit and loss ratios, was as follows:
Assets, at cost P 180,000
Coll, loan P 9,000
Coll, capital (20%) 42,000
Boy, capital (20%) 39,000
Rei, capital (60%) 90,000
Total P 180,000

Coll has decided to retire from the partnership. By mutual agreement, the assets are to be
adjusted to their fair value of P216,000 at June 30, 2009. It was agreed that the partnership
would pay Coll P61,200 cash for Coll’s partnership interest, including Coll’s loan which is to
be repaid in full No goodwill is to be recorded. After Coll’s retirement, what is the balance of
Boy’s capital account?
a. P36,450 c. P45,450
b. P39,000 d. P46,200

DEATH OF A PARTNER
On January 1, 2008, the partnership of D, E and F started with an initial contribution of
P100,000, P200,000 and P300,000, respectively. The partners stipulated that in case of death
of any partner, the parties will compute profits up to the nearest month and to provide for
20% annual interest for the deceased partner interest prior to its settlement.

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ADVANCED FINANCIAL ACCOUNTING

On July 1, 2008, D was heart-attacked and instantly died. The newly hired accountant of the
partnership prepared the following entries during the year:

7/1/8 D, capital 100,000

Payable to D’s estate 100,000
To set-up D’s capital as a liability

12/31/8 Interest expense 10,000

Payable to D’s estate 10,000
To recognize interest on D’s estate

12/31/8 Sales 700,000

Inventory, end 50,000
Purchases 300,000
Operating expenses 160,000
Interest expense 10,000
Profit and loss summary 280,000
To close nominal accounts

12/31/8 Profit and loss summary 280,000

E, capital (40%) 160,000
F, capital (30%) 120,000
To close profit and loss to E and F’s remaining P&L sharing ratio.

Profits were evenly earned throughout the year. Compute the correct capital balances of E
and F as of December 31, 2008, respectively.
a. P302,333; P453,500 c. P298,666; P440,500
b. P332,657; P399,493 d. P320,000; P460,000

INCORPORATION OF A PARTNERSHIP
Illustrative
Partners Amy, Beny, Conie, Devie and Elly decided to incorporate their partnership.
Immediately before incorporation the partnership had P1,000,000 total liabilities while the
partners had capital balances of P2,200,000, P2,000,000, P2,500,000, P1,500,000 and
P1,800,000, respectively. The corporation was authorized to issue 1,000,000 P10-par value
ordinary shares and 10,000 P100-par preference shares. As agreed, the preference shares are
to be divided among the incorporating partners based on the ratio of their capital balances.
The ordinary shares are to be issued in the ratio of 15 ordinary shares for each P200 of share
capital of the partners. The remaining shares are to be issued to the public. Subsequently,
10,000 shares were issued to the public at a total proceeds of P180,000. The partners incurred
P120,000 for organization costs (40,000 was on account) and P20,000 for registration of
shares of stocks with the SEC.

Required: Answer the following:

1. Compute the total assets of the corporation after incorporation ____________
2. Determine the number and class of shares given to each partner

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ADVANCED FINANCIAL ACCOUNTING

Amy Beny Conie Devie Elly

Preferre __________ __________ __________ __________ __________
d _ _ _ _ _
Commo __________ __________ __________ __________ __________
n _ _ _ _ _

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