CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

ADVANCED FINANCIAL ACCOUNTING GERMAN/LIM/VALIX/MARASIGAN

PARTNERSHIP FORMATION

Part I: Theory of Accounts

1. This is the framework within which the partners are to operate or conduct partnership business.
a. Partnership agreement
b. Partnership virtue
c. PFRS
d. Mutual Agency

2. If the partnership assumes a liability of a partner, in recording in the new partnership books, it
involves a
a. Credit to the asset
b. Credit to the capital account of that partner
c. Debit to drawing account of that partner
d. Debit capital account of that partner

3. If a certain asset is contributed to the partnership, and in the absence of the agreed value, when
recording that certain asset in the partnership books, it is valued at
a. Fair market value
b. Assessed value
c. Original cost
d. Tax Base

4. If the partners decide to adjust their initial capital to conform to their profit/loss ratio, the total
capital balance of the partnership before and after adjustment is the same under:
a. Bonus Method
b. Goodwill Method
c. Additional Investment/Withdrawal Method
d. None of the above

Part II: Problem Solving

Problem 1
Kylie and AJ decided to combine their businesses and form a partnership. Below are their statements
of financial position before the formation:
Kylie AJ
Cash P2,048,400 P1,098,360
Accounts receivable 1,031,960 2,498,716
Inventories 528,160 1,144,448
Property and equipment – net 613,380 852,224
Other assets 8,800 15,840
Total assets P4,230,700 P5,609,588
Accounts payable P787,336 P1,072,060
Notes payable 1,000,000 -
Mortgage payable - 1,440,000
Kylie, capital 2,443,364 -
AJ, capital - 3,097,528
Total liabilities and equity P4,230,700 P5,609,588
The partners agreed that the property and equipment of Kylie is over-depreciated by P80,000 and that
of AJ is under-depreciated by P200,000. Accounts receivable of P140,000 in Kylie’s book and
P108,000 in AJ’s book are uncollectible. The partnership decided to assume the mortgage liability of
AJ but not the note payable of Kylie. The partnership agreement provides for a profit and loss ratio of
60% to Kylie and 40% to AJ.
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1. How much is the initial capital balance of Kylie upon formation, based on actual
contributions?
a. 3,383,364
b. 2,383,364
c. 2,789,528
d. 4,229,528

2. How much is the total assets of the partnership upon formation?

a. 6,172,892
b. 9,472,536
c. 9,712,288
d. 9,472,288

3. Assume that Kylie and AJ decided to make their capital ratio conform to their profit/loss
ratio. Under the bonus method, which of the following statement is correct?
a. Total capital balance should decrease by 320,371.20
b. Total capital balance should increase by 320,371.20
c. The adjustment should include a debit to Kylie’s capital of 320,371.20
d. AJ’ capital balance should decrease by 320,371.20

4. Assume that Kylie and AJ decided to make their capital ratio conform to their profit/loss
ratio, and that AJ is willing to invest/withdraw sufficient cash in the process, which of the
following statements is incorrect?
a. Kylie’s capital balance is the same before and after adjustment
b. AJ’s capital balance will decrease by 533,952
c. The total capital balance of the partnership neither increase nor decrease
d. The total capital balance of the partnership after adjustment is 5,638,940

Problem 2

On January 1, 2023, Paolo and Yen, close friends, agreed to form a partnership to engage in the buying
and selling of gift products in Baguio City. Paolo, who owns an existing business, is to invest the
assets and transfer the liabilities of his business, and further agreed to contribute sufficient cash to
bring his capital balance to P420,000, which is 70% of the total capital of the partnership. Details
regarding the book values of Paolo’s business assets and liabilities and their corresponding fair values
are:
Book Values Fair Values
Accounts receivable (net) P107,600 P106,000
Inventory 196,800 214,000
Equipment 51,600 68,000
Notes payable 112,000 112,000

Yen agrees to invest cash of P84,000 and an equipment that is to be measured at current market price.

1. What is the amount of cash to be invested by Paolo?

a. 420,000
b. 276,000
c. 144,000
d. 180,000

2. What is the value of the equipment to be invested by Yen?

a. 96,000
b. 192,000
c. 48,000
d. 129,000
END
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