Partnership Formation and Operations

1. As of July 1, 2012, FF and GG decided to form a partnership. Their balance sheets on this date are as
follows:
FF

GG

Cash.
Accounts Receivable
Merchandise Inventory.
Machinery and Equipment
Total.

15,000
540,000

37,500
225,000
202,500
270,000
735,000

Accounts Payable .
FF, Capital.
GG, Capital

135,000
570,000

150,000
705,000

705,000

240,000
495,000
735,000

The partners agreed that the machinery and equipment of FF is underdepreciated by 15,000 and that of
GG by 45,000. Allowance for doubtful accounts is to be set up amounting to 120,000 for FF and 45,000
for GG. The partnership agreement provides for a profit and loss ratio and capital interest of 60% to FF
and 40% to GG. How much cash must FF invest to bring the partners capital balances to their profit and
loss ratio?
a. 142,500

c. 172,500

b.52,500

d. 102,500

2. CC admits DD as a partner in business. Accounts in the ledger for CC on November 30, 2012 just
before the admission of DD, show the following balances:
Cash.. 6,800
Accounts Receivable.... 14,200
Merchandise Inventory 20,000
Accounts Payable.. ... 8,000
CC, Capital.. 33,000
It is agreed that for purposes of establishing CCs interest, the following adjustments shall be made:
(a) An allowance for doubtful accounts of 3% of accounts receivable is to be established.
(b) The merchandise inventory is to be valued at 23,000
(c) Prepaid salary expenses of 600 and accrued rent expense of 800 are to be recognized.
DD is to invest sufficient cash to obtain a 1/3 interest in the partnership.
Compute for: (1) CCs adjusted capital balance before the admission of DD; and (2) the amount of cash
investment by DD:

a. (1) 35,347; (2) 11,971

c. (1) 35,374; (2) 17,687

b. (1) 36,374; (2) 18,487

d. (1) 28,174; (2) 14,087

3. MM, NN and OO are partners with capital balances on December 31, 2012 of 300,000, 300,000 and
200,000, 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 50,000 and a note for the balance of OOs interest. The
equipment are carried on the books at 65,000. Brand new equipment may cost 80,000. Compute for: (1)
OOs acquisition of the secondhand equipment will result to a reduction in capital; (2) the value of the
note that OO will get from the partnerships liquidation.
a. (1) 15,000 each for MM and NN

(2) 150,000

b. (1) 5,000 each for MM, NN and OO

(2) 145,000

c. (1) 5,000 each for MM, NN and OO

(2) 195,000

d. (1) 7,500 each for MM and NN

(2) 145,000

4. AA and DD created a partnership to own and operate a health food store. The partnership agreement
provided that AA receive a salary of 10,000 and DD a salary of 5,000 to recognize their relative time
spent in operating the store. Remaining profits and losses were divided 60:40 to AA and DD, respectively.
Income for 2012, the first year of operations, of 13,000 was allocated 8,800 to AA and 4,200 to DD.
On January 1, 2013, the partnership agreement was changed to reflect the fact that DD could no longer
devote any time to the stores operations. The new agreement allows AA a salary of 18,000 and the
remaining profits and losses are divided equally. In 2013, an error was discovered such that the 2012
reported income was understated by 4,000. The partnership income of 25,000 for 2013 included the 4,000
related to year 2012.
In the reported net income of 25,000 for the year 2013. AA and DD would have:
AA

DD

a.

21,900

3,100

b.

17,100

17,100

AA

DD

c.

d.

12,500

12,500

5. The partnership of DD and BB was formed and commenced operations on March 1, 2011, with DD
contributing 30,000 cash and BB investing cash of 10,000 and equipment with an agreed upon valuation
of 20,000. On July 1, 2011, BB invested an additional 10,000 in the partnership, DD made a capital
withdrawal of 4,000 on May2, 2011 but reinvested the 4,000 on October 1, 2011. During 2011, DD
withdrew 800 per month and BB, the managing partner, withdrew 1,000 per month. These drawings were
charged to salary expense. A preclosing trial balance taken at December 31, 2011 is as follows:

Debit

Credit

Cash
9,000
Receivablesnet..15,000
Equipmentnet50,000
Other Assets...
19,000
Liabilities
17,000
DD, Capital.
30,000
BB, Capital.
40,000
Service Revenue..
50,000
Supplies Expense
17,000
Utilities Expense.
4,000
Salaries to partners
18,000
Other miscellaneous expenses.
5,000
Compute for the share of DD and BB in the partnership net income assuming monthly salary allowances
800 and 1,000 for DD and BB, respectively; interest allowance at a 12% annual rate on average capital
balances; and remaining profits allocated equally.
a. DD, 10,520; BB, 13,480

c. DD, 10,800; BB, 13,200

b. DD, 12,000; BB, 12,000

d. DD, 10,600; BB, 13,400

6. WW and RR share profits and losses equally. WW and RR receive salary allowances of 20,000 and
30,000 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 were not used in determining the average
capital balances. Total net income for 2011 is 120,000.
WW
January 1 Capital Balances 100,000
Yearly drawings (1,500 a month) 18,000
Permanent withdrawals of Capital:
June 3 (12,000)
May 2
Additional investments of capital:
July 3 40,000
October 2..

RR
120,000
18,000

(15,000)

50,000

What is the weighted average capital for WW and RR respectively for 2011?
a.110,667 and 11,583

c. 100,000 and 120,000

b.105,333 and 126,667

d. 126,667 and 105,333

7. AA and BB formed a partnership in 2012 and made the following investments and capital withdrawals
during the year:
AA

BB

Investment
30,000

March 1
June 1...
August 1... 20,000
December.

Draws

Investment
20,000

10,000

Draws
10,000
2,000

5,000

The partnerships profit and loss agreement provides for a salary of which 30,000 was paid to each
partner for 2012. 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 remaining profits are to be allocated equally among the partners.
Assuming net income of 60,000 before salaries and bonus, determine how the income would be allocated
among the partners.
a. AA, 31,138; BB, 28,862

c. AA, 30,633; BB, 29,367

b. AA, 33,537; BB, 26,463

d. AA, 30,684; BB, 29,316

8. HH, MM and AA formed a partnership on January 1, 2011, and contributed 150,000, 200,000, and
250,000 respectively. Their articles of copartnership provide that the operating income be shared among
the partners as follows: as salary, 24,000 for HH, 18,000 for MM and 12,000 for AA; interest of 12% on
the average capital during 2011 of the three partners ; and the remainder in the ratio of 2:4:4 respectively.
The operating income for the year ending December 31, 2011 amounted to 176,000. HH contributed
additional capital of 30,000 on July 1and made a drawing of 10,000 on October 1; MM contributed
additional capital of 20,000 on August 1and made a drawing of 10,000 on October 1; and, AA made a
drawing of 30,000 on November 1.
The partners capital balances on December 31, 2011 are:
a. HH, 179,680 ; MM, 229, 360 ; and, AA, 239, 360
b. HH, 179,760 ; MM, 229, 520 ; and, AA, 239, 520
c. HH, 189, 680 ; MM, 239, 360 ; and, AA, 269, 360
d. HH, 223,180 ; MM, 272, 060 ; and, AA, 280, 760

Theories
1. The following statements are true with respect to the characteristic elements of a partnership except:
a. Partnership is consensual because it is perfected by the express or implied agreement of two or more
persons.
b. Partnership is innominate because the partners may determine their firm name.
c. Partnership is onerous because each of the parties aspires to procure for himself a benefit through the
giving of something.
d. Partnership is commutative because the undertaking of each of the partner is considered as the
equivalent of that of the other partners.

e. None of the above

2. Which of the following laws generally govern partnership transactions in the Philippines?
a. Civil Code of the Philippines, Articles 1167 1867
b. Batas Pambansa Blg. 68
c. Civil Code of the Philippines, Articles 1767 1867
d. Batas Pambansa Blg. 1167
e. Batas Pambansa Blg. 1767
3. A limited partner may contribute:
a. money

c. industry

b. property

d. all of the above

4. Which of the following is true regarding distribution of profits and losses in a partnership?
a. The industrial partner shall receive a share in the profits, which must be satisfied first before the
capitalist partners shall divide the profits, as may be just and equitable under the circumstances.
b. The losses and profits shall be distributed not in conformity with the agreement in case capital
contributions are well defined.
c. Distribution of losses will be in proportion to the time spent in managing the partnership in case there is
no stipulation in the contract and if there is also no profitsharing agreement.
d. All of the above
5. Which of the following statements is incorrect?
a. Every partner may associate another person with him in his share in the partnership.
b. The associate may be admitted into the partnership even without the consent of all the other partners,
provided that the partner having an associate is the managing partner.
c. Every partner may associate another person with him in his share in the partnership and such associate
is often referred as a subpartner.
d. The associate may not be admitted into the partnership without the consent of all the other partners,
even if the partner having an associate is the managing partner.
6. Which should not hold true in a limited partnership?
a. A limited partnership is formed by compliance with the statutory requirements.
b. One or more general partners control the business and are personally liable to creditors.
c. The partnership debts are paid out of the common fund and the individual properties of the general
partners.

d. One or more purely limited partners contribute to the capital and share in the profits and participate in
the management of the business.