COURSE: BC ACCTG 2 – ACCOUNTING FOR PARTNERSHIP &

CORPORATION
MODULE NO. 1
MODULE TITLE: PARTNERSHIP FORMATION
FACULTY: MINERVA O. CRUZ

I OUTLINE-BCACCTG 2-ACCOUNTING FOR PARTNERSHIP AND

CORPORATION:

Part 1-ACCOUNTING FOR PARTNERSHIP

A Formation
B Operations
C Changes in Partnership Ownership
1. Admission of New Partner
a. By purchase of interest
b. By investment of cash or non-cash assets
into the partnership
2. Retirement or Withdrawal of a partner
3. Death of a partner
D Partnership Liquidation in Total

Part 2-ACCOUNTING FOR CORPORATION

A Formation and Share Capital Transactions

B Transactions Subsequent to Formation
1. Accounting for Delinquent Subscription
2. Closing Entries For Corporation
3. Accounting For Dividends
a. Cash Dividend
b. Scrip Dividend
c. Share Dividend/Bonus Issue
d. Property Dividend
e. Liquidating Dividend
4. Appropriation of Retained Earnings
5. Treasury Shares
C Book Value per Share/Earnings per share
Part 1-Accounting for Partnership:

A Formation

1. Definition/Nature of Partnership:

A partnership is a contract of two or more persons who

contribute money, property or industry to a common fund with the
intention of dividing the profits among themselves.

2. Basic Features/Characteristics/Elements of a contract of

partnership:
a. Voluntary agreement among partners to become
partners as no person can be compelled against his
will to become a partner hence a contract of
partnership is perfected by mere consent or upon
express or implied agreement of two or more partners.
b. Mutual contribution of money, property or industry to
a common fund. Each partner must either
contribute money, property or industry/service to a
partnership firm otherwise there can be no
partnership created or formed.
c. Co-ownership of property-All assets contributed by the
partners become the common property of all partners.
No partner owns any particular piece of partnership
property.
d. Mutual Agency-Each partner acts as agent for the other
partners and his acts is binding to the partnership as
long as this is within the scope of partnership
business.
e. Unlimited liability-Each partner is held personally
liable for all the debts of the partnership firm. If
partnership assets are not sufficient to cover
payments to partnership creditors, the personal
assets of the partners may be used.
f. Limited life-The legal life of the partnership terminates
with the admission of a new partner, death, bankruptcy
or withdrawal of any partner.
g. Division of profits among partners-The primary
purpose of partnership is to earn profits and to
divides the same among the partners in conformity
with the terms of the partnership agreement.
3. Legal Formation of Partnership: A partnership can be constituted
or perfected in any form (oral or written form) except where
immovable property or real rights are contributed thereto or when
the partnership capital is at least P3,000 in which case it should
appear in a public instrument called the articles of co-partnership
which contain the following information among others:

a. name of the partnership

b. names, citizenship and residences of the partners
c. effective date of the contract
d. nature of the business, purpose and principal office of the
business
e. capital of the partnership, contributions of individual
partners, their description and agreed values
f. rights and duties of each of the partners
g. provisions for additional investments and withdrawals
h. manner in which profits or losses are to be shared
i. manner of keeping the books of accounts
j. procedures of dissolving the partnership
k. provision for arbitration in case of disputes

4. Kinds of Partners:
A As to nature:
1. capitalist partner-one who contributes money or
property into the partnership.
2. industrial partner-one who contributes only his
industry or service into the partnership.
3. capitalist-industrial partner-one who contributes
money or property as well as his service into the
partnership.
B As to liability:
1. general partner-one whose liability to partnership
creditors extends to his personal separate property.
2. limited partner-one whose liability is limited to his
capital contributions.
C As to their interest in or obligations to the business
1. managing partner-one who manages the affairs of the
business
2. secret partner-one who is not known by 3’rd parties to
be a partner in the business but takes active part in the
business
3. silent partner-one who does not take active part in the
business but is known by 3’rd parties to be a partner in
the business.
4. dormant partner-one who does not take active part in
the business and is not known by 3’rd parties to be a
partner.
 5. ostensible partner-one who takes active part and
known to the public as a partner in the business
whether or not he has an actual interest in the firm.
5. Classification of Partnership:
As to Liability:
1. General Partnership-is one in which all partners are
general partners and as such the liability of the
partners to the partnership extend to their personal
separate property.

2. Limited Partnership- one which is composed of one or

more general partners and one or more limited
partners.

As to Object:
1. A universal partnership of all present property is that
in which the partners contribute all the property which
actually belongs to them to a common fund, with the
intention of dividing the same among themselves, as
well as all the profits which they may acquire
therewith.
2. A universal partnership of profits comprises all that the
partners may acquire by their industry or work during
the existence of the partnership.
3. A particular partnership has for its object determinate
things, their use or fruits, or a specific undertaking or
the exercise of a profession or vocation.

As to duration:
1. A partnership at will is one in which no time or period
is specified for its existence an is not formed for a
particular undertaking or venture.
2. A partnership with a fixed term is one in which the
term for which the partnership will exist is fixed or
agreed upon.

As to purpose:
1. A commercial or trading partnership is organized to
undertake business transactions such as
merchandising or manufacturing transactions.
2. A professional partnership is formed for the practice on
a profession such as auditing firm, law firm, medical
clinic and similar professions.
6. Accounting Proper for Partnership:
Most of the day to day accounting or the accounting
procedures for partnership is similar or the same with that
of a sole proprietorship even the chart of account engaged in the
same line of business can be adopted en toto without alteration
except the capital and the drawing account. Because in a
partnership there is plurality of capital and drawing accounts.
There are as many capital and drawing accounts as there are
partners. It is only in the area of formation that transactions
peculiar to a partnership will arise. Hence our discussion for
today and in the succeeding meetings would be confined to
partnership formation.

Illustrative Activity 1: Partners comprising the partnership are all new

in business or engage in business for the first time.

Assume that D, E and F organized a partnership with the following

investments/contributions:

D
Cash of P4,000,000
Equipment costing P800,000 but with accumulated
depreciation of P300,000 and a fair value of P450,000.
E
Land and building with appraised value of P5,000,000
and P3,000,000, respectively but with an existing
mortgage on the land and building amounting to
P2,000,000 which is to be assumed by the partnership.

F
is admitted as an industrial partner with a 20% share
in profits and the remaining 80% will be divided
equally between D and E.

Required:
1. Who are the capitalist partners and the industrial partner,
respectively?
2. For how much will the capital of D, E and F be credited at the time
of formation?
3. What entry is made to take up the investments of D, E and F ?
4. How much is the total assets of the partnership right after
formation?
5. How much is the net assets of the partnership at the time of
formation if the mortgage payable is assumed by the
partnership?
 6. What if in the above, the mortgage payable existing on the land
and building is not to be assumed by the partnership, for how
much will the capital of E be credited?
7. How much is the total assets of the partnership right after
formation if the mortgage payable is not assumed by the
partnership?
8. How much is the net assets of the partnership at the time of
formation if the mortgage payable is not assumed by the
partnership?
9. What entry is made to take up the investment of D, E assuming
the mortgage payable is not assumed by the partnership?

Suggested answers:
1. Capitalist partners-D and E; F is an industrial partner.
2. Capital credit of D, E and F, respectively:
D E F
Cash 4,000,000
Equipment at fair value 450,000
Land at appraised value 5,000,000
Building at appraised 3,000,000
value
Mortgage payable
assumed (2,000,000)
by the partnership
Since F is an industrial partner none
Capital credit 4,450,000 6,000,000 none
3. Entry to take up the investments of D, E and F:
Cash 4,000,000
Equipment 450,000
*
Land 5,000,000*
Building 3,000,000*
Mortgage payable 2,000,000
D, Capital 4,450,000
E, Capital 6,000,000

F is admitted as a partner with a

20% share in the partnership
profits(memorandum entry only)

*Non-cash assets recognized in the books either at its fair value

amount or appraised value. Book value or carrying amount is
ignored for purposes of determining the actual capital credit
granted to partners.
4. Total assets of the partnership after formation (assuming
mortgage payable of E is assumed)

Cash 4,000,000
Equipment 450,000
Land 5,000,000
Building 3,000,000
Total assets of the partnership 12,450,000

5. Net assets of the partnership after formation (assuming mortgage

payable of E is assumed)-same as the capital credit granted to
partners:
D (4,000,000+450,000) 4,450,000
E(5,000,000+3,000,000=8,000,000-2,000,000) 6,000,000
F-industrial partner none
Total net assets(12,450,000-2,000,000) 10,450,000

6. Capital credit granted to E if the mortgage payable is not

assumed: (5,000,000, land +3,000,000, building)=8,000,000
7. Total partnership
assets=(4,000,000cash+450,000equipment+5,000,000,land
&3,000,000, building)=12,450,000
8. Net assets of the partnership(D,
4,450,000+E,8,000,000+F,0)=12,450,000
9. Entry to take up the investments of D, E and F:
Cash 4,000,000
Equipment 450,000*
Land 5,000,000*
Building 3,000,000*
D, Capital 4,450,000
E, Capital 8,000,000

F is admitted as a partner with a

20% share in the partnership
profits(memorandum entry only)
Illustrative Activity 2: Partners comprising the partnership have
businesses of their own before they decided to form a partnership
with other partners:

On September 30, 2023, KC and JC, CPAs decided to form a partnership

wherein they will participate in the profits in the ratio of 40% and 60%,
respectively. Prior to formation the following balances are available for KC
and JC.
KC
Assets:
Cash 612,500
Accounts Receivable 2,800,000
Less Allow for UA 700,000 2,100,000
Merchandise Inventory 600,000
Equipment 875,000
Less Accumulated Depreciation 87,500 787,500
Total Assets 4,100,000
Less Liabilities:
Accounts Payable 1,400,000
KC, Capital 2,700,000

JC
Assets:
Cash 652,500
Accounts Receivable 1,050,000
Less: Allowance for uncollectible accounts105,000 945,000
Merchandise Inventory 750,000
Equipment 1,575,000
Less Accumulated Depreciation 472,500 1,102,500
Total Assets 3,450,000
Less Liabilities:
Accounts Payable 315,000
Notes Payable 700,000 1,015,000
JC, Capital 2,435,000

The partners agreed to the following adjustments in their respective

books:
 The accounts receivable of both parties are estimated to be 80%
collectible/realizable.
 The merchandise inventory of KC and JC should be valued at
P500,000 and P800,000, respectively.
 The equipment of KC is 20% depreciated while the fair value of the
equipment of JC is P1,260,000.
 Prepaid expenses of P25,000 and accrued expenses of P42,500 are to
be taken up in the books of KC.
 Interest is to be accrued on the notes payable of JC. The note was
issued on June 30, 2021 and bears an annual interest rate of 10%.
  The new capital of the partnership is based on the adjusted capital of
JC and that KC may either withdraw or contribute additional cash in
order to bring the partner’s capital balances proportionate to their
profits or loss ratio.

Required:
1. Net adjustment to the capital of KC. Indicate whether debit or
credit.
2. Adjusted capital of KC.
3. Net adjustment to the capital of JC. Indicate whether debit or
credit.
4. Adjusted capital of JC.
5. Total partnership capital immediately after formation but before
the cash investment or withdrawal to bring the adjusted capital
of the partners proportionate to the profit and loss ratio of 40%
to KC and 60% to JC.
6. Total partnership capital immediately after formation and after
the cash investment or withdrawal of the partners to bring their
respective capital balances proportionate to the profit and loss
ratio of 40% to KC and 60% to JC.
7. What is the desired capital balance of KC to bring his adjusted
capital but before cash investment/withdrawal proportionate to
the profit and loss ratio
8. Cash contribution or withdrawal on the part of KC to bring his
adjusted capital proportionate to the profit and loss ratio.
9. Total partnership liabilities immediately after formation
10.Total partnership assets immediately after formation and after
the cash investment or withdrawal on the part of KC.
11.Journal entries to adjust and close the respective books of
accounts of the partners assuming a new set of books is used.
12.Journal entries to record the investments of the partners (to
record the opening entries or to open the accounts of the new
concern) in the new set of books of accounts.
13.Prepare a consolidated statement of financial position as of
September 30, 2023 immediately after formation or after giving
effect to the above adjustments.

As far as this type of partnership formation is concerned (where one or

more or all of the partners are already in business or where the partner
has already an existing business) the partners have 2 options to choose
form and the option selected will serve as a guide on how to address this
type of partnership formation problem or situation:

Option 1: Old set of books of books of either KC or JC will be retained in

use:
Should KC and JC form a partnership they have to decide whether the old
set of books of either KC or JC will be adopted by the partnership or will a
new set of books be used.

Should the partnership decide to retain the old set of books of KC, the old
set of books of JC will be adjusted to conform with the fair value amounts
or values agreed upon, whichever value is clearly determinable, and
closed afterwards and the net assets as adjusted is transferred to the old
set of books of KC.

On the other hand, KC’s books will be adjusted to conform with the fair
value amounts or values agreed upon, whichever value is clearly
determinable but there is no need to close the old set of books of account
of KC since they will be retained in use.

Summary of Accounting Procedures if KC’s old set of books is retained in

use:
Old set of books of JC:
1. Adjust the old set of books of JC (preparation of adjusting entries to
bring the book valuation in agreement with values agreed upon by
the partners(fair value amounts)
2. Close the old set of books of JC (preparation of closing entries to
bring the book balances to. zero balances)
Old set of books of KC:
1. Adjust the old set of books of KC (preparation of adjusting entries to
bring the book valuation in agreement with values agreed upon by
the partners (fair value amounts).
2. Note there is no need to close the old set of books of KC considering
that this will be continued to be used by the new concern.
3. Open the accounts of JC as adjusted in the old set of books of KC
(preparation of opening entries for JC/investment entry=net assets
contributed) Note, no need to open the accounts of KC. Considering
his accounts were not closed at all.

Should the partnership decide to retain the old set of books of JC, the old
set of books of KC will be adjusted to conform with the fair value amounts
or values agreed upon, whichever value is clearly determinable, and
closed afterwards and the net assets as adjusted is transferred to the old
set of books of JC.

On the other hand, JC’s books will be adjusted to conform with the fair
value amounts or values agreed upon, whichever value is clearly
determinable but there is no need to close the old set of books of account
of JC since they will be retained in use.

Summary of Accounting Procedures if JC’s old set of books is retained in

use:
Old set of books of KC:
 1. Adjust the old set of books of KC (preparation of adjusting entries to
bring the book valuation in agreement with values agreed upon by
the partners(fair value amounts)
2. Close the old set of books of KC (preparation of closing entries to
bring the book balances to. zero balances)
Old set of books of JC:
1. Adjust the old set of books of JC (preparation of adjusting entries to
bring the book valuation in agreement with values agreed upon by
the partners (fair value amounts).
2. Note there is no need to close the old set of books of JC considering
that this will be continued to be used by the new concern.
3. Open the accounts of KC as adjusted in the old set of books of JC
(preparation of opening entries for KC/investment entry=net assets
contributed) Note, no need to open the accounts of JC considering his
accounts were not closed at all.

Option 2: A new set of books will be used:

Should the partnership decide to use a new set of books of accounts, the old
set of books of KC and JC will be adjusted and closed and the net assets as
adjusted transferred or set up in the new set of books of account. All
accounts will be transferred with the exception of the accumulated
depreciation account because the property, plant and equipment will be
carried over in the new set of books of accounts at carrying amount,
because this will now serve as the new cost basis or to have a fresh start.

Summary of Accounting Procedures if a new set of books will be used:

Old set of books of KC:

1. Adjust the old set of books of KC (preparation of adjusting entries to
bring the book valuation in agreement with values agreed upon by
the partners(fair value amounts)
2. Close the old set of books of KC (preparation of closing entries to
bring the book balances to. zero balances)

Old set of books of JC:

1. Adjust the old set of books of JC (preparation of adjusting entries to
bring the book valuation in agreement with values agreed upon by
the partners(fair value amounts)
2. Close the old set of books of JC (preparation of closing entries to
bring the book balances to. zero balances)

New set of Books :

1. Open the accounts of KC as adjusted in the new set of books
(preparation of opening entries for KC/investment entry=net assets
contributed)
2. Open the accounts of JC as adjusted in the new set of books
(preparation of opening entries for JC/investment entry=net assets
contributed)
Take note that option 1 was only presented for discussion purposes but
will no longer be illustrated since BIR require the books of accounts to be
registered before its actual use by the new concern hence a new set of
books will be used/assumed in all case scenarios:

Suggested answers:
1. Net adjustment to the capital of KC. Indicate whether debit or
credit=net debit of 65,000
Adjustments on the books of KC:
Agreed Book valuation Adjustment
valuation/Fair
value
Accounts receivable 2,240,000 2,100,000 140,000 increase
Merchandise inventory 500,000 600,000 (100,000) decrease
Equipment 700,000 787,500 (87,500) decrease
Prepaid expenses 25,000 none 25,000 increase
Accrued expenses 42,500 none 42,500 increase
Supporting computations:
1. Agreed valuation for AR of KC is( 80% realizable=2,800,000
gross amountx80%)2,240,000
2. Book valuation =2,800,000 gross minus allowance for doubtful
accounts of,700,000=2,100,000
3. Agreed valuation of equipment=80%(100%-20%depreciated) of
gross amount of 875,000=700,000
4. Book valuation of equipment=875,000-87,500=787,500
Net adjustment to the capital of KC
1. Increase of 140,000 in the AR account (A) is debited hence capital is
credited
2. Decrease of 100,000 in the inventory account (A) is credited hence
capital is debited.
3. Decrease of 87,500 in the equipment account (A) is credited hence
capital is debited.
4. Increase of 25,000 in the prepaid expenses account (A) is debited
hence capital is credited.
5. Increase of 42,500 in the accrued expenses (L) is credited hence
capital is debited
The above adjustments is summarized as follows:
KC, Capital
1) 140,000
2)
100,000
3) 87,500
4) 25,000
5) 42,500

Net adj-debit
65,000

2. Adjusted capital of KC=2,635,000

 KC, Capital
Bal before adj
2,700,000
Net adj-debit 65,000

Adjusted capital
2,635,000

3. Net adjustment to the capital of JC. Indicate whether debit or

credit=net credit of 85,0000
Adjustments in the books of JC:
Agreed Book valuation Adjustment
valuation/Fair
value
Accounts receivable 840,000 945,000 (105,000) decrease
Merchandise inventory 800,000 750,000 50,000 increase
Equipment 1,260,000 1,102,500 157,500 increase
Interest payable 17,500 0 17,500 increase
Supporting computations:
1. Agreed valuation of AR=80% of gross amount of 1,050,000=840,000
2. Book valuation of AR=1,050,000-105,000=945,000
3. Book valuation of equipment=1,575,000-472,500=1,102,500
4. Interest to be accrued on notes payable of 700,000 for six months at
10% interest=700,000x10%x3/12(from 6/30-9/30=3
months)=17,500
Net adjustment to the capital of JC:
1. Decrease of 105,000 in the AR account (A) is credited hence capital
is debited
2. Increase of 50,000 in the inventory account (A) is debited hence
capital is credited.
3. Increase of 157,500 in the equipment account (A) is debited hence
capital is credited.
4. Increase of 17,500 in the interest payable account (L) is credited
hence capital is debited.
Net adjustment to JC capital summarized as follows:
KC, Capital
1)
105,000
2)
50,000
3)
157,500
4)
17,500

Net adj-credit of 85,000

4. Adjusted capital of JC=2,520,000

KC, Capital
2,435,000
 Net adj-credit of 85,000

Adjusted capital of 2,520,000

5. Total partnership capital immediately after formation but before

the cash investment or withdrawal to bring the adjusted capital
of the partners proportionate to the profit and loss ratio of 40%
to KC and 60% to JC.
TPC immediately after formation but before cash
investment/withdrawal=KCC+JCC=2,635,000+2,520,000=
5,155,0000

6. Total partnership capital immediately after formation and after

the cash investment or withdrawal of the partners to bring their
respective capital balances proportionate to the profit and loss
ratio of 40% to KC and 60% to JC.
TPC=KCC+JCC
TPC=40% of TPC (KCC)+2,520,000
TPC-40% of TPC+2,520,000
60%TPC=2,520,000
TPC=2,520,000/60%=4,200,000

7. What is the desired capital balance of KC to bring his adjusted

capital but before cash investment/withdrawal proportionate to
the profit and loss ratio
Desired capital of KC=40%x4,200,000=1,680,000

8. Cash contribution or withdrawal on the part of KC to bring his

adjusted capital proportionate to the profit and loss ratio.
Desired capital, 1,680,000-adjusted capital of
KC,2,635,000=(955,000) cash withdrawal

9. Total partnership liabilities immediately after formation=

Total partnership liabilities:
KC JC Total
Accounts payable 1,400,000 315,000 1,715,000
Notes payable 700,000 700,000
Accrued expenses 42,500 42,500
Interest payable 17,500 17,500
Total part liabilities 2,475,000

10.Total partnership assets immediately after formation and after

the cash investment or withdrawal on the part of KC.
TPA=TPL+TPC
TPA=2,475,000+4,200,000=6,675,000

11.Journal entries to adjust and close the respective books of

accounts of the partners assuming a new set of books is used.
 Adjusting and Closing entries on the old set of books of KC
Net adjustment to the capital of KC
1. Increase of 140,000 in the AR account (A) is debited hence capital is
credited
2. Decrease of 100,000 in the inventory account (A) is credited hence
capital is debited.
3. Decrease of 87,500 in the equipment account (A) is credited hence
capital is debited.
4. Increase of 25,000 in the prepaid expenses account (A) is debited
hence capital is credited.
5. Increase of 42,500 in the accrued expenses (L) is credited hence
capital is debited

Old set of books of KC:

Adjusting Entries
Allowance for DA 140,000
Prepaid Expenses 25,000
KC, Capital 65,000
Merchandise Inventory 100,000
Accumulated depreciation 87,500
Accrued expenses payable 42,500

Closing Entries
Allowance for DA(700,000-140,000) 560,000
Accumulated depreciation(87,500+87,500) 175,000
Accounts payable 1,400,000
Accrued expenses payable 42,500
KC, Capital (balancing figure) 2,635,000
Cash 612,500
Accounts receivable 2,800,000
Merchandise inventory(600,000- 500,000
100,000)
Prepaid expenses (0+25,000) 25,000
Equipment 875,000

Adjusting and Closing entries on the old set of books of JC

Net adjustment to the capital of JC:

1. Decrease of 105,000 in the AR account (A) is credited hence capital
is debited
2. Increase of 50,000 in the inventory account (A) is debited hence
capital is credited.
3. Increase of 157,500 in the equipment account (A) is debited hence
capital is credited.
4. Increase of 17,500 in the interest payable account (L) is credited
hence capital is debited
 Adjusting Entries
Merchandise inventory 50,000
Accumulated depreciation 157,500
Allowance for DA 105,000
Interest payable 17,500
JC, Capital-balancing figure 85,000

Closing Entries
Allowance for DA(105,000+105,000) 210,000
Accumulated depreciation472,500-157,500) 315,000
Accounts payable 315,000
Notes payable 700,000
Interest payable 17,500
KC, Capital (balancing figure) 2,520.000
Cash 652,500
Accounts receivable 1,050,000
Merchandise inventory(750,000+50,000) 800,000
Equipment 1,575,000

12.Opening entries to be made on the new set of books of account

Opening Entries
Cash 612,500
Accounts receivable 2,800,000
Merchandise inventory(600,000-100,000) 500,000
Prepaid expenses (0+25,000) 25,000
Equipment ,net 700,000
Allowance for DA 560,000
Accounts payable 1,400,000
Accrued expenses payable 42,500
KC, Capital 2,635,000
To open the accounts of KC

Cash 652,500
Accounts receivable 1,050,000
Merchandise inventory(750,000+50,000) 800,000
Equipment, net 1,260,000
 Allowance for DA 210,000
Accounts payable 315,000
Notes payable 700,000
Interest payable 17,500
JC, Capital 2,520,000
To open the accounts of JC

KC, Capital 955,000

Cash 955,000

.
13.Prepare a consolidated statement of financial position as of
September 30, 2023 immediately after formation or after giving
effect to the above adjustments.

Consolidated Statement of Financial Position:

KC and JC
Statement of Financial Position
As of September 30, 2023

Assets
Current Assets:
Cash P310,000
Accounts Receivable 3,850,000
Less: Allowance for uncollectible accounts 770,000 3,080,000
Merchandise Inventory 1,300,000
Prepaid Expenses 25,000
Total Current Assets 4,715,000
Non-Current Assets:
Equipment, net 1,960,000
Total Assets 6,675,000
Liabilities and Partners’ Equity
Current Liabilities:
Accounts Payable P1,715,000
Notes Payable 700,000
Accrued Expenses Payable 60,000
Total Liabilities 2,475,000
Partners’ Equity
KC, Capital 1,680,000
JC, Capital 2,520,000
Total Partners’ Equity 4,200,000
Total Liabilities and Partners’ Equity 6,675,000

Supporting computations:
Cash=612,500+652,500-955,000=310,000
AR=2,800,000+1,050,000=3,850,000
Allow for UA=560,000+210,000=770,000
MI=500,000+800,000=1,300,000
Equipment=700,000+1,260,000=1,960,000
 AP=1,400,000+315,000=1,715,000
NP=700,000
AEP=42,500+17,500=60,000

Additional explanation on the preparation of adjusting entries:

Supporting computations to come up with the adjustments to be

made on the books of KC:

Balance before Agreed

Accounts adjustment/book valuation./Fair Adjustment*
valuation valuation/adju
sted /desired
balance
Accounts Receivable 2,100,0000 2,240,000 Increase of 140,000 in AR (A) is recognized as
a debit o allowance for uncollectible account
Merchandise Inventory 600,000 500,000 Decrease of 100,000 in MI (A) is recognized
as a credit to merchandise inventory
Equipment 787,500 700,000 Decrease of 87,500 in. Equipment (A) is
recognized as a credit to accumulated
depreciation
Prepaid Expenses 0 25,000 Increase of 25,000 in prepaid expenses(A) is
recognized as a debit to prepaid expenses
Accrued Expenses 0 42,500 Increase of 42,500 in accrued expenses (L) is
recognized as a credit to accrued expenses
payable

Book valuation:
Accounts receivable=gross amount-allowance=2,800,000-700,000=2,100,000
Merchandise inventory,600,000
Equipment=cost minus accumulated depreciation=875,000-87,500=787,500
Prepaid expenses=0
Accrued expenses=0

Agreed Valuation/Fair valuation/Desired/Adjusted Balance:

Accounts receivable is 80% realizable or collectible meaning the amortized cost or net
realizable amount=80% of the gross amount of 2,800,000=2,240,000
Merchandise inventory of KC should be valued at 500,000
Equipment of KC is 20% depreciated hence the carrying amount of the equipment is 80%
of cost of 875,000=700,000 or the accumulated depreciation after adjustment
should be 20% of cost of 875,000=175,000 and then deduct this amount from
875,000 to arrive at the agreed valuation of 700,000.
Prepaid expenses of 25,000 is recognized/taken up in the books of KC
Accrued expenses of 42,500 is recognized/taken up. in the books of KC.

Old Set of Books of KC:

Adjusting Entries:
1) Allowance for uncollectible accounts 140,000
KC, Capital 140,000
#
 The debit to allowance for uncollectible accounts is already explained in the above
proposed adjustment, but why is capital credited because if accounts receivable is
understated in the past it means that previous bad debts expense is overstated.
Overstating bad debts expense will cause the net income to be understated so it
follows that capital is likewise understated hence capital is credited or the ff.
justification is given for the above adjustment:

The increase in AR is recorded as a debit to AR since AR is an asset account

but adjustment is not made directly to the asset account but to the valuation
account hence the debit is made to allowance for uncollectible accounts and
the corresponding credit is made to KC, Capital as shown above. But why is the
credit made to capital because in the past the provision for uncollectible
accounts is overstated hence net income is understated so it follows capital is
also understated.

*At present the accounts receivable of KC is only 75% collectible/realizable

(2,100,000/2,800,000=75%) hence the receivable’s realizable value should be
increased to P2,240,000 (80% x 2,800,000=2,240,000) After adjustment
the balance of allowance for uncollectible accounts is 560,000 (balance before
adjustment of 700,000 credit minus the debit to allowance for 140,000=560,000)
so accounts receivable balance of 2,800,000 minus allowance for uncollectible
accounts as adjusted of 560,000=2,240,000)
(2,240,000/2,800,000=80%realizable/collectible as desired)

2) KC, Capital 100,000

Merchandise Inventory 100,000
#

The credit to merchandise inventory is already explained in the above proposed

adjustment, but why is capital debited because inventory is overstated in the past
it means cost of goods sold is understated resulting to overstatement of net
income hence it follows that capital is also overstated or the ff. justification is
given for the above adjustment.

The decrease in inventory is recorded as a credit to merchandise inventory

since inventory is an asset account and the corresponding debit is made to KC,
Capital as shown above. But why is the debit made to KC, Capital because in
the past merchandise inventory is overstated hence cost of goods sold is
understated and net income is overstated so it follows that capital is also
overstated. After adjustment the balance of merchandise inventory is
P500,000 (600,000 debit balance minus the credit to merchandise inventory
for 100,000 for the adjustment=500,000 as desired)

3) KC, Capital 87,500

Accumulated Depreciation 87,500
#

The credit to accumulated depreciated is already explained in the above proposed

adjustment, but why is capital debited because equipment is overstated in the past
meaning the depreciation in the past is understated hence net income is
overstated and likewise capital is overstated or the ff. justification is given for the
above adjustment:

The decrease in equipment is recorded as a credit to equipment since

equipment is an asset however th ecredit is not made directly to the
equipment account but to the valuation account and the corresponding debit
is made to KC, Capital as shown above. But why is the capital debited because
in the past the equipment’s depreciation is understated hence net income is
overstated so it follows the capital is also overstated.
 *At present the equipment’s carrying amount is 90% of the equipment ‘s cost
(787,500/875,000=90%) hence the equipment is 10% depreciated only (100-
90%) so the equipment’s carrying amount should be brought to 80% of cost (100-
20%)(875,000 x 80%=700,000) as provided. After adjustment the balance of
accumulated depreciation is 175,000 (balance before adjustment of 87,500 credit
plus credit of 87,500 for the adjustment=175,000) (175,000/875,000 cost is
exactly 20% depreciated as desired)

4) Prepaid expenses 25,000

KC, Capital 25,000
#
The debit to prepaid expenses is already explained in the above proposed
adjustment for non-recognition of prepaid expenses in the past causing the
expenses to be overstated and net income to be understated so it follows that
capital is also understated or the ff. justification is given for the above adjustment:

The increase in prepaid expense is recorded as a debit to prepaid expenses since

prepaid expense is an asset account and the corresponding credit is KC, Capital.
But why the capital? Because in the past expenses is overstated hence net income
is understated so it follows that the capital is also understated.

5) KC, Capital 42,500

Accrued expenses payable 42,500
#

The credit to accrued expenses payable is already explained in the above

proposed adjustment for non-recognition of accrued expenses in the past causing
the expenses to be understated and net income to be overstated so it follows that
capital is also overstated or the ff. justification is given for the above adjustment.

The increase in accrued expenses payable is recorded as a credit to accrued

expenses payable since accrued expenses payable is a liability and the
corresponding debit is made to KC, Capital. But why the capital? Because in the
past expenses are understated for failure to record accrued/unrecorded expenses
hence net income is overstated so it follows that the capital is overstated.

Or a compound adjusting entry is made as follows:

Allowance for uncollectible accounts 140,000

Prepaid Expenses 25,000
KC, Capital=balancing figure 65,000
Merchandise Inventory 100,000
Accumulated Depreciation 87,500
Accrued Expenses Payable 42,500
#
So the balancing figure is either a debit or a credit to KC, Capital but since total
debit is 165,000 while total credit is 230,000, the difference of 65,000 is
recorded as a debit to the capital of KC in order to balance the entry or the net
adjustment to the capital can also be determined as follows:

Total debit to capital=100,000+87,500+42,500=230,000

Total credit to capital=140,000+25,000=165,000
Net adjustment to KC’s capital=230,000 debit minus 165,000
credit=65,000 debit
 To determine the adjusted capital of KC after giving effect to the above
adjustment=KC, capital before adjustment (credit) of 2,700,000 minus
debit adjustment to capital of 65,000=adjusted capital of KC of 2,635,000

Old Set of Books of KC:

Closing Entries

Allowance for uncollectible accounts=700,000-140,000= 560,000

Accumulated depreciation=87,500+87,500= 175,000
Accounts payable 1,400,000
Accrued expenses=0+42,500= 42,500
KC, Capital=balancing figure/adjusted capital of 2,635,000
Cash 612,500
Accounts receivable 2,800,000
Merchandise Inventory=600,000-100,000= 500,000
Prepaid Expenses=0+25,000= 25,000
Equipment 875,000
To close the account balances.
Adjusted Capital of KC=2,700,000 credit minus debit of 65,000=2,635,000 credit

In addition to the above opening entries, the following entry is made to take up the
withdrawal or contribution of cash by KC to bring his adjusted capital proportionate to
the profit and loss ratio of 40% to KC and 60% to JC using the adjusted capital of
JC as the base. Since it is KC who is supposed to withdraw or contribute cash, JC’s
capital represents already 60% of total partnership capital hence total partnership
capital is 4,200,000 (2,520,000/60%). To get the desired capital of KC get 40% of total
partnership capital of 4,200,000 and this will amount to 1,680,000 . To get the cash
withdrawal or cash contribution, 2,635,000 adjusted capital before cash
withdrawal or cash contribution minus 1,680,000 which is 40% of total
partnership capital =955,000 cash withdrawal since the desired capital is smaller.

1. Entries to adjust and close the books of JC:

Supporting computations to come up with the adjustments to be

made in the books of JC:

Balance before Agreed

Accounts adjustment/book valuation./Fair Adjustment*
valuation valuation/adju
sted /desired
balance
Accounts Receivable 945,000 840,000 Decrease of 105,000 in AR (A) is recognized
as a credit to allowance for uncollectible
account
Merchandise Inventory 750,000 800,000 Increase of 50,000 in MI (A) is recognized as
a debit to merchandise inventory
Equipment 1,102,500 1,260,000 Increase of 157,500 in Equipment (A) is
recognized as a debit to accumulated
depreciation
Accrued Expenses/ 0 17,500 Increase of 17,500 in accrued
Interest Payable expenses/interest payable (L) is recognized
 as a credit to accrued expenses
payable/interest payable

Book valuation:
Accounts receivable=gross amount-allowance=1,050,000-105,000=945,000
Merchandise inventory,750,000
Equipment=cost minus accumulated depreciation=1,575,000-472,500=1,102,500
Accrued expenses=0

Agreed Valuation/Fair valuation/Desired/Adjusted Balance:

Accounts receivable is 80% realizable or collectible meaning the amortized cost or net
realizable amount=80% of the gross amount of 1,050,000=840,000
Merchandise inventory of KC should be valued at 800,000
Equipment of JC has a fair value of 1,260,000
Accrued expenses/Interest is to be accrued on the notes payable of JC. The note was issued
on June 30, 2021 and bears an annual interest rate of 10%(I=700,000x.10x3/12
(from 6/30-9/30)=17,500

Old Set of Books of JC:

Adjusting Entries:
1) JC, Capital 105,000
Allowance for uncollectible accounts 105,000

#
The credit to allowance for uncollectible accounts is already explained in the
above proposed adjustment, but why is capital debited because accounts
receivable is overstated in the past it means that previous bad debts expense is
understated. Understating bad debts expense will cause the net income to be
overstated so it follows that capital is likewise overstated hence capital is debited
or the ff. justification. Is given for the above adjustment.

The decrease in AR is recorded as a credit to AR since AR is an asset account but

the adjustment to AR is not made directly to the AR account but to the valuation
account hence the credit is made to allowance for uncollectible accounts and the
corresponding debit is made to JC, Capital as shown above. But why is the debit
made to capital because in the past the provision for uncollectible accounts is
understated hence net income is overstated so it follows capital is also
overstated.

*At present the accounts receivable of JC is 90% collectible/realizable

(945,000/1,050,000=90%) hence the receivable’s realizable value should be
adjusted to P840,000 (80% x 1,050,000=840,000) After adjustment the balance
of allowance for uncollectible accounts is 210,000 (credit balance before
adjustment of 105,000 plus credit to allowance for uncollectible accounts of
105,000 for the adjustment =210,000) so accounts receivable balance of 1,050,000
minus allowance for uncollectible accounts as adjusted of 210,000=840,000)
(840,000/1,050,000=80%realizable/collectible as desired)

1. Merchandise Inventory 50,000

JC, Capital 50,000
#

The debit to merchandise inventory is already explained in the above proposed

adjustment, but why is capital debited because inventory is understated in the
past it means that cost of goods sold is overstated resulting to understatement of
net income hence it follows that capital is also understated or the ff. justification is
made for the above adjustment.
 The increase in inventory is recorded as a debit to merchandise inventory since
inventory is an asset account and the corresponding credit is made to JC, Capital
as shown above. But why is the credit made to JC, Capital because in the past
merchandise inventory is understated hence cost of goods sold is overstated and
net income is understated so it follows that capital is also understated. After
adjustment the balance of merchandise inventory is P800,000 (750,000 debit
balance plus the debit to merchandise inventory for the adjustment of
P50,000=800,000 as desired)

2. Accumulated Depreciation 157,500

JC, Capital 157,500
#

The debit to accumulated depreciated is already explained in the above proposed

adjustment, but why is capital credited because equipment is understated in the
past meaning the depreciation in the past is overstated hence net income is
understated and likewise capital is understated or the ff. justification is made for
the above adjustment.

The increase in the equipment account is recorded as a debit since the equipment
is an asset account however the debit is not made directly to the equipment
account but to the valuation account entitled accumulated depreciation and the
corresponding credit is made to JC, Capital as shown above. But why is the capital
credited because in the past the equipment’s depreciation is overstated hence net
income is understated so it follows the capital is also understated.

*At present the equipment’s carrying amount is 1,102,500 (1,575,000-472,500) so

the equipment’s carrying amount should be brought to 1,260,000 which is its fair
value amount at the time of formation hence the equipment should be increased
by 157,500 hence debited via accumulated depreciation and the corresponding
credit is made to JC, Capital. After adjustment the balance of accumulated
depreciation is 315,000 (balance before adjustment of 472,500 credit minus the
adjustment of 157,500 debit=315,000 credit) (1,575,000-315,000=1,260,000
carrying amount as desired)

3. JC, Capital 17,500

Accrued expenses payable/Interest payable 17,500
#

The credit to accrued expenses payable or interest payable is already explained in

the above proposed adjustment for non-recognition of accrued expenses in the
past causing the expenses to be understated and net income to be overstated so it
follows that capital is also overstated.

The increase in accrued expense payable is recorded as a credit since accrued

expense payable is a liability and the corresponding debit is made to JC Capital as
shown above. But why to capital? Because in the past interest expense is
understated since the interest remain unrecorded for the amount of 17,500
(700,000 x .10 x 3/12 from June 30-Sept 30, the date of formation) hence net
income is overstated so it follows that capital is also overstated.

Or a compound adjusting entry is made as follows:

 Merchandise Inventory 50,000
Accumulated Depreciation 157,500
Allow for uncollectible accts 105,000
Accrued Expenses Payable 17,500
JC, Capital 85,000
#
The balancing figure is either a debit or a credit to JC, Capital but since total debit
is 207,500 while total credit is 122,500 hence the difference of 85,000 is
recorded as a credit to the capital of JC to balance the debits with the credits or
the net adjustment to the capital can also be determined as follows:
JC, Capital
105,000 debit 50,000 credit
17,500 debit 157,500 credit
122,500 total debit 207,500 credit

So the net adjustment to the capital account of JC is a credit of 85,000. After the
adjustment to capital is posted to JC, Capital, JC’s adjusted capital will now amount
to P2,520,000 (2,435,000 credit balance before adjustment +85,000 net credit
adjustment to capital =2,520,000)

Total debit to capital=105,000+17,500=122,500

Total credit to capital=50,000+157,500=207,500
Net adjustment to JC’s capital=207,500 credit minus 122,500 debit=net
credit to JC capital of 85,000
To determine the adjusted capital of JC after giving effect to the above
adjustment=JC, capital before adjustment (credit) of 2,435,000
plus credit adjustment to capital of 85,000=adjusted capital of
JC of 2,520,000.

Based on the above discussion, do the following activities:

Activity 1 A and B decided to form a partnership on October 1, 2020. Their statement

of financial position on this date were:
A B
Cash 262,500 656,250
Accounts receivable 5,950,000 3,587,500
Merchandise inventory 3,500,000 3,543,750
Equipment 2,625,000 5,075,000
Total 12,337,500 12,862,500

Accounts payable 1,837,500 4,637,500

A, Capital 10,500,000
B, Capital ______________ 8,225,000
Total 12,337,500 12,862,500

They agreed to the following adjustments:

1. The equipment of A is under-depreciated by P350,000 while that of B is over-
depreciated by 525,000.
2. Allowance for doubtful .accounts is to be set up in the amount of 1,190,000 for
A and 787,500 for B.
3. Inventories of 87,500 and 61,250 are worthless in A and B’s books,
respectively,
4. The partnership agreement provides for a profit and loss ratio of 70% to A and
30% to B.

Required: Determine the following:

1. How much is the net adjustment to A’s Capital?
2. How much is the adjusted capital of A?
 3. How much is the net adjustment to B’s Capital?
4. How much is the adjusted capital of B?
5. Assuming A will invest or withdraw cash to bring the capital balances
proportionate to their profit and loss ratio, how much is the cash investment or
withdrawal of A using B’s adjusted capital as the base.?
6. Assuming B will invest or withdraw cash to bring the capital balances
proportionate to their profit and loss ratio, how much is the cash investment or
withdrawal of B using A’s adjusted capital as the base?
7. Using the transfer of capital method, how much is the desired or agreed capital of
A to bring the capital balances proportionate to their profit and loss ratio ?
8. Using the transfer of capital method, by how much will the capital of B be debited
or credited to bring the capital balances proportionate to their profit or loss ratio?

Activity 2 On January 1, 2023 C and B agreed to form a partnership. The following

are their assets and liabilities.
Accounts C B
Cash 136,000 76,000
Accounts receivable 88,000 48,000
Inventories 304,000 364,000
Machinery 480,000 440,000
Accounts payable 216,000 144,000
Notes payable 140,000 60,000
Capital 652,000 724,000

C decided to pay off his notes payable with his personal assets. It was also agreed
that B’s inventories were overstated by P24,000 and C’s machinery was over-
depreciated by P20,000. B is to invest/withdraw cash in order to receive a capital
credit that is 20% more than C’s total net investment in the partnership.

Required: Determine the following:

1. How much is C’s capital after the above adjustments?
2. How much is B’s capital after the above adjustments?
3. How much is the cash investment/withdrawal of B in order to give him a capital
credit that is 20% more than the net investment of C in the partnership?

Activity 3 On December 1, 2023, Mega and Sha are combining their separate
businesses to form a partnership. Cash and non-cash assets are to be contributed.
The non-cash assets to be contributed and the liabilities to be assumed are as
follows:
Mega Sha
Carrying Carrying
amount Fair Value amount Fair Value
Accounts receivable 250,000 262,500 200,000 195,000
Inventory 400,000 450,000 200,000 207,500
Property & equipment 1,000,000 912,500 862,500 822,500
Accounts payable 150,000 150,000 112,500 112,500

Mega and Sha are to invest equal amounts of cash such that the contributions of
Mega would be 10% more than the investment of Sha.

Required: Determine the following:

1. Net adjustment to Mega’s Capital. Indicate whether debit or credit.
2. Adjusted capital of Mega.
3. Net adjustment to Sha’s Capital. Indicate whether debit or credit.
4. Adjusted capital of Sha.
5. Cash investment on the part of Mega.
6. Desired Capital of Mega
 7. Desired Capital of Sha
8. Amount of cash to be shown/presented on the partnership statement of financial
position as of December 1, 2023.
9. Total partnership assets
10. Total partnership liabilities
11. Total partnership capital

Activity 4 As of February 1, 2023, H and J decided to form a partnership. Their

statement of financial position on this date are as follows:
H J
Cash 41,000 53,500
Accounts receivable 425,000 280,000
Merchandise inventory - 242,500
Property, plant & equipment 360,000 470,000
Total 826,000 1,046,000

Accounts payable 150.000 320,000

H, Capital 676,000
J, Capital ___________ 726,000
Total 826,000 1,046,000

The partners agreed that the property, plant and equipment of H and J were
overvalued by P35,000 and P60,000, respectively. An allowance for uncollectible
accounts of 150,000 and 80,000 shall be recognized in the books of H and J,
respectively.

The capital contribution of each partner is the net amount of the assets
contributed to and liabilities taken over by the partnership.

Required:
1. Adjusted capital of H.
2. Adjusted capital of J.
3. What would be the total partners’ equity immediately after the formation of the
partnership?
4. How much cash should H invest if the partnership agreement provides for capital
balances to be proportionate to profit and loss sharing ratio of 3:2 to H and J,
respectively using the adjusted capital of J as the base.
5. How much should J invest/withdraw to bring the capital balances proportionate
to the profit and loss ratio of 3:2 using H capital as the base.

Activity 5 On August 1, 2023, Rey admits Laura for an interest in his business. On this
date, Rey’s capital account shows a balance of P245,000. The terms and agreement
of the partners before formation follow:
 Rey’s outstanding accounts receivable were P100,000 with related allowance for
uncollectible accounts of P5,000. An assessment of collectability of the receivables
indicates that 80% of the balance is collectible.
 The credit balance of P6,000 in the unearned interest account in the books of Rey
represents interest collected in advance for six months starting on June 1, 2021. Of
this amount, P2,000 has already been earned as of August 1, 2021.
 A count of supplies revealed unused supplies approximating P8,000 which were
not recognized in the books of Rey since the entire amount of supplies purchased
during the year were charged to supplies expense.
 Inventory valuation of Rey should be increased by P25,000.
  Equipment account of Rey should be depreciated by an additional P15,000.
 Laura is to invest cash equal to one third of the total partnership capital. The new
capital is based on the adjusted capital of Rey, which means that Rey’s adjusted
capital represents two thirds of the total partnership capital.

Required:
1. What is the adjusted balance of the unearned interest account in the books of Rey
after giving effect to the above information?
2. What is the amortized cost of accounts receivable invested by Rey?
3. What is Rey’s adjusted capital after giving effect to the above information?
4. What is the total partners’ equity immediately after the formation of the
partnership?
5. How much did Laura invest in the partnership?

Activity 6 On April 1, 2023, A and B agreed to invest equal amounts and share
profits and losses equally in a partnership. A invested cash of P200,000 and
equipment worth P600,000. B will also invest a total of P800,000 including
cash and the agreed values as shown below:
Investment of B
Carrying
amount Fair Value
Accounts receivable 300,000 300,000
Allowance for uncollectible accounts (30,000) (40,000)
Inventory 80,000 100,000
Equipmment 180,000 300,000
Accumulated depreciation (60,000) -
Accounts payable 180,000 180,000

Required:

1. How much cash should B invest to bring his capital to the desired amount of
P800,000?
2. Assuming that the partnership would not assume the accounts payable of B, how
much cash should B invest to bring his capital to the desired amount of P800,000?
What if ?
3. If B would invest cash of P420,000 in addition to the foregoing non-cash assets and
that the partnership would assume the accounts payable of B, how much cash
should A invest in addition to the above equipment, if he would receive a 55%
equity in the partnership?
4. If A would invest cash of P200,000 and equipment worth P600,000 as stated
above, how much cash should B invest in addition to the foregoing non-cash assets
but assume further that his accounts payable would no longer be assumed by the
partnership if he would receive a capital credit equal to 60% of the total
partnership capital?

Activity 7 J and K formed a partnership on October 1, 2023 with the following

investments:

J K
Cash 875,000
Land 7,875,000
Equipment 4,375,000

J and K agreed to divide profits and losses in the ratio of 60:40,

respectively and to assume the mortgage payable amounting to P3,500,000 on the
land invested by K.
Required: Determine the following:
1. Capital credit to J and K, respectively at the time of formation.
2. Capital credit to K assuming that K will continue to personally settle the mortgage
payable related to the land that he invested?

Activity 8 B admits K as a partner in his business. Accounts in the ledger of B on

December 31, 2023, immediately before the admission of K show the following
balances:
Cash 455,000
Accounts receivable 735,000
Merchandise inventory 840,000
Accounts payable 455,000
B, Capital 1,575,000

It is agreed that for purposes of establishing B’s interest , the ff. adjustments
should be made:
 An allowance for uncollectible accounts of 2% of accounts receivable
should be established.
 The merchandise inventory is to be valued at P875,000 and
 Prepaid expenses of P43,750 and accrued expenses of P11,550 should be
recognized.

K is to invest sufficient cash to obtain a 1/3 interest in the partnership. The

partnership will use a new set of books.

Required: Determine the following:

1. Net adjustment to B’s Capital. . Indicate whether debit or credit
2. Adjusted Capital of B.
3. Cash investment on the part of K to give him a 1/3 interest in the partnership.
4. Total partnership assets immediately after formation.
5. Total partnership liabilities immediately after formation
6. Total partnership capital immediately after formation.

Activity 9 The statement of financial position of I Company, a single proprietorship

on December 31, 2023 is shown below.
On this date, I Co. admits G and the latter is to invest cash to give him a
capital credit equal to one fourth (1/4) of I’s capital after giving effect to the
adjustments of the ff. items:

 The merchandise inventory is to be valued at P612,500.

 The accounts receivable is estimated to be 95% collectible.
 The recoverable amount/fair value of property, plant and equipment is
estimated to be P280,000.
Assets
Cash 630,000
Accounts Receivable 1,680,000
Less Allowance for uncollectible accounts 70,000 1,610,000
Merchandise Inventory 560,000
Property, Plant and Equipment 420,000
Less Accumulated Depreciation 35,000. 385,000
Total Assets 3,185,000
 Liabilities and Capital
Accounts Payable 980,000
I, Capital 2,205,000
Total Liabilities and Capital 3,185,000

Required: Determine the following:

1. Net adjustment to I’s Capital. Indicate whether debit or credit.
2. Adjusted capital of I.
3. How much is the cash investment of G to give him a capital credit equal to ¼ of
I’s capital after giving effect to the above adjustments?
4. Total partnership assets immediately after formation.
5. Total partnership liabilities immediately after formation.
6. Total partnership capital immediately after formation.

Activity 10 On July 1, 2023, B and C decide to form a partnership with B transferring

his net assets and C contributing cash to bring his equity proportionate to a 30%
share in profits and losses. The ff. are the business assets and liabilities of B,
immediately before the formation of the partnership.
Cash 96,000
Accounts receivable 240,000
Allowance for doubtful accounts (40,000)
Inventory 600,000
Prepaid expenses 12,000
Furniture and equipment 480,000
Accumulated depreciation (96,000)
Accounts payable 306,000
Notes payable 200,000
B, Capital 786,000

The agreement provides for adjustments in the net assets of B as follows:

 Included in B’s accounts receivable is P20,000 account considered
worthless and should be written off. The allowance for doubtful accounts
shall be adjusted to 10% of remaining accounts receivable after the write
off of worthless account amounting to P20,000.
 Inventories should be valued at P640,000.
 Furniture and equipment is 30% depreciated.
 Prepaid expenses represent supplies of which P9,000 remained unused as
of July 1, 2023.
 Included in the notes payable account is a P160,000, 12%, one year bank
loan issued on June 1, 2023 No interest has been accrued as of July 1, 2023.
 All liabilities of B will be assumed by the partnership.

Required: Determine the following:

1. How much is the net adjustment to B’s Capital. Indicate whether debit or
credit.
2. How much is the adjusted capital of B?
3. How much cash should C invest in the partnership to bring his equity
proportionate to the profit and loss ratio of 70% to B and 30% to C.
4. How much is the total partnership assets immediately after its formation?
5. How much is the total partnership liabilities immediately after its formation?
6. Assume that B and C will share profits and losses equally and that their capital
balances be in accordance with this ratio. How much cash should C invest,?
7. In relation to No. 6, how is total partnership capital?
8. In relation to No. 6, how much is total partnership assets?
Activity 11 A and B are combining their businesses to form a partnership .The non-
cash assets to be contributed and the liabilities to be assumed are:
A B

Carrying Carrying
Amount Fair Value Amount Fair Value
Accounts Receivable 100,000 80,000 200,000 100,000
Inventory 400,000 480,000 320,000 300,000
Building & Equipment 800,000 1,400,000 - -
Accounts Payable 560,000 560,000 80,000 80,000
A and B are to contribute cash or withdraw cash to bring their respective capital to
P1,200,000 each.

Based on the above. Information, answer the ff. requirements:

1. How much should A invest or withdraw to bring his capital to. the desired amount
of P1,200,000.
2. How much should B invest or withdraw to bring his capital to the desired amount
of P1,200,000.
3. What if in the above, A is to invest or withdraw cash to bring his equity/capital
proportionate to the profit and. loss ratio of 80% to A and 20% to B using B’s
adjusted capital as the base, how much should A invest or withdraw? Indicate
whether invest or withdraw.
4. What if in the above, B is to invest or withdraw cash to. bring his equity/capital
proportionate to the profit and loss ratio of 80% to A and 20% to B using A’s
adjusted capital as the base, how much should B invest or withdraw? Indicate
whether invest or withdraw.
5. What if in the above, the transfer of capital method is to be used, by how much
should A Capital be debited or credited to bring his equity/capital proportionate
to the profit and loss ratio of 80% to A and 20% to B?
6. What if in the above, the transfer of capital method is to be used, by how much
should B Capital be debited or credited to bring his capital proportionate to the.
profit and loss ratio of 80% to A and 20% to B?