PARTNERSHIP FORMATION

Problem 1
KK and AA decided to combine their businesses and form a partnership. Below are their statements of financial position before the
formation:

KK AA
Cash 2,048,400 1,098,360
Accounts receivable 1,031,960 2,498,716
Inventories 528,160 1,144,448
Property and equipment – net 613,380 852,224
Other assets 8,800 15,840
Total assets 4,230,700 5,609,588

Accounts payable 787,336 1,072,060

Notes payable 1,000,000 -
Mortgage payable - 1,440,000
KK, capital 2,443,364 -
AA, capital - 3,097,528
Total liabilities and equity 4,230,700 5,609,588
The partners agreed that the property and equipment of KK is over-depreciated by 80,000 and that of AA is under-depreciated by
200,000. Accounts receivable of 140,000 in KK’s book and 108,000 in AA’s book are uncollectible. The partnership decided to assume
the mortgage liability of AA but not the note payable of KK. The partnership agreement provides for a profit and loss ratio of
60% to KK and 40% to AA.
1. How much is the initial capital balance of KK upon formation, based on actual contributions?
2. How much is the total assets of the partnership upon formation?
3. Assume that KK and AA decided to make their capital ratio conform to their profit/loss ratio. Under the bonus method, which of the
following statement is correct?
a. Total capital balance should decrease by 320,371.20
b. Total capital balance should increase by 320,371.20
c. The adjustment should include a debit to KK’s capital of 320,371.20
d. AA’ capital balance should decrease by 320,371.20
4. Assume that KK and AA decided to make their capital ratio conform to their profit/loss ratio, and that AA is willing to invest/withdraw
sufficient cash in the process, which of the following statements is incorrect?
a. KK’s capital balance is the same before and after adjustment
b. AA’s capital balance will decrease by 533,952
c. The total capital balance of the partnership neither increase nor decrease
d. The total capital balance of the partnership after adjustment is 5,638,940

Problem 2
On January 1, 2021, PP and YY, close friends, agreed to form a partnership to engage in the buying and selling of gift products in
Baguio City. PP, who owns an existing business, is to invest the assets and transfer the liabilities of his business, and further agreed to
contribute sufficient cash to bring his capital balance to 420,000, which is 70% of the total capital of the partnership. Details regarding
the book values of PP’s business assets and liabilities and their corresponding fair values are:

Book Values Fair Values

Accounts receivable (net) 107,600 106,000
Inventory 196,800 214,000
Equipment 51,600 68,000
Notes payable 112,000 112,000
YY agrees to invest cash of 84,000 and an equipment that is to be measured at current market price.
1. What is the amount of cash to be invested by PP?
2. What is the value of the equipment to be invested by YY?

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