OUR LADY OF FATIMA UNIVERSITY

GROUP ACTIVITY - PARTNERSHIP FORMATION

PRACTICAL EXERCISES

1. The following items are being invested by A and B to form AB Partnership

Agreed Values
Investment by A Investment by B
Cash 120,000.00 120,000.00
Inventory 120,000.00 -
Land - 240,000.00
Building 480,000.00
Equipment 240,000.00 -
Total 480,000.00 840,000.00
Mortgage on building assumed by the partnership 240,000.00
480,000.00 600,000.00
REQUIRED:
A. Prepare entries to record the formation of partnership assuming that A and B agree that each
partner is to receive a capital credit equal to the agreed values of the net assets each partner
invested.
B. Prepare entities to record the formation of the partnership assuming that A and B agreed that
each partner is to receive an equal capital investment.

2. John, Jeff and Jane, decided to engage in a real estate venture as a partnership. John invested,
P100,000.00 cash and Jeff provided an office equipment that is carried in the books at P82,000.00.
The partner agree that the equipment has a fair value of P110,000.00. There is a P30,000.00 note
payable remaining on the equipment to be assumed by the partnership. Although Jane has no
physical assets to invest in the partnership, both John and Jeff believe that her experience as a
real estate appraiser is a valuable skill needed by the partnership and is a basis for granting her
capital interest in the partnership.
REQUIRED:
A. Record the partnership formation under the bonus method
B. Record the partnership formation under the goodwill (revaluation of asset) method and assume
a total goodwill (or total adjustment) of P90,000.00
C. Discuss the appropriateness of using either the bonus or goodwill methods to record the
formation of the partnership

3. Tom and Julie formed a management consulting partnership on January 1, 20x4, the fair value of
the net assets invested by each partner follows:
Tom Julie
Cash 13,000.00 12,000.00
Accounts receivable 8,000.00 6,000.00
Office supplies 2,000.00 800.00
Office equipment 30,000.00 -
Land - 30,000.00
Accounts payable 2,000.00 5,000.00
Mortgage payable - 18,800.00

During the year, Tom withdrew P15,000.00 and Julie withdrew P12,000.00 in anticipation of
operating profits. Net profit for 20x4 was P50,000.00 which is to be allocated based on the original
capital investment
REQUIRED:
A. Prepare journal entries to (1) record the initial investment in the partnership, (b) record the
withdrawals, and (c) close the income summary and drawing accounts
B. Prepare a statement of changes in partners capital for the year ended December 31, 20x4

4. On October 1, 20x4, J and K decided to pool their assets and form a partnership. They allocate
profit and loss in the ratio of 44:56 for J and K, respectively. The firm is to take over business
assets and assume business liabilities and capitals are to be based on net assets transferred after
the following adjustments:
a. J’s inventory amounting to P12,000.00 is worthless, while K’s agreed value at
inventory amounted to P150,000.00

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 b. Uncollectible accounts of P7,200.00 for J is to be provided: a 5% allowance is to be
recognized in the books of K
c. Accrued rent income of P12,000.00 on J, and accrued salaries of P9,600.00 on K
should be recognized on their respective books
d. Interest at 16% on Notes receivable dated August 17, 20x4 should be accrued
e. The office supplies unused amounted to P24,000.00
f. The equipment’s agreed value amounted to P60,000.00
g. The furniture’s and fixture has a fair market value of P108,000.00
h. Interest at 12% on Notes payable dated July 1, 20x4 should be accrued
i. K has an unrecorded patent amounting to P48,000.00 and is to invest the additional
cash necessary to have a 60% interest in the new firm

In cases wherein days are considered, use 360 days as the basis.
Balance sheets for J and K on October 1, 20x4 before adjustments are given below:
J K
Cash 90,000.00 54,000.00
Accounts receivable 216,000.00 180,000.00
Allowance for doubtful accounts -4,800.00 -6,000.00
Notes receivable - 60,000.00
Merchandise inventory 192,000.00 144,000.00
Office supplies 32,400.00 -
Equipment 120,000.00
Accumulated depreciation - equipment -54,000.00
Furnitures and fixtures 144,000.00
Accumulated depreciation – furniture’s and fixtures -24,000.00
Total assets 591,600.00 552,000.00
Accounts payable 159,600.00 120,000.00
Notes payable 60,000.00 -
Capitals 372,000.00 432,000.00
Total liabilities and capitals 591,600.00 552,000.00

REQUIRED:
A. Prepare the following entries in the books of J and K: (1) adjusting, and (2) closing
B. Prepare the following entries in the new set of books, as to the investments (or withdrawal, if
any) made by the respective partners
C. Determine the following: (1) net adjustments in the books of J and K (identify net debit or net
credit adjustment), (2) the adjusted capital of J and K in their respective books and (3) the
additional investment made by K
D. Prepare the balance sheet after the formation of the partnership

5. Two sole proprietors L and M agreed to form a partnership on January 31, 20x4. The trial balance
for each proprietor is shown below as of January 1, 20x4
L L M M
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
Cash 40,000.00 40,000.00 30,000.00 30,000.00
Account receivable, net 60,000.00 52,000.00 70,000.00 56,000.00
Merchandise inventory 100,000.00 94,000.00 100,000.00 114,000.00
Building, net 280,000.00 320,000.00 250,000.00 280,000.00
Furniture and fixtures, net 60,000.00 64,000.00 40,000.00 44,000.00
Accounts payable 110,000.00 110,000.00 80,000.00 80.000.00
Mortgage payable 200,000.00 200,000.00 150,000.00 150,000.00
L, Capital 230,000.00
M, Capital 260,000.00

The L and M partnership will take over the assets an assume the liabilities of the proprietors as of
January 1, 20x4

REQUIRED:
A. Determine the following items after formation of the partnership. (1) Total assets, (2) Total
liabilities, and (3) Total capital

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*** END OF ACTIVITY***

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