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    CPA Examination Review Manual Advanced Financial Accounting and Reporting (Theories and Problems) 2019 Edition

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    2019 Editien CPA Examination in Advanced Financial Accounting and Reporting (Theories and Problems) Antonio Jaramillo Dayag, CPA, PhD (CAR) CPA Reviewer, The Review School of Accountancy (ReSA) Faculty Member, University of Santo Tomas (UST) Copyright 2019 by Antonio Jaramillo Dayag Any copy of this book not bearing the signature of the author on this page is unauthorized and shall be considered as Proceeding from an illegal source. All rights Reserved ISBN: 978-621-416-060-0 Published & Printed by. GIC ENTERPRISES & CO., INC. *National Book Development Board Registered 2017 C.M. Recto Avenue, Sampaloc Manila, Philippines ii This book is dedicated to my beloved wife, Jennifer, daughters, Kim Dorothy and Drei Cerise, and son, Antonio Jr. to my dearly departed parents, my dearest brothers & sister, nieces, and my students, and reviewees iii A failure is not always a mistake. It may simply be the best one can do under the circumstances, real mistake is to stop trying. - B. F. Skinner — A person who never made a mistake never tried anything new. - Albert Einstein - Preface and Report for most CPA reviewees fo leam Advanced Financlal Accounting Gad Becontree to read textbook relative fo the topic involved since there forastuertitenn knowledge of the subject matter. But. such is not the case such asthe: ences read at a glance importance topics in the textbook ft vi Pr {ural approach then solve the CPA Examination book. Then, baleen multiple Choice problem in the examination book, read the solution se aboot eoiehes st end of each chapter and it is time to read the The key strengths of this book are the clear and readable discussions of concepts ‘and the detailgd demonstrations of these concepts through illustrations and explanations. The result is a text that ties procedures in its application that develops understanding in an incremental depth. The sequential approach used in this books undoubtedly effective in the learning process of each student and the CPA reviewee. | observed reviewees'/students' skills vary widely. As a result, they should strengthen their knowledge on theory and concepts and transform this knowledge in a problem solving approach. This 2019 edition includes discussions on PFRS 9, PFRS 15, the Govemment Accounting Manual, PFRIC 16 and PFRIC 22. There are also certain issues the author raised on some theoretical rules which the author firmly resolve and justity. The author wishes to thank his fellow ReSA CPA Reviewers (Elerie Aranas, Atty. Marceliano S. Bonafe, Gerardo C. Caiga, Atty. Andrix Domingo. Atty. James Christopher D. Domingo. Christopher Espenilla, Shirley Cordova-Ireneo, Jose M. Ireneo, , Charlwin “Aljon” P. Lee, Atty. Christian Lovie U. Lim, Gorgonio S. Mocariola, Kenneth Glenn L. Manvel, Mark Alyson B. Ngina, Atty. Ronn Robby D Rosales, Asser S. Tamayo, Florenz Tugas, Conrado O. Uberita, Nico B. Valderama Gnd Fermin Antonio D. Yabut) for their untiring support, the ReSA staff (Mylene B. Ponce. Cynthia E. Ponce and Rhea Bajaro) for their usual help and coordination Iovigwees for their intelligent questions, former reviewees and UST students, Ms. “hoanna Feliza Cow Go (ReSA reviewee and UST graduate, 1" Placer = May 2005 CPA Board Examination, now an SGV Partner) for her inputs on some topics Gnd most of all to my dearest wife, Jennifer Basilio-Dayag for her helpful Somments and suggestions and to my children - Kim Dorothy and Drei Cerise in editing this 2019 edition. Again, thank you for patronizing this book and for your usual consideration RR ements Cled in he ae Accounl PAS No, PAS No. PAS No. PAS No. PAS No. PAS No: PAS No, PAS No. PAS No. PFRS No, PFRS No PFRS No. PFRS No, PFRS No. PFRS No, PFRS No. PFRS No. PFRS for SMEs PFRIC PFRIC PFRIC. FASB No, FASB No. FASB No. FASB No. FASB No. 52 116 V7 133 138 ting Standards and Pronouncements Clted In this Ediition = Property, Plant and Equipment ~ The Effect of Changes in Foreign Exch = Separate Financial Statements ANGE Rates Investment In Associates and Joint Venture: Financial Reporting in Hyperinflation Economies ‘ary Financial Reporting of Interests in Joint Venty Financial Instruments: Disclosures and Presentates ~ Provisions, Contingent Liabilities and Contingent Assets nt Intangible Assets Business Combinations ~ Insurance Contracts = Financial Instruments: Recognition ang Measurement Consolidated Financial Statements Joint Arrangements Fair value Measurement Revenue from Contracts with Customers Insurance Contracts (effective January 1, 2021) praad Service Concession Arrangement - Hedges on a Net Investment in Foreign Operations = Foreign Currency Transactions and Advance Consideration ~ Foreign Currency Translation - Accounting for Contributions Received and Contributions Made = Financial Statements of Not-for-Profit Organizations - Accounting for Derivative and Instruments and Hedging Activities - Accounting for Certain Derivatives Instruments and Certain Hedging Activities - An Amendment of FASB No. 133 Government Accounting Manual Antonio Jaramillo Dayag August 28, 2018 vi Dedication . Preface .. Contents Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter een 13: 14: 15: 16: VW: 19: TABLE OF CONTENTS Partnership-Formation, Operation, Dissolution and Liquidation Corporate Liquidation Revenue Recognition ~ Contracis with Customers Revenue Recognition - Contract with Custorners: Construction Accounting Appendix: SMEs ~ Construction Contracts - Revenue Recognition - Contract with Customers: Franchise and Consignment... Appendix: SMEs - Franchise... Home Office, Branch, and Agency Accounting Business Combinations - Statutory Mergers and Statutory Consolidations Appendix: SMEs — Business © Consolidation Financial Statements - Stock Acquisition Appendix: SMEs — Consolidations Joint Arrangemenis Accounting for Foreign Currency Transactions, Forward Contract (Hedging) Transactions, Foreign Cumency Financial Statement Translation, and Financial Reporting in Hyperinflationary Economies... Appendix: SMEs - Foreign Currency and Hyperinflation Derivatives as Hedging Instruments in Managing Foreign Currency Exposures .. Appendix: SMEs — Hedging ... Not-for-profit Organizations = Universities, Voluntary Health and Welfare Organizations and Other Not-for-Profit Organizations Insurance Contracts and Service Concession Arrangement (Accounting for Build-Operate and Transter) Government Accounting Manual - General Fund Job Order Costing - Costing of Product, Service Cost Allocation, Overhead Allocation, Accounting for Scrap, Waste, Spoilage, and Rework... Process Costing — Equivalent Units and Cost Allocation, Accounting for Normal and Abnormal Lost Units Joint and By-Products .. Standard Costing .. : Backfiush Costing and ‘Act ‘ity- jased losting: 77 765, 787 861 rah) 92) 969 1049 1141 1201 1241 de Ml. _ Chapter 1 Partnership Introduction A partnership is defined as an association of two or more persons who contributes money. Broperty oF Indusky fo «common fund with the intention of ving the profits among lemselves. Accounting for partnerships should comply with the legal requirements os eu om by the Partnership Law as well as complying with the partnership agreement Partnership Formation and Capital Accounts {All assets contributed fo the partnership are recorded by the parinership at their agreed values (or fair market volves. in the absence of agreed valves). Alliabilifes that the partnership assumes ore recorded at their net present values. Thus, if a partner contributes a noncash asfet fo-the parinership (e.g... land or equipment) subject fo mortgage, the.contributing partner's capital account is credited for the agreed value (oF fair values) of the noncash asset less the morgage assumed by the parinership. The capital account is an equity account similar to the shareholders’ equity accounts in @ corporation. It is used fo account for permanent withdrawals and additional contributions. Other important accounts include a drawing account and loans to or from poriners. The drawing account is used to account for net income oF loss and personal or formal withdrawals, i. share against net income. It is closed at the end of Ine period into the capitol account. Loan accounts are se! up for amounts intended as loans, rather than ‘a: additional capital investments. In liquidation proceedings, a loan to or from a partner is in essence treated as an increase or decrease in a partner's capital account. Division of Profits and Losses ‘As a rule profits ond losses are allocated based on agreement. Methods ~ Various methods exist for the division of partnership profits and losses, including the following 1. Equally. 2. Atbilrary ratio, 3. Capital contribution ratio: WV. er} a. Original Capitol or initial investment b. Beginning Capital of each year c Average Capital d. Ending Capital of each year Interest on capital balance and/or loan balances and the balance ratio, 5. Salaries to portners and the balance on agreed ratio, 6. Bonus fo partners and the balance on agreed ratio, @. Bonus as an “expense” In computing the bonus amount, Here, bons 4 ‘computed based on net income after bonus. b. Bonus as a distribution of proft. Here, the bonus is computed bated on net income before deducting the bonus. 7. Interest on capitals and/or loan balances, salaries 10 partners, and bonus fo partner and the balance on agreed ratio. © On Opteeg The method of division to be used in any given situation is generally the method specitedin the partnership agreement. This agreement must always be Consulted fst, since it legaly binding on the pariners. Ino profit and loss sharing orangement s specifiedin he porinenhi Qgreement, the porinership requires that profils and losses be shared according to copii Contribution. Capital contribution should be interpreted 1a be original capital/beginning copial of each year in the absence of original capital; similarly, if the agreement speci how profils are to be shared but Is silent as to losses, losses are to be shored in the same Manner as profits. Notice that the profit and loss sharing ratio is totally independent of the partners’ ownership interests. Thus, two pariners may have ownership interests of 70% and 30% but share profits and losses equally. Dissolution A. Admission of a New Partner Anew partner may be admitted to the partnership by purchasing the interest of one or more of the existing partners or by contributing cash or other assets (le. investment of additional capital). These two situations are discussed below. |. Purchase of interest - When a new partner enters the partnership by purchosing {he interest of an existing partner, the price paid for that interes! Is krelevant 10 the partnership accounting records because its.a private or personal transaction between the buyer and seller, The assels and liabilities of the partnership are not attected. The capital account of the new partner is recorded by merely reclassifying the capital account of the old partner. 2. Admission by investment of Additional Assets — A new partner may be granted on Interest in the partnership in exchange for contributed ossels and/or goodwill {c-. business expertise, an established clientele, etc). The admission of the new Parner ond contribution of assets may be recorded on Ihe basis of the bonus method, Sonus method ~ This mettiod Is based upon the hislorical cost principle Admittance of a new partner Involves dbiting cash oF other ass for the FAY of the assels contributed and crediting the new partner's caplial for ihe agreed (le., purchased) percentage of total capital, Total capital equals the book Value of Ihe net assets prior to adimitjance of the new partner, plus Ine HAV of the assets coniribuled by Ihe new parlner, A dilference belwaen the [MV of the assets contributed and the Interest granted to Ihe new partner resus In the recognition of a bonus, a 2. No bonus recognized ~ When an Incoming parlner's capital account (ownership interes!) 's to be equal fo his purchase price, the partnership books merely debit cash or other assels and credit capital, b, Bonus granted to the old pariners - When the FMY of the assets contributed by an Incoming pariner exceeds thé amount of avinership: Inlerest to be credited fo his capital account, the old parinor recognize ‘a bonus equal to this excess, This bonus Is allocated on the basis of the same ratlo used for Income allocation (unless otherwise specified In the partnership agreement). Recording Involves crediting the old partners’ capital accounts by the allocated amounts, ¢. Bonus granted to new pariner - An incorning partner may conitbule awols having a FMV smaller than the partnership interest granted to thal new partner, Similarly, the new partner may not contribute any assets at all, The incoming pariner is therefore presumed 10 contiibute an intangible asset, such as managerial expertise or personal business reputation. In thls case, o bonus is granted fo the new pariner, and the capital accounts of the old partners are reduced on the basis of thelr profit and loss ratlo. Goodwill method. In PFRS No. 3, goodwill represents the excess of Ihe cost of the business combination over the fair value of the Identifiable net assels obtained, Therefore, the standard provides that goodwill attaches only fo a business a3 a whole and is recognized only when a business's acquirad. This provision of PFRS No. 3 outlawed the use of the goodwill method in partnership accounting particularly admission and retirement of a pariner because there is no business invoived. The ferm "business" is defined In the Appendix A Of PFRS No. 3 as: An integrated set of activities and assets conducted ond managed for the purpose of providing: ] {a} a retum to investor, or (b) lower costs or other economic benefits directly and proportionately to policyholders or participants, ‘A business generally consists of inputs, processes applied 10 those inputs, and resulting outputs that are, or will be, used to generate revenues. if goodwill is present in a translerred set of ‘activities and assefs, the transferred set shall be presumed to be a business, Refer fo Appendix of this chapter for further discussion and Illustration, 4 Chapter | Withdrawal of a Poriner Admission of a new portneris not the only manner by which a partnership can ung ‘a change in composition. Over the lite of any partnership, portners may i orgonization. Thus, some method of establishing an equitable settieme, withdrawing partner's interest in the business property is necessary. ergo leave tne NY Of the For a partner to withdraw or retire from the partnership, the total interes! of i pariner should be properly determined which includes the following: ofo Share in the profit and loss of the partnership. ‘Adjustments in assets and liabilities to reflect fair market valves. Loans to and from partnership. Drawing occounis, and Copital interest / accounts. waupe withdrawal or retirement from the partnership may either be: 1. Selling of an interest to an outsider. This is similar to admission by purchase, 2. Selling of an interest to an existing partner. The interest of the retiring portner wil be purchased with the personal assets of existing partners rather than with the ‘esses of the parinership. 3. _ Selling of an interest to the parinership/payment from partnership fund. Under this opproach, the withdrawal of a partner maybe treated as: @. Payment at book value b. Payment at less than book value - bonus method ¢. Payment at more than book value - bonus method C. Incorporation of a Partnership For a variety of reasons, including legal and/or tox reasons, the partners of 0 Parinership may choose to incorporate. Two approaches of opening the corporate books are in general use. One is to retain the books of the pqrinership and to record all assets ond liabilities at fair market value concomitant with the closing of the partners’ capital accounts and the opening of a Common Stock account. The ‘other approach is to close out the partnership books completely and to open a new set of books for the corporation. In this case, the fair market values ore used as the basis for recording all assets and liabilities with the balancing amount credited to Common Stock. Occasionally, additional cash or other assels may be invested in the corporation. V. Liquidation Uquidation is the process of converting partnership assets into cash and distributing the cash fo creditors and partners. Frequently, the sale of assets will nol provide sufficient cash 10 Pay doin creditors and partners. The creditors have priority on any distribution. The basic ‘wie is that no distribution is made to any partner until all possible losses and liquidation expenses have been paid or provided for. An individual prematurely distributing cosh Partnership 10.2 Paainer whose capital account later shows a deficit maybe held personally able if the insolvent partner's unable to repay such a distribution. The proceeds of a liquidation may be distributed in a lump sum atter all assets have been sold and all creditors satisfied or the proceeds may be distributed to partners in installments as excess cash becomes avaliable. A Lump Sum Distribution ~ the first step in the liquidation process is fo sell all noncash ‘assets and ollocate the resulting gain of loss to the capital accounts of the partners in accordance with their profit and loss shoring ratio, The second step is to satisty the liabilities owing to creditors other than partners. The third step Is to satis liabilities ‘owing 10 partners other than for capital and profits. The fino! step is to distribute any ‘Cosh remaining fo the partners for capital and finally for profits. Any deficiency (Le., debit balance} in a solvent partner's capital will require that partner to contribute ‘Cosh equal to the debit balance. If the deficient poriner is insolverttthe debit balance must be absorbed by the remaining partners (usually in accordance with their profit ‘and loss sharing ratio). Note, however. that in order to achieve an equitable distribution, GQ partner's loan fo the partnership will fiSt be used 10 offset a debit balance In his ‘Capital account. Therefore, under this so-called right of offset doctrine. a partner's loan to the partnership will have cistibulion priority only to the extent it exceeds o debit balance in the partner's capital account. Installment Distributions - The liquidation of a partnership may take place over a Period of several months. installment distributions may be made to partners on the basis of a Schedule of Safe Payments or Cash Priority Program. in conjunction with a Liquidation Schedule similar to the one used for lump sum liquidations. The Schedule of Safe Payments takes a conservative approach to the distribution by assuming that noncash assets are worthless; thus distribution may be made to Partners on the basis of the value of partnership assets, until the assets ore sold. 2 Ct LTIPLE CHOICE PROBLEMS Note to the Examinees: ing to PERS No. 3, goodwill represents the excess of the cost of the business over the ‘or valve of the identifiable net assets obtained. Therefore, the standard rnoten that goodwill attaches only fo o business as a whole and is recognized onty when a bog eS is acquired. This provision of PFRS No. 3 outlawed the use of the goodwill method in partner particularly odmission and retirement of a partner because there is no business invowveg it goodwill method (sometimes known as adjustment or revalvation method) will sil be dicunt, for purposes of concept illustration and comparison with bonus (book value) method, The Goodwill (Adjustment/Revalvation) Method Under PFRS No. 3, goodwill represents the excess of the cost of the business combination over the fair vaive of the identifiable net assets obfained. Therefore. the standard provides that goodwill attaches only fo a business as a whole and is recognized only when a busines is acquired. This provision of PFRS No. 3 outiowed the use of the goodwill method in partnenhp particularly admission ond retirement of a partner because there is no business involved, Tne term “business” is Gefined in the Appendix A of PFRS No. 3 os: An integrated set of activities ana assets conducted and managed for the purpose of providing: (9) @ retum fo investor: or jower costs or other economic benefits directly and proportionately to policyholders oF potticipani A business generally consists of inputs. processes applied to those inputs. and resulting utDuts that ore, or will be. used to generate revenues. If goodwill is present in a tronsferred set of activities ong assets, the transterrec' set shall be presumed to be o business. This view of rex @ goodwill attaches only to the business as a whole was supported by E. John Larsen in his book Modern Advanced Accounting, 9 Edition (2003) invoking FASB Statement No. 142. “Goodwill and Other intangible Assets.” par. FI. In other words, recognizing gooawil even retirement of partner) in partnership is not on the oumission of @ partner (o considered to be in accordance with GAAP. m7 cases of sole proprietor (or partnership) joining business either with sole proprietor or Partnership, then goodwill snovia be appropriately recognized. ting pronouncements of the IASB, FASB and its primarily for publicly owned corporations, which ver choose to ignore GAAP, the will of the partners The author firmly believes that accou predecessor organizations are intended must follow GAAP. Most partnerships, howe may prevail. Such a departure usuaily falls into one of the following categories 1. Cash basis instead of accrual basis. 2 Prior-period aagjustments 3. Current vaiues instead of historicot cost 4. Recognition of gooawill e topic regarding goodwill (or aojusimen's © $3 outlawing tne use of goodwill method w! Probiems in this chapter discusses aiso #1 asset) method despite the provision of PFR: ne business is involved in partnership formation ond dissolution. Partnership ye Zz Partnership Formation: 1. On December 1, 20x5, EE and FF formed a partnership, agreeing to share for profits and losses in the ratio of 2:3, respectively. EE invested a parcel of land that cost him 25,000. FF invested 40,000 ech, The land was sold for \P50,000 on the same date, three hours after formation of the partnership. How much should be the capital balnce of EE right after formation? g. P25,000 ————"eP60,000 b. 30,000 d. 50,000 (AICPA) 2. On March 1, 20x5, Il and JJ formed a partnership with each contributing the following assets: Wt JJ Cash 300,000 P 700,000 Machinery and equipment 250,000 750,000 Building... = 2,250,000 Fumiture and fixtures 100,000 a The pong is subject to mortgage loan of 800,000, which is to be assumed by the partnership agreement provides that Il and JJ share profits and losses 30% and 70%, respectively. On March 1, 20x5 the balance in JJ's capital account should be: a. P3,700,000 ¢. — P3,050,000 b. 3,140,000 d 2,900,000 (AICPA) 3. The same information in Number 2, except that the mortgage loan is not ‘assumed by the partnership. On March 1, 20x5 the balance in JJ's capital account should be: a. P3,700,000 cc. P3,050,000 b. 3,140,000 d. 2,900,000 (Adapted) 4. As of July 1, 20x5, FF and-GG decided to form a partnership. Their balance sheets on this date are: Cash Accounts receivable . Merchandise inventory .. Machinery and equipment Total .... Accounts Payable... FF, capital GG, capital Total... Be ” Chae The partners agreed that the machinery and equipment of ¢ underdepreciated by P15,000 and that of GG by P45.I0. Manone 2 doubtful accounts is to be set up arnounting 10 120,000 tor FF ana Fas yy. for GG. The partnership agreement provides for a profit ans kins atin uy, capital interest of 60% to FF and 40% to GG, How much cash miss) FF inves to bring the partners’ capital balances proportionate 10 their profit rrr loss ratio? a. P52,560 c, PADS b. 102,500 4d, 17400 (Adortes ohh tes 6 PO rete (Mahon (On August 1, AA and BB pooled their assets to forrn a partnershi firm to take over their business assets and assurn capitals are fo be based on net assets tra} adjustments. (Profit and loss are allocated equal.) is to be increased by P4,000; an allowance for denis accounts of 1,000 and P'1,500 are fo be set up in tne pods of Ak andi’, respectively: and accounts payable of P4,000 it to be recognized in Ah 4 books. The individual trial balances on August |, before adjusirnen Ah PISO PP 5K BB's inventor Assets Liabilitie: above adjustments? YI; BB, P76 WS: What is the capital of AA and BE after tr a. AA, P68,750; BB, P77,250 Cc. AA,P6S. b. AA, P75,000; BB, PB1,000 d. AA, P65! LD (Adapted) dyer for C00 on hg Og CC admits DD as a partner in business. Accounts in tne November 30, 20x5, just before the admission of DD. balances: Cash ogy olonagae P 6H Accot O ncveneres eoonenaeenenee ecerse ADD Merchandise inventory PID Accounts payable ELD BID CC, capital . It is agreed thai for purposes of establishing CC’s interest, tne following adjustments shall be made: (a) An allowance for doubtful accounts of 3% of accounts receivable is fo be established, (o) The merchandise inventory is to be valued of P7400. (c} Prepaid salary expenses of PL) and accrued rent expense A P80 are to be recognized. Partnership 9 ODis to invest sufficient cash to obtain a 1/3 interest in the partners! Compute for: (1) CC's adjusted capital before the adrnission of DD; and (2) the amount of cash investment by DD: a. (1) P35,347; (2) P11,971 c. (1) P35,374; (2) P17.687 b. (1) 36,374; (2) 18,487 d. (1) 28,174; (2) 14,087 {Adapted} 7, MM, NN, and 00 are partners with capital balances on December 31. 20x5 of P300,000, P300,000 and P200,000, respectively. Profits are shared equally. OO wishes to withdraw and it is agreed that OO is to take certain equipment with second-hand value of P50,000 and a note for the balance of OO's interest. The equipment are carried on the books at P65,000. Brand new equipment may cost P80,000. Compute for: (1) OO's acquisition of the second-hand equipment will result to reduction in capitat; (2) the value of the note that will OO get from the partnership's liquidation. a. (1) P15,000 each for MM and NN, (2) P150,000. b. (1) P5,000 each for MM, NN'and OO, (2) P145,000. . (1) P5,000 each for MM, NN and OO, (2) P195,000. d. (1) P7,500 each for MM and NN. (2) P145,000. (Adapted) 8.. Jones and Smith formed a partnership with each pariner contributing the following items: Jones Smith P. 80,000 P 40,000 300,000 - fair value 400,000 Inventory - cost to Smith .. 200,000 - fair value 280,000 Mortgage payable .. 120,000 60,000 Accounts payable Assume that for fax purposes Jones and Smith agree to share equally in the liabilities assumed by the Jones and Smith partnership. What is the balance in each partner's capital account for financial accounting purposes? Jones smith ‘A. P350,000 270,000 B. 260,000 180,000 C. P360,000 260,000 D. —P500,000 300,000 a. Option A c. Option C b. “Option B d. Option D 10 9. The business assets of LL and MM appear below: ue MM Cash P 11,000 P 22,354 Accounts receivable 234,536 567.890 Inventories 120,035 260,102 603,000 = - 428,267 50,345 34,789 Other assets. 2000 _ 3.00 Total. P1,020.916 — P1,317,002 Accounts payable P 178,940 P 243,650 Notes payable 200,000 345,000 LL, capital. 641,976 - MM, capital . = 728,352 Total ... LL and MM agreed to form a parinership by contributing their respective assets and equities subject to the following adjustments: a. Accounts receivable of P20,000 in LL's books and P35,000 in MM's ‘are uncollectible. b. Inventories of P5,500 and P4,700 are worthless in L's and MM's respective books. cc. Other assets of P2,000 and P3,600 in L's and MM's respective books are to be written off. The capital account of the partners after the adjustmenis will be: a. LL, 615,942; MM.P717.894 Cc. LLP 630,376; Mv. P683,050 b. UL, P640,876;MM.P712,345 d. LL, P614,476 MM, P683,052 {PhilCPA) 10. The same information in Number 9, how much toto! assets does the partnership have after formation? a. P2,337,918 c. P2.265,118 b. 2,237,918 d. 2,365,218 (PhiICPA) Partnership uu 11. On March 1, 20x5, PP and QQ decide to combine their businesses and form.a partnership. Their balanée sheets on March 1, before adjustments, showed the following: PP. aa Cas P 9,000 P 3,750 Accounts receivable . 18,500 13,500 Inventories .. 30,000 19,500 Fumiture and fixtures (net) 30,000 9,000 Office equipment (net) . 11,500 2.750 Prepaid expenses 6.375 3,000 P105,375 P51,500 Total P 45,750 P18,000 59,625 33,500 05,375 P51,500 Accounts payable Capital... Total . They agreed to have the following items recorded in their books: 1. Provide 2% allowance for doubtful accounts. 2. - PP's furniture and fixtures should be P31,000, while QQ's office equipment is under-depreciated by P250. 3. _ Rent expense incurred previously by PP was not yet recorded amounting to P1,000, while salary expense incurred by QQ was not also recorded amounting to P800. 4. The fair market value of inventory amounted to: For PP For QQ. 21,000 Compute the net (debit) credit adjustment for PP and QQ: Po __@Q PP GQ. a. P2870 P 2,820 c. P(870)_P 180 b. (2.870) (2.820) d. — 870_—‘(180)_ (Adapted) 12. The same information in Number 11, compute the total lial formation: a. P61,950 c. P65,550 b. 63,750 d. 63,950 13, The same information in Number 11, compute the total assets after formation: a. P157,985 ©. P160,765 b. 156,875 d. 152,985 i2 Chapter} 14. On April 30, 20x5, XX, YY and ZZ formed 4 partnership by combining their separate business proprietorships. XX contributed cash of P75,900. yy contributed property with a P54,000 carrying amount; a P60,009 original cost, and P120,000 fair value. The partnership accepted responsibility for the P52,500 mortgage attached fo the property. 27 contributed equipment with @ P45,000 carrying amount, a P112,500 original cost, and P82,500 fair value. The partnership agreement specifies that profits and losses are {9 be shared equally but is silent regarding capital contributions. Which partner has the largest April 30, 2015, capital balance? a. XX e 2 b. YY d. Allcapital account balances - are equal (AICPA) » Items 15 to 17 are based on the following data: On January 1, 20x4, Jackson and Kendall formed a partnership. Jackson, who has many years of experience in this line of business, contributed P100,000 in cash. Kendall contributed assets having the following book values and fair market values: Book value Market value Merchandise P 15,000 P 25,000 Building 40,000 150,000 Equipment 60,000 85,000 The partnership assumed a mortgage of P40,000 on the building. Capital accounts are set equal to net assets invested. 15. The increase in capital of Kendall: a, None c. byP160,000 b. byP100,000 d. byP220,000 16. The partners have an equal interest in the initial total partnership capital, and the bonus method is used, the increase in capital of Jackson: a. None cc. byP160,000 b. byP100,000 d. byP220,000 17. The partners have an equal interest in the initial total partnership capital, and the goodwill method is used, the increase in capital of Jackson: a. None ¢: byP160,000 b. by P100,000 d. by P220,000 Partnership i Partnership Operations: 18. 21. JJ. and KK are partners who share profits and losses in the ratio of 60%: 40%. respectively. JJ's salary is P60,000 and P30,000 for KK. The parne's are also — interest on their average capital balances. In 20x5, JJ received P30,000 of interest and KK, P12,000. The profit and loss allocation is determined after deductions for the salary and interest payments. If Kk's share in the residual income (income after deducting salaries and interest) was P60,000 in 20x5, what was the total partnership income? a. —P192,000 ¢. — P282,000 b. 345,000 d. 387,000 (Adapted) . The Partnership has the following accounting amounts: Sales = P70,000 (2) Cost of Goods Sold = P40,000 (3) Operating Expenses = P10,000 (4) Salary allocations to partners = P13,000 15) _ Interest paid to banks = P2,000 (6) Partners’ withdrawals The partnership net income (loss) is: a. 20,000 . P_5,000 b. 18,000 d. (3,000) (Adapted) Lancelot is trying to decide whether to accept a salary of P40,000 or a salary of P25,000 plus a bonus of 10% of net income after salary and bonus Gs a means of allocating profit among the partners. Salaries traceable to the other partners are estimated to be P100,000. What amount of income would be necessary so that Lancelot would consider the.choices to be equal? a. P165,000 . C. P265,000 b 290,000 d. 305,000 (Adapted) Peter and Ronald are partners. They have shared profits and losses 65/35 fore: number of years. Peter has indicated that he is going to reduce his (oy Givernent in the parinership so the profit and loss ratio is being modified 1e 48755. At ihe date of the change in the profit and loss ratio, the partnership own vacant land with o market value of P300,000 and a book eels of 100,000. Peter and Ronald compile a list of assets with market way book value differences. Two years after the change in the profit and (aes ratios, the land is sold for P450,000. How much of the gains allocated to Peter? a. P157,500 cc. P227,500 b. P197,500 d. P287,500 14 23. 24. 25. 26. Partnership Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40 to 45/55. At the date of the change, the partners choose to revalue assets with market value different from book value. One asset revalued is land with a book value of P50,000 and a market value of P120,000. Two years after the profit and loss ratio is changed, the land is sold for P200,000. What is the amount of change to Robert's capital account at the date the land is sold? a. P32,000 cc. P60,000 b. 44,000 dd. P82,500 Shawn is a managing parinerin a local business. Part of his profit allocation is a bonus based on the store's operating income. The bonus is 8 percent of operating income in excess of P200,000 after deducting the bonus. If operating income for the year is P250,000, what is Shawn's bonus {rounded to the nearest peso)? a. P 3,703 c. —P20,000 b. 40,000 : d. 40,000 James has a bonus as part of his partner profit allocation. The bonus is based on the partnerships net income. James receives a bonus equal to 5 percent that the net income exceeds P1 50,000. if the net income in the current year is P180,000, how much bonus does James receive? a. —P30,000 c. P7,500 b. P-9,000 d. P1,500 Cherylis the manager of alocal store. She is also a partner in the company and she receives a bonus as part of the profit and loss allocation. Chery!'s bonus is based on the increase in revenues recorded during the period The bonus arrangement is that Cherylreceives | percent of net income for every full percentage point growth for revenues in excess of a 5 percent revenue growth. During the most recent period, revenues grew from P500,000 to P540,000 and net income grew from P98,000 to P120,000. How much bonus does Cheryl receive for this period? a. P2,000 c. P3,600 b. P1,100 d. 6,000 Nick, Joe, and Mike are partners. The company has P150,000 net income for the period. How is this income divided to the partners if the following profit and loss allocation process is followed? Nick Mike Weighted average capital 200.006 pasodee 180,000 Salary 25,000 15,000 32,000 Bonus 7 1 (NI- P100.000) Residual profit/loss ratios 25 45 30 Return on invested capital 9% Partnership 1s Nick Mike a P43,000 P60,500 b. P45,325 P53,990 = P50,000 P50,000 d. P44,075 P57,490. whereby pronts will be 27. Cab and Jo are considering forming a partnership Bonuses will be 10% of allocated through the use of salaries and bonuses. net income after total salaries and bonuses. Cab will receive a salary of 30,000 and a bonus, Jo has the option of receiving a salary of 40,000 ead @ 10% bonus or simply receiving a salary of P52,000. Both partners will receive.the same amount of bonus. +t would be necessary so that Jo ption selected. P 94,000 d. 334,000 Determine the level of net income that ‘would be indifferent to the profit sharing oF a. 240,000 rs b. 300,000 28. The partnership agreement of XX, YY & 22 provides for the year-end allocation of net income in the following order: " First, XX is to receive 10% of net income uP to P200,000 and 20% over P200,000. «Second, YY and ZZ each are fo re income over P300,000. ceive 5% of the remaining «The balance of income is to be allocated equally among the three partners. income was P500,000 before any allocations to sated to XX? c. — P206,000 d. 220,000 (AICPA) The partnership's 20x5 ne partners. What amount should be alloc a. P202,000 b. 216,000 29. The partnership agreement of RR and SS provides that interest at 10% per Tees to be credited fo each partner on the basis of weighted-average Jeet bolonces. A summary of the copital account of $5 for the year ended December 31, 20x5, is as follows Balance, January 1 P420,000 Additional investment, July 120,000 Withdrawal, August 1 { 45,000) 495,000 Balance, December 31 16 31. 32. a pa aeies Chapter} What amount of interest should be credited to $5's capital account foy 20x52 a. P45,750 c. PA6,125 b. 49/500 d. 51,750 (AIcP4) AA, BB, and CC are partners with average capital balances during 20x5 of 360,000, P180,000, and P120,000, respectively. Pariners receive 10% interes) on their average Capital balances. After deducting salaries of 90,000 tg AA and P60,000 to CC the residual profit or loss is divided equally. in 20x$ the partnership sustained a P99,000 loss before interest and salaries te Poriners. By what amount should AA's capital account change? a. P2],000 increase cc, P105,000 decrease b. 33,000 decrease d 126,000 increase (AICPA) AA and DD created a partnership to own and operate a health-tood store. The partnership agreement provided that AA receive a salary of P10,000 and DD a salary of P5,000 to recognize their relative time spent in ‘operating the store. Remaining profits and losses were divided 60:40 fo AA and DD, respectively. Income for 20x5, the first year of operations, of P13,000 was allocated P8,800 to AA and P4,200 to DD. On January 1, 20x6, the partnership agreement was changed to reflect the fact that DD could no longer devote any time to the store's operations The new agreement allows AA a salary of P18,000, and the remaining profits and losses are divided equally. In 20xé an error was discovered such that the 20x5 reported income was understated by P4,000. The partnership income of P25,000 for 20x6 included the P4,000 related to year 20x5. In the reported net income of P25,000 for the year 20x6, AA and DD would have: AA, pp. AA pp a. 21,900 P 3,100 c. P 0 P. 0 b. 17,100 17,100 d. 12,500 12,500 (Adapted) On January 1, 20x5, DD and EE decided to form a partnership. At the end of the year, the partnership made a net income of P120,000. The capital accounts of the partnership show the following transactions. DD, Capital EE, Capital Or. Cr. Cr. January 1 = — P40,000 25,000 April 1. 5,000 = — June } = - 10,000 August | - 10,000 - Septemb = - ie October | - 5,000 - December I - 4,000 5,000 Partnership 7 33. Assuming that an interest of 20% pan dnd the bataner f 20% per annum is given on average capital gn the Balance of the profitsis allocated equally, the allocation of profits a. DD, P60,000; EE, P59,400 ); EE, G . DD, 200; b. DD, P61,200; EE, P58,800 & Bb: pse'80o. E€, Ps1"200 (PhilCPA) The partnership of DD and BB wa: > 3 was formed and commenced operations on March 1,20x5, with DD contributing P30,000 cash and 86 investing cash of 10,000 and equipment with:an agreed upon valuation of F20.000, On July 1, 20x5, B invested an adcitional P10,000/n the partnership: DD made Canital withdrawal of P4,000.on May 2, 20x8 but reinvested ihe 4,000 ‘on October 1, 20x5. During 20x5, DD withdrew P800 per month and BB, the charged fosclaryes he P1,000 per month. These drawings were expense. recl Sharged fo salary ex preciosing trial balance taken at December Debit _Credit Cash... “ P 9,000 Receivable - net 15,000 Equipment - ne 50,000 Other assets... 19,000 Liabilities .. P 17,000 DD, capital. 30,000 8B, capital 40,000 Service rever 50,000 Supplies expense .. 17,000 Utilifies expense .. 4,000 Salaries to partners .. 18,000 5,000 Other miscellaneous expe! Total P137;000 137,000 1D and BB in the partnership net income assuming monthly salary allowances P800 and P1,000 for DD and BB, respectively; interest ‘allowance at a 12% annual rate on average capital balances; and remaining profits allocated equally. a. DD,P10,520; BB, P13,480 c. DD,P10,800; BB, P13,200 b. DD,P12,000; BB, P12,000 d. Ol 10,600; BB, P13,400 (Adapted) Compute for the share of D! AA and BB formed a partnership in 20x5 and made the following investments ‘and capital withdrawals during the year —___AA_ Investments Draws P30,000 P20,000 Se BB ae Investments Draws March 1 os 10,000 P10,000 August 1 20,000 2,000 5,000 December! 35. 36. Chapter } The partnership's profit and loss agreement provides for a salary of which 30,000 was paid to each partner for 20x5. AA is to receive a bonus of 10% on net income after salaries and bonus. The partners are also to receive interest of 8% on average annual capital balances affected by both investments and drawings. Any remainirig profits are to be allocated equally among the partners. Assuming net income of P60,000 before salaries and bonus, determine how the income would be allocated among the partners: a. AA, P31,138; BB, P28,862 c. AA, P30,633; BB, P29,367 b. AA, P33,537; BB, P26,463 d. AA, P30,684; BB, P29.316 (Adapted: Fischer & Taylor) Partner. A first contributed P50,000 of capital into an existing partnership on March 1, 20x5. On June 1, 20x5, the partner contributed another P20,000. On September 1, 20x5, the partner withdrew P15,000 from the partnership, Withdrawals in excess of P10,000 are charged to the partner's capital account. The annual weighted-average capital balance is a. P62,000 c. 60,000 b. 51.667 d. 48,333 (Adapted — Fischer & Taylor) WW and RR share profits and losses equally, WW and RR receive salary allowances of P20,000 and P30,000, respectively, and both partners receive 10% interest on their average capital balances. Average capital balances are calculated at the beginning of each month regardless of when the capital contributions and capital withdrawals were made, and partners drawings are not used in determining the average capital balances. Total net income for 20x5 is P120,000. Ww. RR January | capital balances .. - P100,000 — P120,000 Yearly drawings (P1,500 a month) .. 18,000 18,000 Permanent withdrawals of capital: June 3 .. (12,000) May 2 (15,000) Additional investments of capital July 3... 40,000 Octobér 2 .. -50,000 Wot is the weighted average capital for WW and RR respectively for 20: a. P110,667 and P119,583 ¢, — P100,000 and P120,000 b. —P105,333 and P126,667 d. P126,667 and P105,333 (Adapted - Patterson/Shoulders) Partnership 9 37. HH, MM, and AA formed a partnership on January 1, 20x5, and contributed 150,00, P200,000, and P250,000, respectively. Their arficles of co-partnership provide that the operating income be shared among the partners as follows: as salary, P24,000 for HH, P18,000 for MM, and P12,000 for AA; interest of 12% on the average capital during 20x5 of the three partners; and the remainder in the ratio of 2:4:4, respectively. The operating income for the year ending December 31, 20x5 amounted to P176,000. HH contributed additional capital of P30,000 on July | and made a drawing of P10,000 on October 1; MM contributed additional capital of P20,000 on August 1 and made a drawing of P10,000 on October 1; and, AA made a drawing of P30,000 on November 1. The partners' capital balances on December 31, 20x5 are: a. HH, P179.680; MM, P229,360; and, AA, P239,360 b. HH, P179,760; MM, P229,520; and, AA, P239,520 cc. HH, P189,680; MM, P239,360; and, AA, P269,360 di. HH, P223,180: MM, P272,060; and, AA, P280,760 (PhilICPA) 38. Merlin, a partner in the Camelot Partnership, has a 30% participation in partnership profits and losses. Merlin's capital account has a net decrease of P1,200,000 during the calendar year 20x5. During 20x5, Merlin withdrew 2,600,000 (charged against his capital account) and contributed property valued at P500,000 to the partnership. What was the net income of the Camelot Partnership for year 20x5? a. P3,000,000 .P 7,000,000 b. 4.666.667 d. 11,000,000 (AICPA) 39. On January 2, 20x5, BB and PP formed a partnership. BB contributed capital of P175,000.00 and PP, P25,000.00. They agreed to share profits and losses 80% and 20%, respectively. PP is the general manager and works in the partnership full time and is given a salary of P5,000.00 a month; an interest of 5% of the beginning capital (of both partner) and a bonus of 15% of net income before the salary, interest and the bonus. The profit and loss statement of the partnership for the year ended December 31, 20x5 is as follows: Net Sales .... 875,000 Cost of goods sold 700,000 Gross profit... .. P175,000 Expenses (including the salary, interest and the bonus) 143,000 Net income ... P_32,000 20 Al. 42. = Chapter} The amount of bonus to PP in 20x5 amounted to: a. P13,304 c. — P18,000 b. 16,456 d. 20,700 (Philp) On January 1, 20x5, A, B, C and D formed Bakya Trading Co.,.a Partnership, with capital contributions as follows: A, P50.000; B, P25,000: C, P2509, and D, P20,000. The partnership contract provided that each partner th cat receive a 5% interest on contributed capital. and that A and B shall receive salaries of P5,000 and P3,000, respectively. The contract also provided tha: C shall receive a minimum of P2,500 per annum, and D a minimum of P6,000 per annum, which is inclusive of amounts representing interest and share of remaining profits. The balance of the profits shall be distributed to A.B, C, and D in a 3:3:2:2 ratio. What amount must be earned by the partnership, before any charge for interest and salaries, so that A may receive an aggregate of P12,500 including interest, salary and share of profits? a.. P16,667 c. P30,667 b. 30,000 d. 32,333 (PhilCPA) AA, BB and CC are partners with average capital balances during 20x5 of P472,500, P238.650, and P162,350, respectively. The partners receive 10% interest on their average capital balances; after deducting salaries of P122,325 to AA and P82,625 to CC, the residual profits or loss is divided equally, In 20x, the partnership had a net loss of P125,624 before the interest and salaries to partners. By what amount should AA's and CC's capital account change - increase (decrease)? AA cc AA GG. a. P30,267 (40,448) Cc. P(40,844) 31,235 b. 29,476 17,536 d. 28,358 32,458 (PhilCPA) The same information in Number 41, except the partnership had a loss of P125,624 after the interest and salaries to partners, by what amount should BB's capital account change ~ increase (decrease)? a. P(115,443) c. P(41,875) Ib. 28,865 a. (18,010) Partnership __ 4 43. 44, XX, YY and ZZ formed a partnership on January 1, 20x5, Each contdbuted P120,000, Salaries were to be allocated as follows: XX YY. % 30,000 P30,000 45,000 Drawings were equal to salaries and be taken out evenly throughout the year. With sufficient partnership net income, XX and YY could split a bonus equal to 25 percent of partnership net income after salaries and bonus (in No event could the bonus go below zero) Remaining profits were to be split as follows: 30% for XX; 30% tor YY, and 40% for 17, For the year, partnership net income was P| 20.000. Compute the ending capital for each partner GQ. XX, P155,100; YY, P155,100; 22, P169,800 bb. XX. P126,000: YY, P126,000; Z°, 124,500 ©. XX, P125,100; YY, P125,100; 27, P124,800 XX. P125.500: YY, P125,500: 72, P124,000 (Adapted) CC, PP, and AA, accountants, agree to form a partnership and to share: profits in the ratio of 5:3:2. They also agreed that AA is to be allowed a salary of P28,000, and that PP is to be guaranteed P21,000 as his share of the profits, During the first year of operation, income from fees are P 180,000, while expenses total P96,000, What amount of net income should be credited to each partner's capital account? a. CC, P28,000, PP, P16,800, AA, P11,200 b. CC, P25,000, PP, P21,000, AA, P38,000 c. CC, P24,000, PP, P22,000, AA, P38.000 d. CC, P25,000, PP, P21,000, AA, P39,000 (Adapted) Hunt, Rob. Turman, and Kelly own a publishing company that they operate as a partnership. The partnership agreement includes the following: Hunt receives a salary of P20,000 and a bonus of 3% of Income after all bonuses. = Rob receives a salary of P10,000 and a bonus of 2% of income after all bonuses. = Allpartners are to receive 10% interest on theit average capital balances. The average capital balances are as follows Hunt P50, Rob Turman Kelly 22 46. 47. anne ONO J Any remaining profits and loss are to be divided equally among the partes Determine how a profit of P105,000 would be allocated among the partners. @. Hunt, P41,450; Rob, P29,950; Turrnan,P 15,450; Kelly, P1815 b. Hunt, P28,000; Rob, P16,500; Turman,P 2,000; Kelly, P 4,70) ¢. Hunt, P39,700; Rob, P29,200; Turman,P14,/00; Kelly, PIF AG d. Cannot be determined. (Adopted) RR and PP share profits after the provision of annual salary atlowances of P14,400 and P13,200, respectively in the ratio of 6:4, However, if parinershigs net income is insufficient to provide for said allowances in {ull amount, the net income shall be divided equally between the partners, In 075, the following errors were discovered: Depreciation for 205 is understated ny P2,100, and the inventory on December 31, 20x5 is overstated by P1149, The partnership net income for 20x5 was reported to be P19,500. The capital accounts of the partners should be increased (decreased) by: a. RR, P(6,540); PP, P(6,540) c. RR, P(6,960); PP, P 6540 PP,P 3,000 d. RR, P(6,750): PP, Pl 6,750) (Acapted) JJand KK are partners sharing profits 60% and 40% respectively. The average profits for the past two years are to be capitalized at 20% per year (for purposes of admitting a new partner) in determining the aggregate capital of JJ and KK, after adjusting the profits for the following iterns omitted from the books: Omissions at Year-End 205 tb Prepaid Expense . P1400 Accrued Expense 1,200 Deferred income PL AD Acctued Income 1000 Other pertinent information are as follows: 20x5 20% Net income of partnership .... - Capital accounts, end of the year: WW. KK P14,400 P13,400 45,400 54000 45,000 55,000 The aggregate capital of JJ and KK after at 20% per annum is: a. 67,765 c. 69,000 b. 72,105 d. 71,000 (PhilCPA) capitalizing the average profits Partnership 23 48. MM,NN and OO partners, share profit: 33 PP acrnitfedinto te perth Profits on a 5:3:2ratio, On January 1, 20x6, C the ership with a 10% share in profits. The old partners continue to participate in profits in their orignal ratio. Ee For the year 20xé, the net income of the partnership was reported as P12,500. However, it was discovered that the following items were omitted in the firm's books: Unrecorded at yearend 20x5 20x65 Prepaid expense... 800 Accrued expense P600 Uneamed income «. 700 Accruedincome 500 (1) The new profit and loss ratio for N, and (2) the share of partner OO in the 20x6 net income: a. (1) 30%; (2) P2,214 c. (1) 27%; (2) P2,286 b. (1) 27%; (2) P2.214 d. (1) 30%; (2) P2,286 (PhilCPA) 49. A,B, and C are partners in an accounting firm: Their capital account balances at year-end were A P90,000; B P110,000 and C P50,000. They share profits and losses on a 4:4:2 ratio, after the following special terms: 1. Partner C is to receive a bonus of 10% of net income after the bonus. Interests of 10% shall be paid on that portion of a partner's capital in excess of P100,000. 3. Salaries of P10,000 and P12,000 shall be paid to partners A & C respeciively. 2. Assuming a net income of P44,000 for the year, the total profit share of Partner C was: a. P 7,800 cc P19,400 b. 16,800 d. —19'800 (PhiICPA) 50. X, Y and Z, a partnership formed on January 1, 20x5 had the following initial investments: x - P100,000 Y “ 150,000 z a 225,000 The partnership agreement states that profits and losses are to be shared equally by the partners after consideration is made for the following: the. Salaries allowed to partners: P60,000 for X, P-48,000 for Y and 36,000 for Z. -— Average partner's capital balances during the year shall be allowed 10%. Ze Chapter Additional information: = On June 30, 20x5 X invested an additional P60,000 - Z withdrew P70,000 from the partnership on September 30, 20x5, — Share in the remaining partnership profit was P5,000 for each partner. - The. total partnership capital on December 31, 20x5 was: a. —P405,000 c. P480,000 , b. 671,500 d. 672,750 (Philcpa) 51 X and Y are in partnership, sharing profits equally and preparing their accounts to 31 December each year. On 1 July 20xS, Z joined in the partnership, and from that date profits are shared X 40%, Y 40%, and Z 20%, In the year ended 31 December 20x5. profits were: 6 months to 31 June 20x5 ... 200,000 6 months to 31 December 20xS 300,000 Itwas agreed that X and Y only should bear equally the expense for a bad debt of P40,000 written-off in the six months,to 31 December 20xsS in arriving at the P300,000 profit, Which of the following correctly states X's profit share for the year? a. P216,000 c. — P220,000 b. 200,000 d. 224,000 (ACCA) 52. S$ and T are in partnership and prepare their accounts to 31 December each year. On 1 July 20x5, U joined the partnership. Profit sharing arrangements are: 6 months to 6 months to 31 30 June 20x5 December 20x5 Salary Ss P15,000 P25,000 Share of balance in profit $ 60% 40% T 40% 40% U 20% The partnership profit for the year ended 31 December 20x5 was P350,000 accruing evenly over the year. What ar : res for the year ended 31 Gepenbor vial cre the partners’ total profit shal a= Soe Tee U a. P196,000 P124,000 b. 217,000 108,000 F000 ¢. 155,000 130,000 65.000 a. 175,000 145,000 35,000 (acca) Partnership i 53. AA and BB entered into a partnership as of March 1, 20x5 by investing P125,000 and P75,000, respectively. They agreed that AA, as the managing partner, was to receive a salary of P30,000 per year and a bonus computed at 10% of the net profit after adjustment for the salary; the balance of the profit was to be distributed in the ratio of their original capital balances. On December 31, 20x5, account balances were as follows: 70,000 Accounts payable . P go.000 1 Accol : 67,000 AA, capital 1000 Fumiture and fixtures. 45,000 BB, capital 75,000 Sales return 5,000 AA, drawing ( 20,000) Purchase: 196,000 BB, drawing .. (30,000) Operating expense: 000 Sales... 000 Inventories on December 31, 20x5 were as follows: supplies, P2,500, merchandise, P73,000. Prepaid insurance was P950 while accrued expenses were P1,550. Depreciation rate was 20% per year. The paiiners' capital balances on December 31, 20x5, after closing the net profit and drawing accounts, were: AA BB AA B a. P135,940 P47,960 c. P139,680 P 48,680 b. — P139,540 P49,860 d.— P142,350 47,670 (PhiiCPA) 54. There and Craig are partners. Their current profit and loss ratios (70/30) are being changed to (60/40). The partners decide to adjust their capital accounts at the date of the change in the profit and loss ratios to reflect the difference between market value and book value of assets and liabilities. At the date of the change, land has a market value of P259,000 ‘and a book value of P120,000. How much will Craig's capital account be adjusted at the date of the change in.the profit and loss ratios? ‘a. P52,000increase cc. P52,000 decrease b. P13,000 increase d. P13,000 decrease 55, James and Bruce are pariners. They have shared profits and losses 70/30 jor several years. The partnership profit allocation agreement is currently being modified to 60/40. At the date of the change, the partners choose fo revalue assets with market value different from book value. One asset revalued is a building with a book value of P370,000 and a morket value Of P520,000. One year atter the profit and loss ratio is changed the building is sold for P650,000. What is the amount of change to Bruce's capital account at the date the building is revalued? a. 105,000 c. P-45,000 b. P-91,000 d. 39,000 26 Chapter 1 ame information in No. 55, what is the amount of change jo Bruce's capital account at the date the building is sold? a. 2 1,000 c. —P39,000 b. —P78,000 d. P52,000 56. Using the s items 57 and 58 are based on the following information: — | 57. Johnson and Pritchard are partners. They are changing the profit and loss ratios from the current 60/40 to 70/30. At the date of the change, vacant land owned by the partnership has a book value of P50,000 and a market value of P60,000. The partners choose to prepare an itemized list of assets with market values different from book values. If the land is sold in the future for P80,000, how much of the gain will be assigned to Johnson? a. P18,000 c. P21,000 b, — P20,000 d. —P27,000 58. If the land Is sold in the future for P80,000, how much of the gain will be assigned to Pritchard? a. P9,000 cc. P12,000 b. 10,000 d. P13,000 59. Karen and Andrea are currently changing their partnership profit and loss ratios from 75/25 to 60/40. They have created a list of assets that have market and book value differences. One of the assets is a building witha P300,000 market value and P200,000 book value. Two years after changing the profit and loss ratios, the building is sold for P380,000. How much of the profit is allocated to Karen? a. P 108,000 c. P135,000 b. —P123,000 d. —P183,000 60. Eric and Phillip have been partners for several years. During that time they have shared profits and losses (60/40). They are currently revising the profit and loss ratios to (70/30). Eric and Phillip decide to adjust the capital accounts at the date of the change to reflect the difference between market value and book value of assets and liabilities. At the date of the change, the partnership owns a. building with a book value of P350/ and a market value of P600,000. How much will Eric’s capital account be adjusted at the date of the change in the profit and loss ratios? a. P25,000 Increase c. P25,000 decrease b. _P50,000 increase d. P50,000 decrease Partnership Assignment of Interest to a Third Party: 61. Capital balances and profit and loss sharing ratios of the partners in the BIG Entertainment Gallery are as follows: Betty, capital (50%) P'140,000 Iggy, capital (or : 160,000 rabby, capital (20%) 100,000 Total .. P-400,000 Betty needs money and agrees to assign half of her interest in the partnership to Yessi for P90.000 cash. Yessir pays directly o Betty. Yessr does nef become a partner. What is the total capital of the BIG Partnership immediately after the assignment of the interest to Yessir? a. —P310,000 c. P490,000 b. 200,000 d. 400,000 (Adapted) 62. Jenna is about to purchase some of Cynthia's partnership interest. Cynthia currently has partnership equity of P84,500. If Jenna pays Cynthia P30,000 for 30 percent of her capital, what amount will be recorded in the partnership accounting records? i nti Seo debit a. 30,000 credit P2. b. P25,350credit 25,350 debit c. P30,000 credit P30,000 debit d. 25,350 debit P25,350 credit Partnership Dissolution: Admission of a New Partner — Purchase or Investment 63. Presented below is the condensed balance sheet of the partnership of KK. LL and MM who share profits and losses in the ratio of 6:3:1, respectively: Cash... P 85,000 Liabilities P 80,000 Other assets 415,000 KK, capital... 252,000 LL, capital 126,000 MM, capital .. 42,000 Total ..... Total ... The partner agree to sell NN 20% of their respective capital and profit and loss interests for a tofal payment of P90,000. The payment by NN is to be made directly to the individual partners. The capital balances of KK, LL. and MM, respectively after admission of NN are: a. 198,000; —-P.99,000: 33,000. bb. 201,600; P100,800; ——P33,600. c. 216,000: + P108,000; ——-P36,000. dd. P255,600; —-P127,800; ——-P42,600. (AICPA) 28 64, 65. 66. 67. Chapter | ing the same information in No. 58, assuming that implied goo. reveuetion of asset) is to be recorded prior to the acquisifion-oy or Capitals of Kk, LL, and MM, respectively after admission of NN are: G. P198,000; P_ 99,000; P33,000 c. —P216,000; P108,000; P36,099 ‘B. _ P201,600; P100,800; P: d. P255,600; P127,800; P42\609 XX, Y¥. and ZZ are partners who share profits and losses in the ra respectively. They agree to sell a 25% of their respective capital Gnd losses ratio for a total payment direcily to the partners int tio of 5:3. Nd profits ‘ ° he $f'1140,000.00 They agree that goodwill orrevaluation of assets of Pas ont B10 be recorded prior to admission of AA. The condensed balance sho of the XYZ partnership is as follows: P 60,000 Liabilities... P100,000 540,000 XX, Capital 250,000 YY, Capital . 150,000 72, Capital: 100,000: 600,000 ‘Total... 600,000 The capital of XX, YY and ZZ respectively after the payment and admission of AA are: a. P187,500; P112,500; and P75,000 c. P280,000; P168,00t nd P112,000 b. P210,000; P126,000; and P84,000 d. P250,000; P150, nd P100,000 On June 30, 20x5, the balance sheet of Western Marketing, a partnership, is summarized as follows Sundry assets P150,000 West, capital 30,000 Tem, capital 60,000 West and Tern share profit and losses at a 60:40 ratio, respectively. They agreed to take in Cuba as a new partner, who purchases 1/8 interest of West and Tern for P25,000. What is the amount of Cuba's capital to be taken up in the partnership books if book value method is used? a. P12,500

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