Solutions and Explanations

SOLUTIONS AND EXPLANATIONS
PROB. 1-1 Suggested answer (a) Limited liability
In a partnership, each partner is personally and individually liable for all partnership liabilities. In other
words, the liability of the partners in a partnership is unlimited.
PROB. 1-2 Suggested answer (c) A partnership is characterized by limited liability
Partnerships have been affected by the proprietary theory, which looks at the entity through the eyes
of the owners. Characteristics of a partnership that emphasizes that the entity is viewed as the
individual owners include the following:
a. Salaries to partners are viewed as distributions of income rather than a component of income;
b. Unlimited liability of general partners extends beyond the entity to the individual partners;
c. Income of the partnership is not taxed at the partnership level but rather than, is included as
part of the partners ' individual taxable income;
d. An original partnership is dissolved upon admission or withdrawal of a partner.
PROB. 1-3 Suggested answer (c) A general partner may be a secured creditor of the limited
partnership
A general partner has a voice in management and has unlimited personal liability. Anyone, including a
secured creditor of the limited partnership, may be a general partner if he/she takes on these
responsibilities.
PROB. 1-4 Suggested answer (c) A partnership is created by mere agreements of the partners
A partnership is easily formed and is relatively free from governmental regulations and restrictions.
Decisions can be made quickly on substantive matters affecting the firm, whereas in a corporation,
formal meetings with the board of directors are often needed.
PROB 1-5 Suggested answer (a) Fair value at the date of contribution
Where a new legal entity exists, noncash assets are permitted to be recorded at its fair market value;
thus, the capital account should be credited for the current fair value of the assets at the date of the
contribution.
PROB 1-6 Suggested answer (d) Market value, Market value
Non-cash assets contributed into the partnership should be recorded at its current fair value.
PROB. 1-7 Suggested answer (a)
Partnership capital accounts are similar to corporate paid in capital and retained earnings; while
partnership drawing accounts are similar to corporate dividends accounts.
PROB. 1-8 Suggested answer: (c) Ces
Al capital 50,000
Ben capital (80,000 - 35,000) 45,000
Ces capital 55,000
At the date of the formation of the partnership, all assets contributed by the partners are recorded in
the books of the partnership at their fair values, and all liabilities assumed by the partnership are
recorded at their present values.
PROB. 1-9 Suggested answer (a) 75,000, 80,000, 85,000
Al Sharif Booba
Cash contribution 50,000 80,000 25,000
Store equipment 25,000
Computer 60,000
Capital balances 75,000 80,000 85.000

Noncash assets contributed by the partners into the partnership should be recorded at its fair market
values. In this case, the fair market value is the cash selling price of the computer and the second hand
value of the store
equipment.
PROB. 1-10 Suggested answer: (a) 592,000 750,000
Atta Boy
Capital balances before adjustments 620,000 800,000
a. Uncollectible accounts receivable (20,000) (40,000)
b. Worthless inventories ( 6,000) ( 7,000)
c. Intangible assets written off ( 2,000) ( 3,000)
Adjusted capital balances 592,000 750,000
When assets other than cash are invested into the partnership, it is necessary for the partners to agree
upon the value of such assets. The assets are recorded in accordance with the agreement, and the
partners' capital accounts are credited for the amounts of the respective investments. The effects of
the adjustments to the capital accounts should be in accordance with the accounting equation (Asset =
Liabilities + Capital).
PROB. 1-11 Suggested answer: (b) 190,000
Mary capital before adjustments 264,000
Allowance for doubtful accounts (3% x 120,000) ( 3,600)
Merchandise inventory 25,000
Prepaid expenses 3,600
Accrued liabilities ( 4,000)
Mary capital after adjustments 285,000
Total partnership capital (285,000/3/5) 475,000
Multiply by Jane interest 2/5____
Cash to be invested by Jane 190,000

Again, when assets other than cash are invested into the partnership, it is necessary for the partners
to agree upon the value of such assets. The assets are recorded in accordance with the agreement,
and the partners' capital accounts are credited for the amounts of the respective investments. The
effects of the adjustments to the capital accounts should be in accordance with the accounting
equation (Asset = Liabilities + Capital)
In this case where Jane will have an interest of 2/5, Mary should have an interest of 3/5. Since no
goodwill or bonus was mentioned in the problem, the adjusted capital of Mary represents her 3/5
interest, which will be used as basis to determine the total partnership capital.
PROB. 1-12 Suggested answer (b) 35,000 75,000
Roberts Smith
Cash P 20,000 P 30,000
Inventory 15,000
Building (net of P10,000 mortgage ) 30,000
Furniture & equipment 15,000
P 35,000 P 75,000
Generally,
individual capital
accounts should be credited for the fair market value, at the date of contribution, of the assets
contributed by that partner. The partner's capital credit is based upon the net assets contributed by
the particular partner, thus the liabilities assumed by the partnership reduced the fair market value of
the building invested.
PROB. 1-13 Suggested answer: (a)18,000
The importance of proper valuation of assets invested by partners cannot be overemphasized. In order
to achieve equity, assets invested by partners should be reported at their fair market value. Fair value
is determined by making reference to the following: cash transactions of the same or similar assets,
quoted market prices, and independent appraisals.
PROB. 1 -14
a. Suggested answer (d) 60,000

Contributed Agreed Increase
Capital Capital Decrease)
Grey 60,000 60,000
Redd 20,000 60,000 40,000
Total 80,000 120,000 40,000
80,000 120,000 40,000
The partnership agreement provides for equal initial capital. Thus under the goodwill method, the
capital credit for Redd should be the same as the contribution of Grey, thereby increasing the total
agreed capital to P120,000, which is P40,000 more than the total contributed capital (goodwill).
b. Suggested answer (b) 20, 000 bonus to Redd
Contributed Agreed Increase
Capital Capital (Decrease)
Grey 60,000 40,000 (20,000)
Redd 20,000 40,000 20,000
Total 80,000 80,000

The partnership
agreement provides for equal initial capital. Thus under the bonus method, the capital credit for Redd
should be the same as the contribution of Grey, resulting to P20, 000 bonus from Grey to Redd.
PROB. 1-15 Suggested answer: (d) 0
Under the bonus method, assets are not revalued, instead, adjustments are made to partnership
capital accounts; consequently, unidentifiable assets are not recognized.
PROB. 1-16 Suggested answer: (b) 500,000 450,000 550,000
Alex Benjie Cesar
Contributions @ fair value P500,000 P800,OOO P550,000
Less liabilities assumed - 350,000 -_____
Capital balance, 4/30/06 P500,000 P450,000 P550,000
Again, any noncash asset contributed into the partnership should be valued at the fair value of the
noncash asset contributed. Any liabilities assumed by the partnership, reduces the partners’ capital
balance. As a general guideline, what is to be recorded as a credit to partner’ capital is the fair value
of the net assets contributed.
PROB 1-17 Suggested answer (d) 187,500 200,000 212,500
Abel Cain Josuah
Cash contributed P 100,000 P 160,000 P 50,000
Noncash contributed 50,000 120,000
Capital balances beginning 150,000 160,000 170,000
Capital beginning Distribution of net

income:
(150/480 x 120,000) 37,500
(160/480 x 120,000) 40,000
(170/480 x 120,000) 42,500
Capital balances, 12/31/16 P187,500 P200,000 P212,500
Noncash assets contributed by partners to form a partnership should be recorded at its fair value.
Profits and losses are divided in accordance with the agreement of the partners, normally, the profit
and loss ratio. In the absence of any agreement, profits and losses are divided in accordance with the
partners ' contributed capital.
PROB 1-18 Suggested answer (b) Flat Flat
Profit (Flat) Loss (Flat)
Bonus 20% Bonus 0
Balance (2/5 x 80%) 32% P & L (2/5 x 100%) 40%
Total advantage 52% Total advantage 40%
In case of profit Flat has 52%, an advantage, and in case of loss, its only 40%, also an advantage
PROB. 1-19 Suggested answer (c) In all earnings or loss situation
When agreement provides for salaries without qualification, salary distribution must be made even
though profit is inadequate to cover salaries or there is a loss. In this case, Partner A will benefit by P6,
000 in all situations, whether there is a profit or loss.
PROB. 1-20 Suggested answer (c) 9, 000
Vick's share of undistributed losses (30% x 30,000) 9,000
If the partners agree to distribute profits based on profit sharing ratio but
are silent on loss sharing, partnership losses will be divided based on the agreed profit sharing
proportions.
Date Balance Months Unchanged Total
January 1 P140,000 6 P 840,000
July 1 180,000 1 180,000
August 1 165,000 5 825,000
Total 12 P 1,845,000
Weighted average capital (1,845,000/ 12months) P153,750
Interest rate 10%
Interest to be credited to Simm P 15,375
When partners wish to distribute profits in terms of relative investments, the use of average capitals,
which provides for the recognition of capital changes during the period, normally offers the most
equitable method. From the data given above, partner 's investments were expressed in terms of peso
month. Under this method (peso-day, peso-month), withdrawals and investments made during the
first half of the month should be treated as if they were made on the first day of the month, while
withdrawals and investments made during the later half of the month should be treated as if they
were made on the first day of the following month.
PROB. 1-22 Suggested answer (b) 51, 667
Date Balances Months Total
Unchanged
March 1 P 50,000
3 P 150,000
June 1 70,000 3 210,000
September 1 65,000 4 260,000
Total 12 P 620,000
Annual weighted average capital (P620,000/ 12) P 51,667
The partnership agreement should provide how invested capital is to be determined. Since each
partner's equity is a combination of capital and drawing account balances, partner's drawings may be
offset against their respective capital accounts for purposes of allocating income based on invested
capital. However, the agreement may also provide that only withdrawals more than a certain limit are
to be viewed as offset against capital balances. Thus, only P5,000 excess of P10,000 limit is viewed as
deduction from the capital balance.
PROB. 1-23 Suggested answer (d) In accordance with capital contribution
The ratio in which partnership profits and losses are divided is known as profit and loss ratio. Profits
and losses are divided in accordance with the agreement of the partners. In the absence of any
agreement, profits and losses are divided in accordance with the partners ' contributed capital.
PROB. 1-24 Suggested answer (d) lnterest on notes to partners
The division of partnership income should be based on an analysis of th correlation between capital
and labor committed to the firm by individual partners and the income that subsequently is
generated. As a result, profits might be divided in one or more of the following ways: 1.) according
ratio; 2.) according to the capital investments of the partners; and according to the labor (or service)
rendered by the partners. Interest on notes to partners is a legitimate expense of a partnership
PROB. 1-25 Suggested answer: (a) Interest paid to partners based on the amount of invested capital
Again, the division of partnership income should be based on an analysis of the correlation between
capital and labor committed to the firm by individual partners and the income that subsequently is
generated and therefore includes interest paid to partners based on the amount of their invested
capital.
PROB. 1-26 Suggested answer: (c) Being characteristics of the proprietary theory
Partnerships have been affected by the proprietary theory, which looks at the entity through the eyes
of the owners. Characteristics of a partnership that emphasizes that the entity is viewed as the
individual owners include the following:
a. Salaries to partners are viewed as distributions of income rather than a component of income;
b. Unlimited liability of general partners extends beyond the entity to the individual partners;
c. Income of the partnership is not taxed at the partnership level but rather than, is included as part of
the partner’s individual taxable income;
d. An original partnership is dissolved upon dismissal or withdrawal of a partner.
PROB. 1-28
a. Suggested answer: (d) 136,543 103,457
A, capital:
Date Balances Months Unchanged Total
January 1 P120,000 4 P480,000
May 1 100,000 3 300,000
Aug. 1 110,000 2 220,000
Oct. 1 100,000 3 300,000
Total 12 P1,300,000
Average capital – A = P1,300,000/12= P108,333
B, capital:
Date Balances Months Unchanged Total
January 1 P80,000 4 P320,000
May 1 70,000 2 140,000
July 1 90,000 3 270,000
Oct. 1 85,000 3 255,000
Total 12 P985,000
Average capital – A = P985,000/12= P82,083
A P240,000 x (108,333/190417) P136,543

B 240,000 x (82,083/190,417) 103,457
Total P240,000
Again, under this method (peso-day, peso-month), withdrawals and investments made under during
the first half of the month should be treated as if they were made on the first day of the month, while
withdrawals and investments made during the latter half of the month should be treated as if they
were made on the first day of the following month.
b. Suggested answer: (a) 121,500 118,500
A B Total
Interest on ending capital
(100,000 x 20%) P20,000
(85,000 x 20%) P17,000 P37,000
Balance (equally) 101,500 101,500 203,000
Total P121,500 P118,500 P240,000
The capital contributions to be considered as the basis for the distribution of profits and losses should
be based on the original capital contribution, on the capitals at the beginning of each period, on the
capitals at the end of each period, or on the average capitals during the period.
PROB. 1-29 Suggested answer: (a) 1,000 decrease

Young Zinc Total
10% interest on ave. capital:
(10% x 160,000) P16,000
(10% x 100,000) P10,000 P26,000
Balance (equally) (11,000) (11,000) (22,000)
Total P5,000 (P1,000) P4,000
The partnership profit before interest was P4,000, however, it resulted to a loss of P22,000 after
interest. Thus, the capital balance of Zinc decreases by P1,000.
PROB. 1-30 Suggested answer: (b) 43,000 37,000
Red White Total

Salary allowances 55,000 45,000 100,000
Loss after allowances (60:40) (12,000) (8,000) (20,000)
Earnings credited to partners 43,000 37,000 80,000
The earnings before allowances of P80,000 is reduced by the salary allowances in total amount of
P100,000 which resulted to a loss after allowances of P20,000, because credits to partners capital
accounts are based on earnings after allowances (e.g. interest, salary, and bonus). It should be pointed
out that per partnership agreement profits should be shared equally and losses in a 60/40 ratio, thus
the loss of P20,000 was shared at 60/40 ratio.
PROB. 1-31 Suggested answer: (a) 7,000 increase
Fox Greg Howe Total

10% interest on
average capital 12,000 6,000 4,000 22,000
Salaries 30,000. 20,000 50,000
Bal. (equally) (35,000) (35,000) (35,000) (105,000)
Total inc. (dec) 7,000 (29,000) (11,000) (33,000)
Again, when the partnership agreement provides without specification that interest is to be allowed
on investment, interest must be allowed even though operations have resulted in earnings that are
less than the allowable interest or in a loss.
And when agreement also provides for salaries without qualification, salary distribution must be
made even though profit is inadequate to cover salaries or there is a loss. Interest and salary
allowances allocated to partners increase their capital balances as well as the amount of loss.
Accordingly, the amount of loss will reduce the partners’ capital accounts. The resulting loss in the
total amount of P105,000 after the interest and salary allowances was allocated among partners
equally based on their agreement, that profit and loss is divided equally.
PROB. 1-32 Suggested answer: (c) 4,000
Net income before bonus 44,000

Less net income after bonus 40,000
Bonus (10%) 4,000
Note that the provision for bonus is 10% of income AFTER the bonus, thus the bonus is the difference
between the net income before and after the bonus.
PROB. 1-33 Suggested answer: (a) 28,600
Donn Eddy Farr Total

10% bonus to Donn 10,000 10,000
6% interest on
average capital 4,800 3,000 1,800 9,600
Balance (equally) 26,800 26,800 26,800 80,400
Total 41,800 29,800 28,600 100,000
In some instances, a managing partner is allowed a bonus that is to be based on the earnings of the
business. The bonus is commonly stated as a percentage of profits, but the agreement should indicate
whether the percentage is to be applied to the profit determined before deduction of the bonus or
after deduction of the bonus. Based on the data provided in this problem, the “10% bonus of the
profit” was assumed to be applied to the profit before deduction of the bonus.
PROB. 1-34 Suggested answer: (d) 210,000
Adam Eve Total

Salaries 60,000 60,000 120,000
Bonus to Adam:
NY before bonus P360,000
-NY after bonus
(360,000/120%) 300,000. 60,000 60,000
Balance (equally) 300,000 150,000 150,000 300,000
Total 270,000 210,000 480,000
It should be pointed out that it was clearly mentioned in the problem that the P360,000 net income is
after salaries but before bonus, therefore, the net income before salaries and bonus should be
P480,000 (120,000+360,000).
AA BB Total
Salaries 30,000 45,000 75,000
Bonus (after bonus)
NY before Bonus 27,500
NY after Bonus
(27,500/110%) 25,000 2,500 2,500
10% interest 2,000 3,500 5,500
Balance (1/3:2/3) 6,500 13,000 19,500
Total 41,000 61,500 102,500
One of the alternatives in profit allocations if the net income is not sufficient is to completely satisfy
all provisions of the profit and loss agreement and use the profit and loss ratios to absorb any
deficiency or additional loss caused by such action.
PROB 1-36 Suggested answer (d) 8,800

AA BB Total
Salaries (30:45) 8,800 13,200 22,000
Another alternative in profit allocation if the net income is not sufficient is to satisfy each of the
provision to whatever extent it is possible. In other words, the allocation of salaries would be satisfied
to whatever extent possible before the allocation of interest is begun. If the provision of the profit and
loss agreement are ranked by order of priority starting with salaries, and the total salaries amounted
to P75,000, therefore the net income of P22,000, which is insufficient, will be distributed between AA
and BB based on the degree of salary claims.
Luz Vi Minda Total
Interest
8% x 80,000-75,000 400
8% x 100,000-75,000 2,000 2,400
Salary (20:30) 11,040 16,560 27,600
Total 11,040 16,960 2,000 30,000
Again, where income is not sufficient or an operating loss exists, two alternatives may be employed:
1.) all provisions of the profit and loss agreement may be satisfied and any deficiency will be absorbed
using the profit and loss ratio; and 2.) each of the provision may be satisfied to whatever extent
possible. The second alternative, as applied above, requires that provisions of the profit and loss
agreement be ranked by order of priority.
PROB. 1-38 Suggested answer (b) 108,000
X Y Z Total
10% of P100,000 to X 10,000 10,000
20% of excess to X
(20% x 150,000) 30,000 30,000
5% of remaining in excess
to Y and Z
(5% x 210,000-150,000) 3,000 3,000 6,000
Balance, equally 68,000 68,000 68,000 204,000
Total 108,000 71,000 71,000 250,000
Note that the distribution of profit is based on the agreement of the partners.
PROB. 1-39
a. Suggested answer: (b) 3,450 (7,050) (19,550) (16,850)
Hanz Ivy Jasper Kelly Total
Salaries 20,000 10,000

30,000
Interest 5,000 4,500 2,000 4,700

16,200
Balance (equally) (21,550) (21,550) (21,550) (21,550)
(86,200)
Total 3,450 (7,050) (19,550) (16,850)
(40,000)
Based on the information provided in the problem, the profit and loss ratios are used to absorb any
deficiency or any additional loss.
b. Suggested answer: (c) 20,750 12,560 2,000 4,700
Hanz Ivy Jasper Kelly Total
Interest 5,000 4,500 2,000 4,700

16,200
Bonus (3:2) 1,143 762
1,905
Salaries (20:10) 14,597 7,298 21,895
Total 20,740 12,560 2,000 4,700
40,000
Net income before bonuses 40,000

Net income after bonuses (40,000/105%) 38,095
Bonuses 1,905
If each of the provision of the profit and loss agreement are satisfied to whatever extent it is possible
based on the given order of priority, at such provision (salaries) the remaining amount (21,895) shall
be allocated using the degree of the claims.
Zita Jones Total

Salaries (360,000 x 2/12) 60,000 60,000 120,000
Bonus 60,000 60,000
Balance (equally) 150,000 150,000 300,000
Total 270,000 210,000 480,000
Net income before bonus 360,000

Net income after bonus (360,000/120%) 300,000
Bonus 60,000
Note that based on the given information, the net income after salaries is P360,000 (300,000+60,000),
which is equivalent to P480,000 net income before salaries, bonus and distribution of balance using
profit and loss ratio (equally).
Amount of bonus needed to equalize (40,000-25,000) 15,000
Net income after bonus and salaries (15,000/10%) 150,000

Multiply by 110%
Net income before bonus and salaries 165,000
Add salaries (100,000+25,000) 125,000
Net income before bonus and salaries 290,000
Since the question being asked is the amount of income necessary to equalize, the appropriate
approach is to determine the amount of the difference between the two alternatives, which is
P15,000 bonus. At this point, the net income could be determined by working back, as shown above.
Sales 700,000
Less cost of goods sold 400,000
Gross profit 300,000
Less operating expenses 100,000
Operating profit 200,000
Less interest paid to banks 20,000
Net income 180,000
Salaries, like interest on capital investments, are viewed as a means of allocating income rather than
as an expense. The drawing account is a temporary account and is periodically closed to the partner’s
capital account, and has nothing to do with the computation of net income.
PROB. 1-43 Suggested answer: (a) 0
In case there is an industrial partner, and there is no profit and loss sharing agreement, an industrial
partner shall not be liable for the losses. As to profit, the share of an industrial partner shall be that
which is just and equitable under the circumstances. In order for an industrial partner be liable for the
losses, there should be an expressed stipulation to that effect.
PROB. 1-44 Suggested answer: (c) The existing partner’s capital should be reduced and the new
partner’s account increased.
When a new partner deals directly with an existing partner or partners rather than with the
partnership entity, the acquisition price is paid to the selling partner/s and not to the partnership
itself. The partnership records the redistribution of capital interests by transferring all or a portion of
the seller’s capital to the new partner's capital account but does not record the transfer of any asset
or consideration.
PROB. 1-45 Suggested answer: (d) Withdrawal of a partner from a partnership.
Dissolution is the change in the relation od the partners caused by any partner ceasing to be
associated in the carrying on as distinguished from the winding up of the business. Generally, a
partnership is dissolved upon the death, withdrawal, admission, or bankruptcy of an individual
partner (owner).
PROB. 1-46 Suggested answer: (b) His or her share of previously unrecorded intangible assets
traceable to the original partner.
Accounting change in the ownership of a partnership is influenced heavily by the legal concept of
dissolution. When there is a change in the ownership structure, the original partnership is dissolved
and most often a new partnership is created. This dissolution and subsequent creation of a
partnership indicate that a new legal entity has been created and accounting should measure properly
the initial contributions of capital being made to the new partnership.
PROB. 1-47 Suggested answer: (c) Assuming that recorded assets are properly valued, the book value
of the new partnership is equal to the book value of the previous partnership and the investment of
the new partner.
Under the bonus method, total contributed capital of the old and new partnership is equal to the total
agreed capital (total capital of the new partnership).
PROB. 1-48 Suggested answer: (c) Allocated among the previous partners according to their original
profit and loss sharing percentages.
Unrecorded goodwill also may be identifiable. If there are no differences between the fair market
value and book value of recorded assets, the new partner’s willingness to pay more than the
proportionate book value of the new entity indicates that goodwill existed prior to the new partner’s
admission. If this intangible asset could have been sold prior to the admission of the partner, the
realized profit would have been allocated to the old partners. Therefore, the goodwill is recorded and
allocated to the old partners according to their profit and loss ratio.
PROB. 1-49 Suggested answer: (a) The bonus method does not revalue assets to market values.
When an incoming partner's contribution is different from that indicated by the book values of th3
original partnership, the admission of the partner typically is recorded by either the bonus method or
th3 goodwill method. Both methods permit the assumption that there is unrecorded goodwill to be
recognized. However, the use of either method does not prevent the recognition of differences
between the book value and fair market value of recorded net assets.
The bonus method strictly follows the principle that net assets should be recorded at historical cost
and simply readjusts capital accounts and makes no changes in existing assets accounts. While, the
goodwill method emphasizes the legal significance of a change in the ownership structure of a
partnership and revalues assets to adjust the total value of partnership capital.
Contributed Capital Agreed Capital Increase (Decrease)

Old partners P110,000 P100,000 (P10,000)
New partners 40,000 (1/3) 50,000 10,000
Total P150,000 P150,000 -
Blau’s capital before admission of Lind P60,000

Less share in bonus to Lind (10,000 x 60%) 6,000
Blau’s capital after admission of Lind P54,000
When a partnership is in urgent need of additional funds or the partners may desire the services of a
certain individual, a new partner may be admitted with the provision that (a) part of the capitals of
the old partners shall be allowed as a bonus to the new partner, or (b) goodwill shall be established
and credited to the new partner.
When the total contributed capital is equal to the agreed capital, there is bonus. In this case, the
amount by which the interest allowed to the new partner exceeds his investment may be considered
as bonus contributed by the old partners. The bonus is deducted from the capitals of the old partners
based in their original profit and loss ratio.
PROB. 1-51 Suggested answer: (c) 56.25%
Capital contributed by the new partner 90,000

Divide by total contributions (70,000+90,000) 160,000
New Partner's interest 56.25%
Since no goodwill or bonus to b3 recognized, the capital contribution is equal to the capital credited to
partners.

Old partners P150,000 P200,000 P50,000
New partner 100,000 (1/3) 100,000 -
Total P250,000 P300,000 P50,000
When a partnership has operated with considerable success, the partners may admit a new partner
with the provision that (a) part of the new partner’s investment shall be allowed as a bonus to the old
partners, or (b) partnership goodwill shall be established and credited to the old partners. When the
total agreed capital is more than the contributed capital, there is goodwill. Since the combined
capitals of the old partners was increased to P200,000, the increase in capital of P50,000 should be
recognized as goodwill and distributed to them using their original profit and loss ratio.
PROB. 1-53
a. Suggested answer: (b) 15,000

Old partners
[235,000-(15%x 80,000)] 223,000 260,000 37,000
New partner
[80,000+(15%x 80,000)] 92,000 70,000 (22,000)
Total 315,000 330,000 15,000
Again, when the total agreed capital is more than the contributed capital, there is goodwill and this
amount of P15,000 will be distributed to the old partners using their original profit and loss ratio.
However, in the above computations, it should be pointed out that aside from goodwill, the new
partner provides bonus to old partners in the amount of P22,000 (decrease in the new partner’s
capital).
b. Suggested answer: (c) 79,100
Marc’s capital before Vince’s admission 80,000

Interest purchased by Vince (15% x 80,000) (12,000)
Share in goodwill (30% x 15,000) 4,500
Share in bonus (30% x 22,000) 6,600
Marc’s capital after Vince’s admission 79,100
When an incoming partner purchases a portion or all of the interest of one or more of the original
partners, the partnership assets remains unchanged and the related amount paid for the purchase
should not be recorded in the books of the partnership for this is regarded as a personal transaction
between the selling partner/s and the buyer.
Bonus to old partners is recorded by making transfer from the contributed capital of the new partner
to the old partners’ capital accounts, which gives the new partner a capital credit less than his actual
investment. While, Goodwill to old partners should be recognized by a debit to Goodwill account, and
the resulting credit should be to old partners’ capital accounts allocated based on their profit and loss
ratio.
Ranken’s capital (50% x 30,000) 15,000
When a new partner deals directly with an existing partner or partners rather than with the
partnership entity, the acquisition price is paid to the selling partner/s and not to the partnership
itself. The partnership records the redistribution of capital interests by transferring all or a portion of
the seller’s capital to the new partner’s capital account but does not record the transfer of any asset
or consideration.
Amor Bing Cora

Interest purchased (1/2) 100,000 100,000 150,000
Excess payment (150,000) P&L 30,000 45,000 75,000
Total 130,000 145,000 225,000
A new partner may be admitted to the partnership by acquiring all or part of the capital interest of
one or more existing partners in exchange for some consideration. The partnership records the
redistribution of capital interest by transferring all or a portion of the seller’s capital to the new
partner’s capital account but does not record the transfer of any asset. Any difference between the
amounts paid by the new partner, which is not recorded in the books of the partnership, is allocated
to the selling partners based on their profit or loss ratio.
Total capital of the old partnership (560,000+320,000+40,000) 920,000

Divide by profit and loss (old partnership) 4/5
Total capital of the new partnership 1,150,000
Multiply by profit and loss of D 1/5
Required contribution by D 230,000
If the book value of the original partnership’s net assets approximates fair market values or no bonus,
no goodwill to be recognized, the incoming partner’s contribution would be expected to be equal to
the portion of the equity that the new partner is acquiring.
A B C
Capital balances P250,000 P150,000 P100,000
Share in goodwill 5:3:2 30,000 18,000 12,000
Adjusted capital balances 280,000 168,000 112,000
¼ interest purchased (70,000) (42,000) (28,000)
Capital balances after D P210,000 P126,000 P84,000
Again, when an incoming partner purchases a portion or all of the interest of one or more of the
original partners, this may be regarded as a transfer from the capital account/s of the seller/s to that
of the buyer, and any amount paid for the purchase should not be recorded in the books of the
partnership, therefore, the partnership assets remained the same. The one-fourth interest purchased
by D was based on the adjusted capitals of the old partners (after goodwill) because of the stipulation
in the problem that goodwill is to be recorded prior to the admission of D.
PROB. 1-58

Old partners P100,000 P118,250 P18,250
New partners 115,000 (45%) 96,750 (18,250)
Total P215,000 P215,000 -
The goodwill and bonus method are two means of adjusting for differences between the net book
value and the fair market value of partnership when new partners are admitted. The goodwill method
revalues assets to market value; while the bonus method does not revalue assets to market value.
Further, under the bonus method, the total contributed capital is equal to the agreed capital.

Old partners P100,000 P151,250 P51,250
New partners 115,000 (45%) 123,750 8,750
Total P215,000 P275,000 P60,000
Total increase in capital 60,000

Less undervalued equipment (320,000-300,000) 20,000
Balance 40,000
Goodwill to Linda 8,750
Goodwill to original partners 31,250
Again, when there is a difference between the book value and fair market value of the partnership
when new partners are admitted, the goodwill method revalues assets to market value. Ordinarily, to
determine the new capital of the partnership, contributed capital of the new partner may be divided
by his interest in capital. In this case, where Linda will be provided with goodwill for bringing her
expertise and clients contact to the partnership, the capital of Rosa was used instead, because it
serves as concrete basis with no goodwill involved, in determining the new capital of the partnership.
Thus, the new capital of the partnership is P275,000 (55,000/20%).

Old partners 150,000 157,500 7,500
New partner 60,000 52,500 25% (7,500)
Total 210,000 210,000 -
Bonus to A (7,500 x 20%) 1,500
Under the bonus method of admitting a new partner into the partnership, the total contributed
capital (including that of the new partner) is equal to the new partnership capital. Accordingly, any
bonus to the old partners shall be allocated using their old profit and loss ratio.
PROB. 1-60
a. Suggested answer: (c) 108,000 72,000
Goodwill to be paid to Eddy (P180,000-160,000) P20,000

Divide by Eddy’s P&L 50%
Total goodwill P40,000
Fox Grimm
Capital balance before goodwill P96,000 P64,000
Goodwill: (40,000x30%) 12,000
(40,000x20%) 8,000
Capital balance after goodwill P108,000 P72,000
Since the problem identified that total goodwill implicit in the agreement is to be recorded, the excess
of the amount received by Eddy over his capital balance represents his share in the total goodwill to
be recognized. Accordingly, Fox and Grimm will share in the total goodwill based on their respective
profit and loss percentage.
b. Suggested answer: (b) 210,000

Old partners P320,000 P420,000 P100,000
New partner 140,000 (25%) 140,000 -
Total P460,000 P560,000 P100,000
Eddy’s capital before goodwill P160,000

Share in goodwill (50% x 100,000) 50,000
Eddy’s capital after goodwill P210,000
Again, goodwill is the excess of total agreed capital over the contributed capital. In this case, the
amount of P100,000 represents goodwill to old partners, which will be divided based on their
respective profit and loss ratio.
PROB. 1-61 Suggested answer: (c) 608,000 608,000
Mikee Raul
Capital balance before withdrawal 600,000 600,000
Distribution of gain on realization (24,000/3) 8,000 8,000
Capital balances after withdrawal 608,000 608,000
When a partner withdraws, he may receive an amount equal, more than or less than his interest. The
interest of the withdrawing partner is measured by his capital balances adjusted by the distribution of
profit or loss from operations, and changes in valuation of all assets and liabilities. Thus, their capital
balances will be increased by their respective share in the realization of noncash asset with a fair
value different from its book value at the date of withdrawal.
PROB. 1-62
a. Suggested answer: (d) 145,000
Total capital [(348,000+232,000)/80%] 725,000

Capp’s interest x 20%
Cash or other assets to be contributed by Capp 145,000
It should be pointed out that the problem clearly state that no bonus or goodwill is to be recognized,
thus the total capital of the old partners was used as the basis in computing the total capital of the
partnership.
b. Suggested answer: (b) 273,000
Alfa Beda
Capital balances 348,000 232,000
Beda, loan (30,000)
Total interest 348,000 202,000
Loss on realization (625,000-500,000) 6:4 (75,000) (50,000)
Cash to be distributed 273,000 152,000
Beda, loan account was appropriately presented as an asset (receivable of the partnership from
Beda), therefore it will reduce the capital balance od Beda. And loss on realization should be charged
to the partners’ capital. In partnership liquidation, cash is distributed bases on the capital balances of
the partners after any adjustments. It should be pointed out that the total amount of cash to be
distributed between partners equals the total partners’ capital after adjustments.
PROB. 1-63 Suggested answer: (d)
Note that the capital balance of the retiring partner is P1,800,000 and was paid P1,500,000, this
situation will result to the recognition of bonus to the remaining partners from the retiring partner.
Thus the difference of P300,000 was allocated to the remaining partner based on their profit and loss
agreement (equally) by crediting their respective capital account.
Coll Maduro Prieto

Capital balances before
Retirement of Coll P42,000 P39,000 P90,000
Coll, loan 9,000
Adjustments of assets 2:2:6
(216,000-180,000) 7,200 7200 21,600
Total interest 58,200 46,200 111,600
Less payment to Coll 61,200
Balance (3,000) 46,200 111,600
Bonus to Coll 2:6 3,000 (750) (2,250)
Capital balances after
Retirement of Coll P0 P45,450 P109,350
Again, when partner withdraws from a partnership, adjustment of assets its fair market should be
made. Total interest of the withdrawing partner must be determined and be compared with the
amount paid. Since the problem stated that the withdrawing partner is selling his interest to the
partnership and no goodwill is to be recorded, the resulting difference between the total interest and
the amount paid represents the bonus provided by the remaining partners to the withdrawing
partner.
PROB. 1-65 Suggested answer: (c)
Under the bonus method, the excess of the amount paid by the partnership to the retiring partner
shall be absorbed by the remaining partners based on their existing profit and loss ratio.
PROB. 1-66 Suggested answer: (d) Reduction in capital of P55,000 for Roy.
Peter Queen Roy

Second hand value taken 50,000
Loss on realization
(65,000-50,000) (equally) 5,000 5,000 5,000
Total reduction in capital 5,000 5,000 55,000
PROB. 1-67
a. Suggested answer: (c) 35,000
Total partnership capital (140,000/ 4/5) 175,000

Multiply by 1/5
Assets to be contributed by Z 35,000
Again, if there is no bonus or goodwill to be recognized, total partnership capital may be computed
using the capital accounts of the old partners as the base, as shown above.
b. Suggested answer: (d) 24,000 13,000 13,000
N X Y
Loss on realization
(80,000-40,000) 4:3:3 (16,000) (12,000) (12,000)
Possible loss
(130,000-80,000) 4:3:3 (20,000) (15,000) (15,000)
Cash distribution P24,000 P13,000 P13,000
In installment liquidation, to insure an equitable distribution of cash to the partners, considerable care
is required. Usually, the statement of liquidation is supported by the Schedule of Safe Payments,
wherein each installment of cash is distributed as if no more cash is forthcoming. Thus, cash is
distributed to a partner only if he has an excess credit balance in his partnership interest after
absorption of his share of the maximum possible loss that may occur, which consists of the assumed
realizable value of the remaining noncash assets, cash withheld for payment of anticipated liquidation
expenses and unrecorded liabilities that may arise, and any additional loss that may also accrue to the
partners when a debit balance in any of the capital accounts results from the allocations of possible
loss. Should the liquidation extend over a long period of time, these calculations may become
frequent such that it may be desirable to prepare in advance an installment distribution plan, known
as Cash Priority Program.
PROB. 1-68 Suggested answer: (d) 80,000 60,000 20,000 130,000
Gerber Williams George Total

Capital contributions 50,000 60,000 20,000 130,000
Asset revaluation 13,200 4,400 4,400 22,000
Total 63,200 64,400 24,400 152,000
Goodwill to old partners 16,800 5,600 5,600 28,000
Total capital 80,000 70,000 30,000 180,000

Old partners 152,000 180,000 28,000
New partner 60,000 60,000 25% -
Total 212,000 240,000 28,000
Again, under the goodwill method total contributed capital is less than the total agreed capital.
PROB. 1-69 Suggested answer: (b)
In the event of liquidation, subject to any agreement to the contrary, the following sequence of
payments should be observed:
1. Amounts owed to creditors other than partners;

2. Amounts owed to partners other than for capital and profits (i.e. partners’ loans to the
partnership);
3. Amounts owed to partners as capital;
4. Amounts owed to partners as profit not currently closed to partners’ capital accounts.
PROB. 1-70 Suggested answer: (d) Safe payment computations
A lump-sum liquidation is one in which all of the assets are sold in bulk and all of the creditors’ claims
are satisfied before a single liquidating distribution id made to the partners. Because assets are sold in
bulk, there is a tendency to realize greater losses than if the assets were sold over a period of time.
Therefore, payments to partners should be distributed safely.
PROB. 1-71 Suggested answer: (b) Balances of partners’ capital accounts
The four basic steps to partnership liquidation are:
1. Net income or loss up to the date of liquidation should be allocated to the partners’ capital
accounts based on their P&L ratio.
2. The gain or loss realized from the sale of noncash assets should be allocated to the partners’ capital
accounts based on their P&L ratio.
3. Creditors’ claims, including liquidation expenses or anticipated future claims should be paid.
4. Remaining cash is distributed to partners in accordance with the balance in their capital accounts,
and not the P&L ratio.
PROB. 1-72 Suggested answer: (c)
The provisions that call for the contribution of personal assets to a liquidating partnership illustrate
the characteristics of unlimited liability. However, such personal liability depends on the legal doctrine
of marshaling of assets. This doctrine, which is applied when the partnership and/or one or more of
the partners are insolvent, states that:
a. Partnership assets are first available for the payment of partnership debts. Any excess assets are
available for payment of the individual partner’s debts, but only to the extent of the partner’s interest
in the capital of the partnership.
b. Personal assets of a partner are applied against personal debts, ranked in the order of priority as
follows: 1.) Amounts owed to personal creditors; 2.) Amounts owed to partnership creditors; and 3.)
Amounts owed to partners by way of contribution.
PROB. 1-73 Suggested answer: (d) 27,500 0 52,000
Cohen Butler Davis Total

Capital balances 60,000 (10,000) 33,000 83,000
Notes payable to Davis 32,000 32,000
Actual liquidation exps. (7,000) (4,200) (2,800) (14,000)
Loss on realization
(248,000-218,000) (15,000) (9,000) (6,000) (30,000)
Addt’l contribution - B 8,500 8,500
Balances 38,000 (14,700) 56,200 79,500
Absorption - Butler (10,500) 14,700 (4,200) -
Cash payments 27,500 - 52,000 79,500
Liquidation expenses and loss on realization are charged against the partners’ capital accounts. The
liability of partners in a partnership is unlimited, thus, the creditors of the partnerships may go after
the partners to the extent of their personal assets. However, it should be noted that under the
doctrine of marshaling of assets, personal assets should be applied first to personal obligations and
any excess shall be applied to the unliquidated partnership obligation.
PROB. 1-74 Suggested answer: (a) 0
Axel Barr Cain

Capital balances
Before liquidation P40,000 P180,000 P30,000
Loss on realization 4:3:3
(200,000-300,000) 40,000 30,000 30,000
Capital balances
After liquidation P0 P150,000 P0
Since all assets are distributed at one point in time rather than installments, this represents simple
liquidation. As assets are converted into cash, any differences between the book values and the
amounts realized represent gains or losses to be divided among partners in the profit and loss ratio.
Such gains and losses are carried to the capital accounts. The capital balances then becomes the basis
for settlement.
PROB. 1-75 Suggested answer: (c) 195,000 decrease
Nal Lou Gee

Capital balances
Before liquidation P175,000 P125,000 P175,000
Distribution of loss 3:2:5
(P475,000+25,000) (150,000) (100,000) (250,000)
Balances 25,000 25,000 (75,000)
Absorption of Gee (3:2) (45,000) (30,000) 75,000
Capital balances (P20,000) (P5,000) -
Distribution of loss P150,000

Absorption of Gee 45,000
Decrease in capital of Nal P195,000
Note that upon liquidation, all of the partnership’s assets are sold and sufficient cash is realized to pay
all claims except one for P25,000, therefore, the partnership incurred loss from realization, which will
eventually reduce the capital balances of the partners. In addition, the deficiency of an insolvent
partner is simply eliminated by absorption, thus increasing the decrease in capital account of Nal to
P195,000, as shown above. Incidentally, since Nal and Lou are solvent, additional cash of P20,000 and
P5,000, respectively will be invested by them.
Given that noncash assets were sold for an amount equal to its book value, therefore, no gain or loss
was realized from the sale of noncash assets. Thus, the partners will receive an amount equal to their
respective capital balances before liquidation.
Total capital of the partnership (750,000+500,000) 1,250,000

Add liability (Notes payable) 200,000
Total assets 1,450,000
Less available cash 300,000
Loss on realization 1,150,000
Sammy Michael
Capital balances before liquidation 750,000 500,000
Notes payable to Michael 200,000
Loss on realization (equally) (1,150,000) 575,000 575,000
Capital balances after cash distribution 175,000 125,000
Loss on realization is the difference between the total assets (equal to the total capital and liabilities)
and the amount realized from its sale.
PROB. 1-78 Suggested answer: (a) 136,000

Smith Jones
Capital balances P195,000 P155,000
Smith, loan (Dr) (20,000)
Loss on realization (60:40)
(450,000-385,000) (39,000) (26,000)
Cash available for partners P136,000 P129,000
Again, since all assets are distributed at one point in time rather than installments, this represents
simple liquidation or total liquidation. The loan account was presented as an asset of the partnership;
therefore, it is a receivable on the part of the partnership, and eventually, reduces the capital balance
of the partner concerned.
Alex Jay John

Loss on realization
(150,000-70,000) 2:1:1 (40,000) (20,000) (20,000)
Possible loss
(265,000-150,000) 2:1:1 (57,500) (28,750) (28,750)
Balances (2,500) 31,250 21,250
Absorption of Alex 1:1 2,500 (1,250) (1,250)
Cash distribution P0 P30,000 P20,000
Again, in installment liquidation, to insure an equitable distribution of cash to the partners,

considerable care is required. Usually, the statement of liquidation is supported by the Schedule of
Safe Payments, wherein each installment of cash is distributed as if no more cash is forthcoming.
Thus, cash is distributed to a partner only if he has an excess credit balance in his partnership interest
after absorption of his share of the maximum possible loss that may occur, which consists of the
assumed unrealizable value of the remaining noncash assets, ash withheld for payment of anticipated
liquidation expenses and unrecorded liabilities that may arise, and any additional loss that may also
accrue to the partners when a debit balance in any of the capital accounts results from the allocations
of possible loss.
Munoz Nieva Perez

Capital balances
Before liquidation 312,500 107,500 50,000
Loan balances 80,000 25,000
Total interest 312,500 187,500 75,000
Loss on realization (5:3:2)
(900,000-400,000) (250,000) (150,000) (100,000)
Balances (deficiency) 62,500 37,500 (25,000)
The loan balances were presented in the liability section of the condensed balance sheet, thus, these
should be treated as obligations of the partnership and eventually increase the interests of the
partners. Since Perez is the only solvent partner, while other partners incur no deficiency, Perez will
invest additional cash equal to his own deficiency.
When the liquidation period extend over a long period of time, calculations of safe payments to
partners may become frequent and bothersome such that it may be desirable to prepare in advance
an installment distribution plan, called Cash Priority Program. This program, which is an alternative to
Schedule of Safe Payments, permits the partners to determine how cash should be safely distributed
when it becomes available. Using this program, the first priority of payments should be provided to
the partner with the highest loss absorption balance. The amount to be paid could be determined by
multiplying the excess loss absorption balance of partner over another by his profit and loss
percentage. The process should be continually done until the loss absorption balances of the partners
are equal, in which case, distribution of available cash should be made according to their profit and
loss percentage.
Since there are three partners in the form (Goh, Kong, and Wei), in the third priority program of
payments, the amounts to be received by Wei is P5,600 (P28,000 x 20%), because at this point, their
loss absorption balances are equal.
PROB. 1-82 Suggested answer: (c) 49,000 0 57,000
Able Baker Chapman

Capital balances 50,000 (32,000) 70,000
Personal assets applied
to capital deficiency
(80,000-50,000) 30,000
Capital balances applied
to personal liabilities
(72,000-60,000) (12,000)
Balances 50,000 (2,000) 58,000
Absorption of Baker (1,000) 2,000 (1,000)
Balances after applying
the doctrine of
marshaling of assets 49,000 0 57,000
The doctrine of marshaling of assets is applied when the partnership and/or one or more of the
partners are insolvent. It provides that partnership assets are first available for payment of
partnership debts. Any excess is applied to individual partners’ debt to the extent of his interest.
While, personal assets are applied against personal debts, any excess is applied to partnership
creditors, then to partner's debit capital balance.
Personal assets 200,000

Add capital credit balances 120,000
Total amount due to personal creditors 320,000
Note that the capital accounts of Morgan and other partners have credit balances; therefore, the
partnership has no deficient partner. Accordingly, there is no possible absorption that will reduce the
capital of Morgan, thus the personal creditors of Morgan can collect, not only his personal assets but
to the extent of his entire capital balance.
PROB. 1-84
Total capital before liquidation (40,000+25,000+5,000) 70,000

Less: Cash left for distribution 28,000
Loss on realization of the noncash assets 42,000
Upon payment to partners in the event of liquidation, the amount of cash available for distribution is
always equal to the total partners’ capital.
A M E
Capital balances before liquidation 40,000 25,000 5,000
Loss on realization (3:2:1) (42,000) (21,000) (14,000) (7,000)
Balances 19,000 11,000 (2,000)
Absorption of E (3:2) (1,200) (800) 2,000
Cash payment to A and M 17,800 10,200 -
In the event of liquidation, all liquidation expenses and gains or losses from conversion of partnership
assets must be allocated to the partners before assets actually are distributed to the individual
partners. Failure to consider these factors may result in the premature distribution of assets to a
partner. Furthermore, generally accepted accounting principles states that partners should contribute
assets to the partnership to the extent of their debit balances. However, if such contribution is not
possible because of special personal or legal considerations, the debit balance will be viewed as a
realization loss and allocated according to the remaining partners’ profit or loss ratio.
PROB. 1-85 Suggested answer: (c) 0 31,000 49,000
Salve Galo Norma

Loss on realization (50,000) (5:3:2) (25,000) (15,000) (10,000)
Balances 55,000 100,000 95,000
Less: Possible loss (170,000) (5:3:2) (85,000) (51,000) (34,000)
Balances (30,000) 49,000 61,000
Absorption of Salve (3:2) 30,000 (18,000) (12,000)
Safe payment to partners - 31,000 49,000
To avoid the problem associated with premature payments, installment payments may be made to
partners only after anticipating all liabilities, possible losses, and liquidation expenses. The allocation
of the assumed loss is allocated among the partners according to their profit and loss ratio. The
allocation of the assume loss could produce debit balances in partners’ capital accounts, and these
balances are treated as being uncollectible. Therefore, the assumed debt capital balances are
allocated to those partners with credit balances according to their profit and loss ratio.
PROB. 1-86 Suggested answer: (c) 410,00 230,000 0
A B C
Loss on realization (280,000) (5:3:2) (140,000) (84,000) (56,000)
Balances 420,000 236,000 (16,000)
Absorption of C (5:3) (10,000) (6,000) 16,000
Payment to A and B 410,000 230,000 -
Again, generally accepted accounting principle states that partners should contribute assets to the
partnership to the extent of their debit balances. However, if such contribution is not possible
because of special personal or legal considerations, the debit balance will be viewed as a realization
loss and allocated according to the remaining partners’ profit or loss ratio.
PROB. 1-87 Suggested answer: (a) 2, 3, 4, 1
Unlike a dissolution where the partnership continues its business purpose, liquidation results in the
partnership's ending or terminating its business. The process of liquidation consist the conversion of
partnership assets into a distributable form and the distribution of these assets to creditors and
owners. All liquidation expenses and gains or losses from conversion of partnership assets also must
be allocated to the partners before assets actually are distributed to the individual partners. Failure to
consider these factors may result in the premature or incorrect distribution of assets to a partner.
Almond Barney Colors

Total interest 20,000 50,000 90,000
Divide by P&L 20% 40% 40%
Loss absorption balance 100,000 125,000 225,000
Priority 1 - Colors (100,000)
Balances 100,000 125,000 125,000
Priority 2 - Colors & Barney (25,000) (25,000)
Balances (P&L) 100,000 100,000 100,000
Since the question being asked is “one of the partners will get… before any other partners get
anything”, therefore, it is the partner under priority no. 1 (Colors). Colors shall receive, under priority
no. 1, P40,000 (100,000 x 40%)
PROB. 1-89
a. Suggested answer: (b) P70,000 outside liabilities, P30,000 Able
Able Baker Chapman

Total interest 90,000 30,000 50,000
Divide by P&L (equally) 1/3 1/3 1/3
Priority 1 - Able (120,000)
Balance 150,000 90,000 150,000
Priority 2 - Able & Chapman (60,000) (60,000)
Balance 90,000 90,000 90,000
Priority 3 - P&L
Payments by priority: Able Baker Chapman

Priority 1 (120,000 x 1/3) 40,000
Priority 2 (60,000 x 1/3) 20,000 20,000
Cash Liability Able Baker Chapman
Total 100,000
Liability (70,000) 70,000
Balance 30,000
Loan - A (20,000) 20,000
Balance 10,000
Priority 2 (10,000) 10,000
Total 70,000 30,000
The Partnership Law provides, that in the event of partnership liquidation, available cash shall be
distributed in the following order: first: to outside creditors, second: to inside creditors (partners’
loan), and third: to owners (partners’ capital accounts).
b. Suggested answer: (d) Able: 55,000, Baker: 15,000, Chapman: 5,000
Able Baker Chapman

Total interest (excluding loan) 70,000 30,000 50,000
Divide by P&L (equally) 1/3 1/3 1/3
Priority 1 - Able (60,000)
Balance 150,000 90,000 150,000
Priority 2 - Able & Chapman (60,000) (60,000)
Balance 90,000 90,000 90,000
Priority 3 - P&L
Payments by priority: Able Baker Chapman

Priority 1 (60,000 x 1/3) 20,000
Priority 2 (60,000 x 1/3) 20,000 20,000
Cash Able Baker Chapman

MV of assets 195,000
Liabilities (70,000)
Able, loan (20,000)
Balance 105,000
Priority 1 (20,000) 20,000
Balance 85,000
Priority 2 (40,000) 20,000 20,000
Balance 45,000
Priority 3 (45,000) 15,000 15,000 15,000
Total 55,000 15,000 35,000
Less: Asset taken
by Chapman 30,000
Balance 55,000 15,000 5,000
PROB. 1-90
a. Suggested answer: (b) 2,592 1,440
Roy Gil Total

Capital before adjustment P94,800 P214,200 P309,000
Accounts receivable (6,667) (13,333) (20,000)
Inventory (7,333) (14,667) (22,000)
Fixed Assets 2,200 4,400 6,600
Total stock to be issued 83,000 190,600 273,600
Common stock (720 x 10) 7,200 7,200 14,400
Preferred stock P100 par P75,800 P183,400 P259,200
Shares to be issued: Roy Gil Total

Common stock 720 720 1440
Preferred stock 758 1,834 2,592
In order to secure the advantages found in the corporate form of business organization, the partners
may decide to incorporate. Upon incorporation, the corporation will act to acquire the net assets of
the partnership in exchange for its stock. The stock received by the partnership is distributed to the
partners in settlement of their equities. The corporation therefore takes over the assets and assumes
the liabilities of the partnership; the partnership is dissolved and the partners now become
stockholders in the newly formed corporation. The allocated common shares and preferred shares
were computed by dividing the amount of each stock by its respective par value, as shown above.
b. Suggested answer: (c) 758 720 1,834 720
See above computations in question “a”.
PROB. 1-90
a. Suggested answer: (c) 215,000
Net assets at fair value (P240,000-20,000) P220,000

Less par value of stock issued (1,000 x 5) 5,000
Additional paid in capital P215,000
The incorporation of a partnership results in the formation of a new accounting (and legal) entity. This
means that the partnership must adjust its records up to the date of incorporation. Among others, the
partnership’s books are adjusted to reflect the fair market value of the partnership assets and the
present value of partnership liabilities. In addition, when capital stock were issued, capital stock
account should be credited at par or stated value, any excess over par or stated value must be
credited to additional paid in capital.

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SOLUTIONS AND EXPLANATIONS

PROB. 1-1 Suggested answer (a) Limited liability

PROB. 1-2 Suggested answer (c) A partnership is characterized by limited liability

d. An original partnership is dissolved upon admission or withdrawal of a partner.

PROB 1-6 Suggested answer (d) Market value, Market value

PROB. 1-7 Suggested answer (a)

PROB. 1-8 Suggested answer: (c) Ces

Ben capital (80,000 - 35,000) 45,000

Ces capital 55,000

PROB. 1-9 Suggested answer (a) 75,000, 80,000, 85,000

Cash contribution 50,000 80,000 25,000

Store equipment 25,000

Capital balances 75,000 80,000 85.000

PROB. 1-10 Suggested answer: (a) 592,000 750,000

Capital balances before adjustments 620,000 800,000

a. Uncollectible accounts receivable (20,000) (40,000)

b. Worthless inventories ( 6,000) ( 7,000)

c. Intangible assets written off ( 2,000) ( 3,000)

Adjusted capital balances 592,000 750,000

PROB. 1-11 Suggested answer: (b) 190,000

Mary capital before adjustments 264,000

Allowance for doubtful accounts (3% x 120,000) ( 3,600)

Merchandise inventory 25,000

Prepaid expenses 3,600

Accrued liabilities ( 4,000)

Mary capital after adjustments 285,000

Total partnership capital (285,000/3/5) 475,000

Multiply by Jane interest 2/5____

Cash to be invested by Jane 190,000

PROB. 1-12 Suggested answer (b) 35,000 75,000

Cash P 20,000 P 30,000

Building (net of P10,000 mortgage ) 30,000

Furniture & equipment 15,000

PROB. 1-13 Suggested answer: (a)18,000

a. Suggested answer (d) 60,000

Capital Capital Decrease)

Grey 60,000 60,000

Redd 20,000 60,000 40,000

Total 80,000 120,000 40,000

80,000 120,000 40,000

b. Suggested answer (b) 20, 000 bonus to Redd

Contributed Agreed Increase

Capital Capital (Decrease)

Grey 60,000 40,000 (20,000)

Redd 20,000 40,000 20,000

Total 80,000 80,000

PROB. 1-15 Suggested answer: (d) 0

PROB. 1-16 Suggested answer: (b) 500,000 450,000 550,000

Alex Benjie Cesar

Contributions @ fair value P500,000 P800,OOO P550,000

Less liabilities assumed - 350,000 -_____

Capital balance, 4/30/06 P500,000 P450,000 P550,000

Abel Cain Josuah

Cash contributed P 100,000 P 160,000 P 50,000

Noncash contributed 50,000 120,000

Capital balances beginning 150,000 160,000 170,000

Capital beginning Distribution of net