Chapter 1 Partnership Formation Test Banks

Chapter 1: Partnership Formation
On January 1, 2015, Ernie and Bert both sole proprietors decided to form a partnership to expand both
of their businesses. According to their agreement, they will split profits and losses 75:25 and their initial
capital will also reflect that ratio.
The following are Ernie and Berts Statement of Financial Position:
Ernie Proprietor
Statement of Financial Position
December 31, 2014
ASSETS LIABILITIES AND EQUITY
Cash 50,000 Accounts payable 65,000

Accounts Receivable 100,000 Accrued expenses 55,000
Inventories 75,000 Notes payable 80,000
Equipment 250,000 Ernie, capital 90,000
Accumulated depreciation- Equipment (185,000)
TOTAL ASSETS 290,000 TOTAL LIABILITIES&EQUITY 290,000
Bert Proprietor
Statement of Financial Position
December 31, 2014
ASSETS LIABILITIES AND EQUITY
Cash 30,000 Accounts Payable 75,000
Accounts receivable 110,000 Accrued expenses 90,000
Inventories 85,000 Notes Payable 100,000
Equipment 300,000 Bert, Capital 160,000
Accumulated Depreciation- Equipment (100,000)
TOTAL ASSETS 425,000 TOTAL LIABILITIES&EQUITY 425,000
The values reflected in the Statement of Financial Position are already at fair values except fo the
following accounts:
Ernies Accounts Receivable is now 20,000 less than what is stated in his Statement of Financial Position.
Both inventories of Ernie and Bert are now 90,000 and 70,000 respectively. Equipment for Bert has an
assessed value of 275,000, appraised value of 250,000 and book value of 200,000. Additional accrued
expenses are to be established in the amount of 10,000 for Bert only while additional accounts payable
in the amount of 5,000 for Ernie. It is also agreed that all liabilities will be assumed by the partnership,
except for the notes payable of Bert which will be personally paid by him.
1. How much is the adjusted capital balance of Bert upon formation?

A. 91,250
B. 185,000
C. 285,000
D. 310,000
Answer: ( C )
2. How much is the capital credit to Ernie upon formation?
A. 80,000
B. 273,750
C. 292,000
D. 255,500
Answer: ( B )
3. How much should Ernie invest as additional cash to be in conformity with their initial capital
agreement?
A. 193,750
B. 212,000
C. 175,500
D. 205,000
Answer: ( A )
Bonnie and Clyde enters into a partnership agreement in which Bonnie is to have 55% interest in the
partnership and 35% in the profits and losses, while Clyde will have 45% interest in the partnership and
65% in the profits and losses. Bonnie contributed the following:
Cost Fair value

Building 235,000 255,000
Equipment 168,000 156,000
Land 500,000 525,000
The building and the equipment has a mortgage of 50,000 and 35,000 respectively. Clyde is to
contribute 150,000 cash and equipment. The partners agreed that only the building mortgage will be
assumed by the partnership.
1. How much is the fair market value of the equipment which Clyde contributed?
A. 615,818
B. 989,143
C. 546,273
D. 574,909
Answer: ( D )
2. How much is the total asset of the partnership upon formation?

A. 1,892,143
B. 1,701,818
C. 1,660,909
D. 1,632,273
Answer: ( C )
Theories (letter of answer is underlined)
1 The partnership agreement is an express contract among the partners (the owners of the business).
Such an agreement generally does not include
a. A limitation on a partners liability to creditors.
b. The rights and duties of the partners.
c. The allocation of income between the partners.
d. The rights and duties of the partners in the event of partnership dissolution.
2. A partnership records a partners investment of assets in the business at

a. The market value of the assets invested.
b. A special value set by the partners.
c. The partners book value of the assets invested.
d. Any of the above, depending upon the partnership agreement.
?3. When property other than cash is invested in a partnership, at what amount should the noncash
property be credited to the contributing partners capital account?
a. Fair value at the date of recognition.
b. Contributing partners original cost.
c. Assessed valuation for property tax purposes.
d. Contributing partners tax basis.
?4. When property other than cash is invested in a partnership, at what amount should the noncash
a. Fair value at the date of contribution.
d. Contributing partners tax basis.
5. Four individuals who were previously sole proprietors form a partnership. Each partner contributes
inventory and equipment for use by the partnership. What basis should the partnership use to record
the contributed assets?
a. Inventory at the lower of FIFO cost or market.
b. Inventory at the lower of weighted-average cost or market.
c. Equipment at each proprietors carrying amount.
d. Equipment at fair value.
1. A contract where two or more persons bind themselves to contribute money, property, or industry
to a common fund with the intention of dividing the profits among themselves.
a. Voluntary Association
b. Corporation
c. Partnership
d. Sole Proprietorship
Answer: (c)
2. A partnership formed for the exercise of a profession which is duly registered is an example of:
a. Universal partnership of profits
b. Universal partnership of all present property
c. Particular partnership
d. Partnership by estoppel
Answer: (c)
3. One of the following is not a characteristic of contract of partnership.

a. Real, in that the partners must deliver their contributions in order for the partnership contract
to be perfected
b. Principal, because it can stand by itself
c. Preparatory, because it is a means by which other contracts will be entered into
d. Onerous, because the parties contribute money, property, or industry to the common fund
Answer: (a)
4. One of the following is not a requisite of a contract of partnership. Which is it?

a. There must be a valid contract
b. There must be a mutual contribution of money, property, or industry to a common fund
c. It is established for the common benefit of the partners which is to obtain profits and divide
the same among themselves
d. The articles are kept secret among members
Answer: (d)
5. The minimum capital in money or property except when immovable property or real rights
thereto are contributed, that will require the contract of partnership to be in a public instrument
and be registered with the Securities and Exchange Commission (SEC).
a. P5, 000.00
b. P10, 000.00
c. P3, 000.00
d. P30, 000.00
Answer: (c)
6. Roberts and Smith drafted a partnership agreement that lists the following assets contributed at
the partnerships formation:
Contributed by
Roberts Smith
Cash P 20,000 P 30,000
Inventory 15,000
Building 40,000
Furniture & Equipment 15,000
The building is subject to a mortgage of P 10,000, which the partnership has assumed. The
partnership agreement also specifies that profits and losses are to be distributed evenly. What
amounts should be recorded as capital for Roberts and Smith at the formation of the partnership?
Roberts Smith
a. 35,000 85,000
b. 35,000 75,000
c. 55,000 55,000
d. 60,000 60,000
Suggested Answer: (b) 35,000 & 75,000
Roberts: 20,000 + 15,000 = P35, 000 Smith: 30,000 + 15,000 + 40,000 10,000 = P75,000.
The partners capital credit is based upon the net assets contributed by the particular partner,
thus the liabilities assumed reduced the fair market value of the building invested.
7. The Grey and Redd Partnership was formed on January 2, 2010. Under the partnership
agreement, each partner has an equal initial capital balance. Partnership net income or loss is
allocated 60% to Grey and 40% to Redd. To form the partnership, Grey originally contributed
assets costing P30,000 with a fair value of P60,000 on January 2, 2010, and Redd contributed
P20,000 cash. Drawings by the partners during 2010 totaled P3, 000 by Grey an P9,000 by Redd.
The partnership net income in 2010 was P25,000
Under the goodwill method, what is Redds initial capital balance in the partnership?
a. 20,000
b. 25,000
c. 40,000
d. 60,000
Suggested Answer: (d) 60,000
Contributed Capital Agreed Capital Increase (Decrease)

Grey 60,000 60,000
Redd 20,000 60,000 40,000
Total 80,000 120,000 40,000
The partnership agreement provides for equal initial capital. Thus under the goodwill method ,
the capital credit for Redd should be the same as the contribution of Grey, thereby increasing the
total agreed capital to P120,000, which is P40,000 more than the total contributed capital
(goodwill).
8. Using the information in No. 2, under the bonus method, what is the amount of bonus?
a. 20,000 bonus to Grey
b. 20,000 bonus to Redd
c. 40,000 bonus to Grey
d. 40,000 bonus to Redd
Suggested Answer: (b) 20,000 bonus to Redd
Contributed Capital Agreed Capital Increase (Decrease)

Grey 60,000 40,000 (20,000)
Redd 20,000 40,000 20,000
Total 80,000 80,000
The partnership agreement provides for equal initial capital. Thus under the bonus method, the
capital credit for Redd should be the same as the contribution for Grey, resulting to P20,000
bonus from Grey to Redd.
9. On May 1, 2010, the business assets of John and Paul appear below:
John Paul
Cash P 11,000 P 22,354
Accounts Receivable 234,536 567,890
Inventories 120,035 260,102
Land 603,000
Building 428,267
Furniture & Fixture 50,345 34,789
Other Assets 2,000 3,600
Total P 1, 020, 916 P 1, 317, 002
Accounts Payable P 178,940 P 243,650

Notes Payable 200,000 345,000
John, Capital 641, 976
Paul, Capital\ 728,352
Total P 1, 020, 916 P1, 317, 002
John and Paul agreed to form a partnership contributing their respective assets and equities
subject to the following adjustments:
a. Accounts receivable of P20, 000 in Johns books and P35, 000 in Pauls are uncollectible.
b. Inventories of P5, 500 n P6, 700 are worthless in Johns and Pails respective books.
c. Other assets of P2, 000 and P3, 600 in Johns and Pauls respective books are to be written
off.
The capital accounts of John and Paul, respectively, after the adjustments will be:
a. 614, 476 683, 052 c. 640, 876 712, 345
b. 615, 942 717, 894 d. 613,576 683, 350
Suggested Answer: (a) 614, 476 683, 052
John: 641, 976 20, 000 5, 500 2, 000 = P 614, 476
Smith: 728, 352 35, 000 6, 700 3, 600 = P 683, 052
10. Based on No. 4, how much assets does the partnership have?
a. 2, 317, 918
b. 2, 237, 918
c. 2, 265, 118
d. 2, 365, 218
Suggested Answer: (c) 2, 265, 118

John: 1, 020, 916 20, 000 5, 500 2, 000 = P 993, 416
Smith: 1, 317, 002 35, 000 6, 700 3, 600 = P 1, 271, 702
Total: 2, 337, 918 55, 000 12, 200 5, 600 = P 2, 265, 118
Problems
1. LF, EZ, and GT are partners with capital balances of P67,200, P108,000 and P38,000 respectively,
sharing profits and losses in the ratio of 2:5:1. SG is admitted as a new partner bringing with him
expertise and is to invest cash for a 15% interest in the partnership considering the transfer of capital
from him of P18,000 upon his admission.
Upon admission of SG, which of the following statements is false?
A. The capital account of GT will be credited in the amount of P2,250

B. The total agreed capital of the old partners is P18,000 greater than their contributed capital
C. The capital balance of EZ amount to P119,250
D.Cash will be debited in the amount of P40,800.
2. On June 1, 2013, AZ invited MG to join him in his business. MG agreed provided that AZ will adjust the
accumulated depreciation of his equipment account to a certain amount, and will recognize additional
accrued expenses of P40,000. After that, MG is to invest additional pieces of equipment make her
interest equal to 45%. If the capital balances of AZ before and after adjustment were 556,00 and 484,000
respectively, what is the effect in the carrying value of the equipment as a result of the admission of
MG?
A. 364,000
B. (32,000)
C. 396,000
D. (324,000)
3. TM and SJ, having capital balances of P980,000 and P525,000 respectively, decided to admit GD
into the partnership. If TM and SJ share profit in proportion of 3;1 respectively, and SJ's capital balance
after GD's investment is P589,750, how much was invested by GD?
A. P848,750
B. P1,174,250
C. P588,000
D. P847,000
4. RD formed a partnership on February 10, 2009. R contributed cash of P150,000, while D contributed
inventory with a fair value of P120,000. Due to R's expertise in selling, D agreed that R should have 60%
of the total capital of the partnership. R and D agreed to recognize goodwill. what is the total capital of
the RD partnership after the goodwill is recognized?
A.P450,000
B.P330,000
C.P300,000
D.P270,000
5. In AD partnership, Allen's capital is P140,000 and Daniel's capital is P40,000 and they share a net
income ratio of 3:1 respectively. They decided to admit David in the partnership. What amount will David
invest to give him 1/5 interest in the partnership if no bonus/goodwill is recorded?
A.P60,000
B.P36,000
C.P50,000
D.P45,000
Theories
1. ZEE acquired the assets (net of liabilities) of partner BEE in exchange for cash. The acquisition price
exceeds the fair value of the net assets acquired. How should ZEE determines the amount to be reported
for the plant and equipment, and for long-term debt of the acquired debt of partner BEE?
A. Plant and equipment: Fair value ; Long-term debt: BEE's carrying amount
B. Plant and equipment: Fair value ; Long-term debt: Fair value
C. Plant and equipment: BEE's carrying amount; Long-term debt: Fair Value
D. Plant and equipment: BEE's carrying amount; Long-term debt: BEE's carrying amount
2. Goodwill represents the excess cost of an acquisition over the:

A. Sum of the fair values assigned to an intangible assets less liabilities assumed
B. Sum of the fair values assigned to tangible and intangible assets acquired less liabilities assumed
C. Sum of the fair values assigned to intangibles acquired less liabilities assumed
D. Book value of an acquired company
3. When a partnership is formed, noncash assets contributed by partners should be recorded:

I.At their respective book values for income tax purposes
II.At their respective fair values for financial accounting purposes
A. I only
B. II only
C. Both I and II
D. Neither I nor II
4. A limited liability company (LLC):

I.Is governed by the laws of the states in which it is formed
II.provides liability protection to its investors
III.does not offer pass-through taxation benefits of partnership
A. Both I and III
B. III
C. Both I and II
D. I, II, III
5. Transferable interest of a partner includes all of the following except:

A.the partner's share in profits and losses
B.the right to receive distributions
C.the right to receive any liquidating distribution
D.the authority to transact any of the partnerships business operation
Answers
Problem
1. D
2. A
3. D
4. C
5. D
Theories
1. B
2. B
3. B
4. C
5. D
1. A partnership is a(n):
I. accounting entity.
II. taxable entity.
a. I only
b. II only
c. Neither I nor II
d. Both I and II
2. Which of the following is NOT a feature of a general partnership?

a. mutual agency
b. limited life
c. limited liability
d. none of these
3. A partner's tax basis in a partnership is comprised of which of the following items?

I. The partner's tax basis of assets contributed to the partnership.
II. The amount of the partner's liabilities assumed by the other partners.
III. The partner's share of other partners' liabilities assumed by the
partnership.
a. I plus II minus III

b. I plus II plus III
c. I minus II plus III
d. I minus II minus III
4. Which of the following accounts could be found in the general ledger of a

partnership?
a. Option A
b. Option B
c. Option C
d. Option D
5. Which of the following accounts could be found in the PQ partnership's general

ledger?
I. Due from P
II. P, Drawing
III. Loan Payable to Q
a. I, II
b. I, III
c. II, III
d. I, II, and III
6. Anton and Bauzon formed a partnership and agreed to divide initial capital equally,
even though Anton contributed P100,000 and Bauzon contributed P84,000 in
identifiable assets. Under the bonus method, to adjust capital accounts, Bauzon's
intangible assets should be debited for:
a. 0
b. 16,000
c. 8,000
d. 46,000
7. Roy, Sam and Tim decided to engage in a real estate venture as a partnership. Roy
invested P140,000 cash and Sam provided an office and furnishings valued at
P220,000. (There is a 60,000 note payable remaining on the furnishings to be assumed
by the partnership). Although Tim has no tangible assets to invest, both Roy and Sam
believe that Tim's expert salesmanship provides an adequate investment. The partners
agree to receive an equal capital interest in the partnership. Using the bonus method,
what is the capital balance of Tim?
a. 0
b. 50,000
c. 100,000
d. 140,000
8. Lara and Mitra formed a partnership on July 1, 2011 and invested the following
assets: P130,00 cash by Lara, and P200,000 cash and P50000 computer equipment by
Mitra. The computer equipment has a note payable amounting to P10,000, which was
assumed by the partnership. The partnership agreement provides that Lara and Mitra
will have an equal capital credit. Using the goodwill method, the amount of goodwill to
be recorded upon formation of partnership is:
a. 100,000
b. 110,000
c. 120,000
d. 140,000
9. Ana and Elsa form a new partnership. Ana invests P300,000 in cash for her 60%
interest in the capital and profits of the business. Elsa contributes land that has an
original cost of P40,000 and a fair market value of P70,000, and a building that has a
tax basis of P50,000 and a fair market value of P90,000. The building is subject to a
P40,000 mortgage that the partnership will assume. What amount of cash should Elsa
contribute?
a. 40,000
b. 80,000
c. 110,000
d. 150,000
10. Jones and Smith formed a partnership with each partner contributing the following
items:
Assume that for tax purposes Jones and Smith agree to share equally in the
liabilities assumed by the Jones and Smith partnership.
What is each partner's tax basis in the Jones and Smith partnership?
a. Option A
b. Option B
c. Option C
d. Option D
ANSWERS & SOLUTIONS (Chapter 1)
1. a
2. c
3. c
4. d
5. d
6. a
Zero, because under the bonus method, a transfer of capital is only required.
7. c
Roy Sam Tim
Cash P140,000
Office Equipment P220,000
Note payable ________ _( 60,000) ______
Net asset invested P140,000 P160,000 P
Agreed capitals, equally (P300,000/3) = P100,000
8. b
Lara Mitra
Cash P130,000 P200,000
Computer equipment 50,000
Note payable ________ _( 10,000)
Net asset invested P130,000 P240,000
Goodwill (P240,000 - P130,000) = P110,000
9. b
Total Capital (P300,000/60%) P500,000
Elsa's interest ______40%
Elsa's capital P200,000
Less: Non-cash asset contributed at market value
Land P 70,000
Building 90,000
Mortgage Payable ( 40,000) _120,000
Cash contribution P 80,000
10. a
Jones: (80000+300000) - 120000 + (180000/2) = 350000
Smith: (40000+200000) - 60000 + (180000/2) = 270000
1.1 THEORIES.
1. A partnership is a(n):
I. accounting entity.
II. taxable entity.
A. I only
B. II only
C. Neither I nor II
D. Both I and II
2. Anton and Garcia formed a partnership, each contributing assets to the business. Anton
contributed inventory with a current market value in excess of its carrying amount. Garcia
contributed real estate with a carrying amount in excess of its current market value. At what
amount should the partnership record each of the following assets?
Inventory Real Estate
a. Carrying Amount Market Value
b. Market Value Carrying Amount
c. Carrying Amount Carrying Amount
d. Market Value Market Value
3. On June 30, 2015, a partnership was formed by Mendoza and Lopez. Mendoza contributed cash.
Lopez, previously sole proprietor, contributed noncash assets including a realty subject to
mortgage which was assumed by the partnership. Lopezs capital account at June 30, 2015
should be recorded at:
a. The fair value of the property on June 30, 2015 less the mortgage payable
b. Lopezs carrying amount of the property on June 30, 2015
c. Lopezs carrying amount of the property on June 30, 2015 less the mortgage payable
d. The fair value of the property on June 30, 2015
4. Two individuals who were previously sole proprietors formed a partnership. Property other than
cash which is part of the initial investment in the partnership would be recorded for financial
accounting purposes at the :
a. Proprietors book values or the fair value of the property at the date of the investment
whichever is higher.
b. Proprietors book values or the fair value of the property at the date of the investment
whichever is lower.
c. Proprietors book values of the property at the date of the investment
d. Fair value of the property at the date of investment
5. A unique feature of partnerships (compared with publicly owned corporations) is that:

a. Limited liability with respect to damages arising from professional services
b. Greater allowable tax deductions for retirement plans
c. Ease of formation
d. Book value
1.2 PROBLEMS.
1. On May 1, 2015, Cat and Meow formed a partnership and agreed to share profits and losses in
the ratio of 3:7, respectively. Cat contributed a parcel of land that cost her P10,000. Meow
contributed P40,000 cash. The land has a fair value of P15,000. Cat insisted that the value of
land should be P18,000. The partners agreed to value the land at P18,000. What amount should
be recorded in Cats capital account on formation of the new partnership?
a. P18,000 b. P17,400 c. P15,000 d. P10,000
2. On July 1, Manny and Floyd formed a partnership, agreeing to share profits and losses in the
ratio of 4:6, respectively. Manny contributed a parcel of land that cost him P25,000. Floyd
contributed P50,000 cash. The land was sold for P50,000 on July 1, four hours after formation of
the partnership. How much should be recorded in Mannys capital account on the partnership
formation?
a. P10,000 b. P20,000 c. P25,000 d. P50,000
Use the following question for 3 & 4
On March 1, 2014, cat and Fish formed a partnership with each contributing the following
assets:
Cat Fish
Cash P30,000 P70,000
Machinery P25,000 P75,000
Building - P225,000
Furnitures and Fixtures P10,000 -
3. On March 1, 2015, the capital account of Fish would show a balance of:
a. P280,000 b. P305,000 c. 314,000 d. 370,000
4. Assuming that the partners agreed to bring their respective capital in proportion to their
respective profit and loss ratio, and using Fish capital as the base, how much cash is to be
invested by Cat?
a. P19,000 b. P30,000 c. P40,000 d. P55,000
5. On October 1, 2015, Albano and Armando formed a partnership and agreed to share profits and
losses in the ratio 3:7 respectively. Albano contributed a parcel of land that cost him P2,000,000.
Armando contributed P3,000,000 in cash. The land has a quoted price of P3,600,000 on October
1, 2015. What amount should be recorded in Albanos capital account upon formation of the
partnership?
a. P3,600,000 b. P3,000,000 c. P3,480,000 d. P2,000,000
1. Jones and Smith formed a partnership with each partner contributing the following items:
Jones Smith
Cash P 80,000 P 40,000
Building - cost to Jones 300,000
- fair value 400,000
Inventory - cost to Smith 200,000
- fair value 280,000
Mortgage Payable 120,000
Accounts Payable 60,000
Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed
by the Jones and Smith partnership. What is the balance in each partners capital account for
financial accounting purposes?
A. Jones: P 360,000, Smith: P 260,000

B. Jones: P 350,000, Smith: P 270,000
C. Jones: P 260,000, Smith: P 180,000
D. Jones: P 500,000, Smith: P 300,000
2. The business assets of LL and MM appear below:

LL MM
Cash P 11,000 P 22,354
Land 603,000 -
Building - 428,267
Furniture and Fixture 50,345 34,789
Total P 1,020,916 P 1,317,002

LL, capital 641,976 -
MM, capital - 728,352
Total P 1,020,916 P 1,317,002
LL and MM agreed to form a partnership by contributing their respective assets and equities
a. Accounts Receivable of P20,000 in LLs books and P35,000 in MMs are uncollectible.
b. Inventories of P5,500 and P6,700 are worthless in LLs and MMs respective books.
c. Other assets of P2,000 and P3,600 in LLs and MMs respective books are to be written off.
The capital account of the partners after the adjustments will be:
a. LL: P615,942, MM: P717,894
b. LL: P614,476, MM: 683,052
c. LL: P640,876, MM: P712,345
d. LL: P640,876, MM: 683,050
3. The same information in number 2, how much total assets does the partnership have after
formation?
a. P2,265,118
b. P2,337,918
c. P2,237,918
d. P2,365,218
4. On March 1, 2015, PP and QQ decide to combine their businesses and form a partnership. Their
balance sheets on March1, before adjustments, showed the following:
PP QQ
Cash P 9,000 P 3,750
Furniture and Fixtures (net) 30,000 9,000
Office Equipment (net) 11,500 2,750
Prepaid Expenses 6,375 3,000
Total P 105,375 P51,500
Accounts Payable P45,750 P18,000

Capital 59,625 33,500
Total P105,375 P51,500
They agreed to have the following items recorded in their books:

1. Provide 2% allowance for doubtful accounts.
2. PPs furniture and fixtures should be P31,000, while QQs office equipment is
underdepreciated 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 amount to:
For PP ...............................P29,500
For QQ ...............................P21,000
Compute the net (debit) credit adjustment for PP and QQ:

PP QQ
a. P 2,870 P 2,820
b. (2,870) (2,820)
c. 870 180
d. (870) 180
5. The same information in number 4, compute the total liabilities after formation:
a. P 65,550
b. 61,950
c. 63,750
d. 63,950
1. Which of the following is not a characteristic of most partnership?

a. Limited liability
b. Limited life
c. Mutual agency
d. Ease of formation
Suggested answer (a) limited liability
The liability of the partners in a partnership is unlimited.
2. Which of the following is not a characteristic of the proprietary theory that influences accounting for
partnerships?
a. Partners salaries are viewed as a distribution of income rather than a component of net
income.
b. A partnership is not viewed as separate entity, distinct, taxable entity.
c. A partnership is characterized by limited liability.
d. Changes in the ownership structure of a partnership result in the dissolution of the
partnership.
Suggested answer (c) A partnership is characterized by limited liability
3. An advantage of the partnership as a form of business organization would be

a. Partners do not pay income taxes on their share in partnership income
b. A partnership is bound by the act of the partners
c. A partnership is created by mere agreements of the partners
d. A partnership may be terminated by the death or withdrawal of a partner
Suggested answer (c) A partnership is created by mere agreements of the partners
4. When property other than cash is invested in a partnership, at what amount should the noncash
a. Fair value at the date of contribution
b. Contributing partners original cost
c. Assessed valuation for property tax purposes
d. Contributing partners tax basis
Suggested answer (a)
Fair value at the date of contribution
5. Partnership capital and drawings accounts are similar to the corporate

a. Paid in capital, retained earnings, and dividends accounts
b. Retained earnings account
c. Paid in capital and retained earnings accounts
d. Preferred and common stock accounts
Partnership capital accounts are similar to corporate paid in capital and retained earnings; while
partnership drawing accounts are similar to corporate dividends accounts
For questions 6-10:

On May 1, 2015, the business assets of Jessyreen and Leilani appear below:
Jessyreen Leilani
Cash P 11, 000 P 22, 354
Accounts receivable 234, 536 567, 890
Inventories 120, 035 260, 102
Land 603, 000
Building 428, 267
Furniture and fixtures 50, 345 34,789
Other assets _ _2, 000__ __ 3,600_
Total P 1,020,916 P 1,317,002
Accounts payable P 178,940 P 243,650

Notes payable 200,000 345,000
John, capital 641,976
Paul, capital ________ 728, 352
Total P 1,020,916 P1,317,002
Jessyreen and Leilani agreed to form a partnership contributing their respective assets and equities
a. Accounts receivable of P20,000 in Jessyreens books and P35,000 in Leilanis are uncollectible
b. Investors of P5,500 and P6,700 are worthless in Jessyreens and Leilanis respective books
c. Other assets of P2,00 and P3,600 in Jessyreens and Leilanis respective books are to be
written off
6. The capital accounts of the partners after adjustments will be:
a. Jessyreens 614,476
Leilanis 683, 052
b. Jessyreens 615, 942
Leilanis 717, 894
Leilanis 712, 345
Leilanis 683, 350
Jessyreen Leilani
Unadjusted capital balances p641,976 P728,352
Adjustments:
Uncollectible accounts (20,000) (35,000)
Worthless inventories (5,500) (6,700)
Other assets written off (2,000) (3,600)
Adjusted capital balances P614,476 P683,052
7. How much assets does the partnership have?

a. 2,337,918
b. 2,237,918
c. 2,265,118
d. 2,365,218
Suggested answer (c)
Jessyreen Leilani Total
Unadjusted asset bals. 1020916 1317002 2337918
Adjustments:
Uncollectible accounts (20000) (35000) (55000)
Worthless inventories (5500) (6700) (12200)
Other assets written off (2000) (3600) (5600)
Adjusted assets bals. 993416 1271702 2265118
8. Shamira offered to join for a 20% interest in the firm. How much cash should he contribute?
a. 330,870
b. 337,487
c. 344,237
d. 324,382
Suggested answer (d)
New capital of the partnership [(614476+683052)/80%] P1621910
Multiply by 20%
Cash to be contributed by Shamira P324382
9. After Shamiras admission, the profit and loss sharing ratio was agreed to be 40:40:20, based on
capital credits. How much should the cash settlement be between Jessyreen and Leilani.
a. 33,602
b. 32,930
c. 32,272
d. 34,288
Suggested answer (d)
Jessyreen Leilani
Capital balances at P614476 683052
40:40:20 ratio
New capital ratio:
@ 40% each (1621910) 648764 648764
Cash settlement bet.
Jessyreen and Leilani P34288 (P34288)
10. During the first year of their operations, the partnership earned P325,000. Profits were distributed in
the agreed manner. Drawings were made in these amounts: Jessyreen, p50,000; Leilani, 65,000;
Shamira, P28,00.
How much are the capital balances after the first year?
a. Jessyreen, capital 750,627
Leilani, capital 735,177
Shamira, capital 372,223
b. Jessyreen, capital 728,764
c. Jessyreen, capital 757,915
Shamira, capital 375, 837
d. Jessyreen, capital 743,121
Suggested answer (b)

Jessyreen Leilani Shamira
Capital balances at P648764 P648764 P324382
40:40:20 ratio
Drawings (50000) (65000) (28000)
Share in profit (40:40:20) 130000 130000 65000
Capital balances P728764 P713764 P361382
Use following information for question 1 to 5

On July 1, 2015, A and B decided to form a partnership. The firm is to take over the business assets
and assume liabilities, and the capitals are to be based on net assets transferred after the ff.
adjustments:
A and Bs inventory is to be valued at 31,000 and 22,000 respectively.

Accounts receivable of 2,000 in As book and 1,000 in Bs books are uncollectible.
Accrued salaries of 4,000 for A and 5,000 for B are still to be recognized in the books.
Unused office supplies of A and B amounted to 5,000 and 1,500.
Prepaid rent of 7,000 and 4,500 are to be recognized in the books A and B, respectively.
A is to invest or withdraw cash necessary to have a 40% interest in the firm.
Balance sheet for A and B before adjustments

A B
Cash 31,000 50,000
Accounts receivable 26,000 20,000
Inventory 32,000 24,000
Office supplies 5,000
Equipment 20,000 24,000
Accum. Depreciation- Equipment (9,000) (3,000)
Total Assets 100,000 120,000
Accounts Payable 28,000 20,000

Capitals 72,000 100,000
Total Liabilities and Capital 100,000 120,000
1. The additional investment (withdrawal) made by A:

a. (15,000) c. 3,000
b. (6,667) d. 8,333
2. The total assets of the partnership after formation:

a. 235,333 c. 220,333
b. 230,000 d. 212,000
3. The total liabilities of the partnership after formation:

a. 57,000 c. 54,000
b. 48,000 d. 51,000
4. The total capital of the partnership after formation:

a. 180,000 c. 163,333
b. 178,000 d. 155,000
5. The total capital balances of A and B in the combined balanced sheet:

a. A, 81,250; B, 72,000 c. A, 100,000; B, 75,000
b. A, 81,250; B, 75,000 d. A, 62,000; B, 93,000
6. On June 1, 2015, T, U and V formed a partnership by combining their separate business

proprietorships. T contributed cash of 100,000. U contributed property with a 80,000
carrying amount, a 95,000 original cost, and 120,000 fair value. The partnership
accepted the responsibility for the 55,500 mortgage attached to the property. V
contributed equipment with a 65,000 carrying amount, a 90,000 original cost, and
78,000 fair value. The partnership agreement specifies that P & L are to be shared
equally but is silent regarding capital contributions. Which partner has the largest capital
balance at the beginning of the partnership?
a. T c. V
b. U d. All capital account balances are equal
7. For financial accounting purposes, assets of an individual partner contributed to a

partnership are recorded by the partnership at:
a. Historical cost c. Fair market value
b. Book value d. Lower of cost or market
8. A unique feature of partnership:

a. They do not have to follow GAAP c. Books have to be maintained on the tax
basis
b. They are not governed by laws d. They do not file income tax return
9. Which of the following is not an advantage of a partnership over a corporation?

a. Ease of formation c. The elimination of taxes at the entity level
b. Unlimited liability d. All of the above
10. A partners withdrawal of assets from a limited liability partnership that is considered a
permanent reduction in that partners equity is debited to the partners:
a. Drawing account c. Capital account
b. Retained earnings account d. Loan receivable account
1. A partner who is entitled to a share of the profits from a partnership is known as:
a) A salaried partner.
b) A managing partner.
c) An equity partner.
d) A limited liability partner.
Answer: An equity partner.

A partner on a fixed salary is known as a salaried partner.
2. The maximum number of persons who are legally allowed to operate in a partnership is:
a) 2
b) 20
c) There is no legal limit
d) 100
Answer: There is no legal limit
3. Sparkle Ltd is a private limited company limited by shares. It has one director. How many
shareholders does the law require it to maintain?
a) One provided it is a different person from the director.
b) Five.
c) Two.
d) One which can be the same person as the director.
Answer: One which can be the same person as the director.

The law allows private limited companies to exist with one shareholder who is the same person
as the director.
4. Which one of the following statements about limited liability partnerships (LLPs) is incorrect?
a) An LLP has a legal personality separate from that of its members.
b) The liability of each partner in an LLP is limited.
c) Members of an LLP are taxed as partners.
d) A limited company can convert to an LLP.
Answer: A limited company can convert to an LLP.

A general partnership can convert to an LLP but a limited company cannot.
5. An organisation running a business has the following attributes: the assets belong to the
organisation, it can create a floating charge over its assets, change in membership does not
alter its existence, and members cannot transfer their interests to others. What type of
organisation is it?
a) A private limited company
b) A limited liability partnership
c) A general partnerships
d) A private limited company
Answer: A limited liability partnership.
In the question the attributes of the organisation are the same for LLPs as companies except
members of a company (private and public) can transfer their interests to others.
6. Roberts and Smith drafted a partnership agreement that lists the following assets
contributed at the partnerships formation:
Contributed by
Roberts Smith
Cash $20,000 $30,000
Inventory -- 15,000
Building -- 40,000
Furniture & equipment 15,000 --
The building is subject to a mortgage of $10,000, which the partnership has assumed. The
partnership agreement also specifies that profits and losses are to be distributed evenly. What
amounts should be recorded as capital for Roberts and Smith at the formation of the
partnership?
Roberts Smith
a. $35,000 $85,000
b. $35,000 $75,000
c. $55,000 $55,000
d. $60,000 $60,000
Answer: (b) The requirement is to determine the amounts to be recorded as capital for Roberts
and Smith at the formation of the partnership. Unless otherwise agreed upon by the partners,
individual capital accounts should be credited for the fair market value (on the date of
contribution) of the net assets contributed by that partner. It is necessary to assume that the
amounts listed are fair market values. The amount of net assets that Roberts contributed is
$35,000 ($20,000 + $15,000). The fair market value of the net assets Smith contributed is
$75,000 ($30,000 + $15,000 + $40,000 $10,000). The partners profit and loss sharing ratio
does not affect the initial recording of the capital accounts.
7. On April 30, year 1, Algee, Belger, and Ceda formed a partnership by combining their
separate business proprietorships. Algee contributed cash of $50,000. Belger contributed
property with a $36,000 carrying amount, a $40,000 original cost, and $80,000 fair value. The
partnership accepted responsibility for the $35,000 mortgage attached to the property. Ceda
contributed equipment with a $30,000 carrying amount, a $75,000 original cost, and $55,000
fair value. The partnership agreement specifies that profits and losses are to be shared equally
but is silent regarding capital contributions. Which partner has the largest April 30, year 1
capital account balance?
a. Algee.
b. Belger.
c. Ceda.
d. All capital account balances are equal.
Answer: (c) The requirement is to determine which partner has the largest capital account
balance. Use the solutions approach to solve the problem.
Algee Belger Ceda
Partner contribution 50,000 80,000 55,000
Less: Liabilities assumed
by the partnership 0 (35,000) 0
Ending capital balance $50,000 $45,000 $55,000
Each partner values his contribution to the partnership at its fair market value. The fair market
value becomes the partners balance in his capital account and is basis to the partnership under
generally accepted accounting principles. Any liabilities assumed by the partnership, reduces
the partners capital balance by the amount assumed.
8. Abel and Carr formed a partnership and agreed to divide initial capital equally, even though
Abel contributed $100,000 and Carr contributed $84,000 in identifiable assets. Under the bonus
approach to adjust the capital accounts, Carrs unidentifiable asset should be debited for
a. $46,000
b. $16,000
c. $ 8,000
d. $0
Answer: (d) Under the bonus method, unidentifiable assets (i.e., goodwill) are not recognized.
The total resulting capital is the FV of the tangible investments of the partners. Thus, there
would be no unidentifiable assets recognized by the creation of this new partnership.
9. Ellis and Nossiter are partners sharing profits in a 30:70 ratio. The following data summarizes
2004 activity:
Partnership net income, 2004 $68,000

Ellis capital, 1/1/2004 90,000
Ellis additional investment in 2004 10,000
Ellis drawings in 2004 12,000
Nossiter capital, 1/1/2004 80,000
Nossiter drawings in 2004 20,000
What amount of net income is allocated to Nossiters capital account for 2004?
a. $26,600
b. $27,600
c. $34,000
d. $47,600
Answer: (d) (68,000.7)

10. Ellis and Nossiter are partners sharing profits in a 30:70 ratio. The following data
summarizes 2004 activity:
Partnership net income, 2004 $68,000

Ellis capital, 1/1/2004 90,000
Ellis additional investment in 2004 10,000
Ellis drawings in 2004 12,000
Nossiter capital, 1/1/2004 80,000
Nossiter drawings in 2004 20,000
What is the value of Elliss capital account at 12/31/2004?

a. $20,400
b. $108,400
c. $111,400
d. $120,400
Answer: (b) (90,000+10,000-12,000+(68,000.3))
Chapter 1 Partnership Formation
1.On July 1,1997, Monuz and Pardo form a partnership, agreeing to share profits and losses in the ratio
of 4:6,respectively. Monuz contributed a parcel of land that cost him P25,000. Pardo contributed
P50,000 cash. The land was sold for P50,000 on July 1,1997 four hours after formation of the
partnership. How much should be recorded in Munoz capital account on formation of the partnership?
a) P10,000
b) P20,000
c) P25,000
d) P50,000
2.Moonbits partnership had a net income of P8,000.00 for the month ended September 30,1997.
Sunshine purchased an interest in the Moonbits partnership of Liz and Dick by paying Liz P 32,000.00 for
half of her capital and half of her 50 percent profit sharing interest on October 1,1997. At this time Liz
capital balance was P24,000.00 and Dick capital balance was P56,000.00. Liz should receive a debit to
her capital account of:
a) P 12,000.00
b) P 20,000.00
c) P 16,000.00
d) P 26,667.00
3.On March 1,1997, Santos and Pablo formed a partnership with each contributing the following assets:
Santos Pablo
Cash P 30,000 P 70,000
Machinery and Equipment 25,000 75,000
Building -0- 225,000
Furniture & Fixtures 10,000 -0-
The building is subject to a mortgage loan of P80,000, which is to be assumed by the partnership. The
partnership agreement provides that Santos and Pablo share profits and losses 30% and 70%,
respectively. On March 1,1997 the balance in Pablos capital account should be:
a) P 290,000.00
b) P 305,000.00
c) P 314,000.00
d) P 370,000.00
4. The business assets of John and Paul appear below:
John Paul
Cash P 11,000 P 22,354
Land 603,000
Building 428,267
Furniture & Fixtures 50,435 34,789
Total P 1,020,916 P 1,317,002
Accounts Payable 178,940 243,650

John, Capital 641,976
Paul, Capital 728,352
Total P 1,020,916 P 1,317,002
John and Paul agreed to form a partnership contributing their respective assets and equities subject to
the following adjustments:
a. Accounts receivable of P 20,000 in Johns books and P 35,000 in Pauls are uncollectible.
b. Inventories of P 5,500 and P 6,700 are worthless in Johns and Pauls respective books.
c. Other assets of P 2,000 and P 3,600 in Johns and Pauls respective books are to be written off.
The capital account of the partners after the adjustment will be:
a) Johns P 614,476
Pauls P 683,052
b) Johns P 615,942
Pauls P 717,894
c) Johns P 649,876
Pauls P 712,345
d) Johns P 613,576
Pauls P 683,350
5. The following is the condensed balance sheet of the partnership Jo, Li and Bi who share profits and
losses in the ratio of 4:3:3.
Cash P 180,000 Accounts Payable P 420,000

Other Assets 1,660,000 Bi, Loan 60,000
Jo, receivable 40,000 Jo, Capital 620,000
Li, Capital 400,000
Bi, Capital 380,000
Total P1,880,000 Total P1,880,000
Assume that the assets and liabilities are fairly valued on the balance sheet and the partnership decides
to admit Mac as a new partner, with a 20% interest. No goodwill or bonus is to be recorded. How much
Mac contributes to cash or other assets?
a) P 350,000
b) P 280,000
c) P 355,000
d) P 284,000
Solution and Explanation
1. D. The requirement is Munoz capital account balance upon formulation of the partnership. As in the
case with all entities, investment in the capital of a partnership should be measured at the fair market
value of the assets contributed. In this case, the FMV of the land would be measured at the fair market
value by its sales price on the date of sale (P50,000) which is also the date of the partnership formation.
Recording the land of Munoz cost would result in the partners sharing the gain from the sale in
accordance with their profit and loss ratio. This is not equitable since the gain accrued while the land
was held by Monuz.
2. A. Under the admission by purchase only the transfer of the capital purchase by the selling partner
(Liz) to the buying partner (Sunshine) is recorded. Therefore 50% of the capital of Liz (P24,000) or P
12,000 is to be debited to her capital account.
3. A. P 290,000.00
Assets contributed by Pablo P 370,000

Less: Mortgage assumed by partnership (80,000)
Capital balance of Pablo P 290,000
Note that the profit and loss sharing ratio is irrelevant to the solution of this problem.
4. A. Johns P 614,476
Pauls P 683,052
John Paul
Capital balance before adjustments P641,976 P 728,352
Adjustments:
Uncollectible accounts (20,000) (35,000)
Inventories Written Off (5,500) 6,700
Other Assets written off (2,000) (3,600)
Capital balances after adjustments P 614,476 P 683,052
5. A. P 350,000
Total agreed capital of the new partnership ( 1,400,000 80% ) P 1,750,000
Total contributed capital of the old partners ( 1,400,000)
Macs contribution P 350,000
1. Partnership capital and drawing accounts are similar to the corporate

A. Paid-in capital, retained earnings, and dividend accounts
B. Retained earnings account.
C. Paid-in capital and retained earnings accounts.
D. Preferred and common stock accounts
2. For individuals who were previously sole proprietors form a partnership. Each partner
contributes inventory and equipment for use by the partnership. What basis should the
partnership use to record the contributed assets?
A. Inventory at the lower of FIFO cost or market.
B. Inventory at the lower of weighted-average cost or market.
C. Equipment at each proprietors carrying amount.
D. Equipment at fair value.
3. Meca and Came formed a partnership on January 1,2015 with each contributing the
following assets:
Meca Came
Cash P30,000 P70,000
Machinery 25,000 75,000
Inventory 10,000 -
Building 225,000
The building is subject to a mortgage loan of P90,000 which is to be assumed by the
partnership. On January 1,2015, the capital account of Came would show a balance of:
A. P280,000 B. P305,000 C. P314,000 D. P370,000
4. Alma and Becca have just formed a partnership. Alma contributed cash of P176,400 and
office equipment that cost P75,600. The equipment had been used in his sole
proprietorship and had been 70% depreciated, the current value of the equipment is
P50,400. Alma also contributed a note payable of P16,800 to be assumed by the
partnership. Alma is to have a 30% interest in the partnership. Becca contributed
P256,000 land at fair market value. Becca should make additional investment of
a. P234,000 b. P490,000 c. P256,000 d. P210,000
5. The business assets of LL and MM appears below:
LL MM
Cash P11,000 P22,354
Land 603,000 ----------
Building ---------- 428,267
Furniture and Fixtures 50,345 34,789
P1,020,916 P1,317,002
Accounts Payable P178,940 P 243,650
LL,Capital 641,976 -------------
MM, Capital ---------- 728,352
P1,020,916 P1,317,002
LL and MM agreed to form a partnership contributing their respective assets and equities
a. Accounts receivable of P20,000 in LLs books and P35,000 in MMs are
uncollectible.
b. Inventories of P5,500 and P6,700 are worthless in LLs and MMs respective books.
c. Other assets of P2,000 and P3,600 in LLs and MMs respective books are to be
written off.
The capital account of the partners after the adjustments will be:
a. LL, P615,942; MM, P717,894 c. LL, P640,876; MM, P683,050
b. LL, P640,876; MM, P712,345 d. LL, P614,476; MM, P683,052
6. Langley invests his delivery van in a computer repair partnership with McCurdy. What
amount should the van be credited to Langleys partnership capital?
A. The tax basis.
B. The fair value at the date of contribution.
C. Langleys original cost.
D. The assessed valuation for property tax purposes.
7. On April 30, 1993, Algee, Belger, and Ceda formed a partnership by combining their
separate business proprietorships. Algee contributed cash of $50,000, Belger contributed
property with a $36,000 carrying amount, a $40,000 original cost, and $80,000 fair value.
The partnership accepted responsibility for the $35,000 mortgage attached to the
property. Ceda contributed equipment with a $30,000 carrying amount, a $75,000
original cost, and $55,000 fair value. The partnership agreement specifies that profits and
losses are to be shared equally but is silent regarding capital contributions. Which
partner has the largest April 30, 1993, capital account balance?
A. Algee. c. Ceda.
B. Belger. d. All capital account balance are equal.
8. Jamby and Minam just formed a partnership. Jamby contributed cash of P2,205,000 and
office equipment that cost P945,000. The equipment had been used in her sole
proprietorship and had been 70% depreciated, the appraised value of the equipment is
P630,000. Jamby also contributed a note payable of P210,000 to be assumed by the
partnership. Jamby is to have 60% interest in the partnership. Miriam contributed only
P1,575,000 merchandise inventory at fair market value. Assume the use of bonus method,
the partners capital must be in conformity with their profit and loss ratio upon formation.
In the formation of a partnership, which of the following is true?
A. The agreed capital of Jamby upon formation is P2,625,000
B. The total agreed capital of the partnership is P4,375,000
C. The capital of Miriam will increase by P105,000 as a result of the transfer of capital
D. There is either an investment or withdrawal of asset under the bonus method
9. Alley and Barvey established a partnership on December 1, 20x4. They agreed that Alley
will contribute cash of P20,000; Land of P15,000 and Building of P50,000. Alleys
accounts payable of P10,000 is to be assumed by the partnership. Barvey will contribute
cash of P30,000 and furniture and fixtures of P25,000.
Assume that each partner initially should have an equal interest in partnership capital
with no contribution of intangible asset (bonus method). How much are the capital
balances of each partner?
a. P85,000 for Alley and P55,000 for Barvey
b. P65,000 for Alley and P65,000 for Barvey.
c. P75,000 for Alley and P55,000 for Barvey
d. P75,000 for Alley and P75,000 for Barvey.
10. The partnership agreement is an express contract among the partners (the owners of the
business). Such an agreement generally does not include
a. A limitation on a partners liability to creditors.
b. The rights and duties of the partners.
c. The allocation of income between the partners.
d. The rights and duties of the partners in the event of partnership dissolution.
1. The partnership form of business is:

a. An economic entity.
b. A separate legal entity, just as a corporation is a legal entity.
c. A taxable entity.
d. A fiscal entity.
2. A distinct and major advantage of the professional corporation form of organization in
comparison with the partnership form of organization is:
a. Limited liability with respect to damages arising from professional services.
b. Greater allowable tax deductions for retirement plans.
c. Ease of formation
d. Book value
e. Historical cost
3. Which of the following is not a characteristic of a partnership?
a. The partnership itself pays no income taxes.
b. It is easy to form a partnership.
c. Any partner can be held personally liable for all debts of the business.
d. A partnership requires written Articles of Partnership.
e. Each partner has the power to obligate the partnership for liabilities.
4. The advantages of the partnership form of business organization, compared to
corporations, include
a. Single taxation
b. Ease of raising capital
c. Mutual Agency
d. Limited Liability
e. Difficulty of formation
5. Which of the following is NOT a characteristic of the proprietary theory that influences
accounting for partnerships?
a. Partners salaries are viewed as a distribution of income rather than a
component of net income.
b. A partnership is not viewed as a separate, distinct, taxable entity.
c. A partnership is characterized by limited liability.
d. Changes in the ownership structure of a partnership result in the dissolution of
the partnership.
PROBLEMS
6. Albert, Claude, and Jamie form a partnership by contributing P25,000, P70,000, and
P80,000, respectively. In addition, the partners agree that Albert should receive P20,000
of goodwill because of his special skills relevant to this business. What amount of capital
will exist for Claude when the partnership is formed?
a. P60,000
b. P65,000
c. P70,000
d. Some other amount
7. Bill and Ken enter into a partnership agreement in which Bill is to have a 60% interest in
capital and profits and Ken is to have a 40% interest in capital and profits. Bill
contributes the following:
Cost Fair value
Land P10,000 P20,000
Building P100,000 P60,000
Equipment P20,000 P15,000
There is a P30,000 mortgage on the building that the partnership agrees to assume. Ken
contributes P50,000 cash to the partnership. Bill and Ken agree that Kens capital
account should equal Kens P50,000 cash contribution and that goodwill (revaluation of
asset) should be recorded. Goodwill (revaluation of asset) should be recorded in the
amount of:
a. P10,000
b. P15,000
c. P16,667
d. P20,000
8. Paul, Jeremy, and Juan are forming a partnership. Juan contributes a building having an
historical cost, accumulated depreciation, and market value of P290,000, P100,000, and
P400,000, respectively. The building is initially recorded on the partnerships books at
Juans book value (P190,000). Two years later the building is sold for a P270,000 gain.
What portion of the profit or loss should be allocated to Juan?
a. P20,000
b. P90,000
c. P210,000
d. P230,000
9. Jones and Smith formed a partnership with each partner contributing the following
items:
Jones Smith
Cash P80,000 P40,000
Building-Cost to 300,000
Jones
-Fair Value 400,000
Inventory- Cost 200,000
Smith
-Fair Value 280,000
Mortgage Payable 120,000
Account Payable 60,000
Assume that for tax purposes Jones and Smith agree to share equally in the liabilities
assumed by the Jones and Smith partnership. What is the balance in each partners
capital account for financial accounting purposes?
a. Jones- P350,000 and Smith- P270,000
b. Jones- P260,000 and Smith- P180,000
c. Jones- P360,000 and Smith- P260,000
d. Jones- P500,000 and Smith- P300,000
10. On July 1, ML and PP formed a partnership, agreeing to share profits and losses in the
ratio of 4:6, respectively. ML contributed a parcel of land that cost her P25,000. PP
Chapter 1
1. B.
2. A.
3. D.
4. A.
5. C.
6. C.
7. A.
8. B.
contributed P50,000 cash. The land was sold for P50,000 on July 1, four hours after
formation of the partnership. How much should be recorded in MLs capital account on
the partnership formation?
a. P10,000
b. P20,000
c. P25,000
d. P50,000
9. C.
10. D.
1.1 A partnership is formed by two individuals who were previously sole proprietors.
Property other than cash which is part of the initial investment in the partnership would
be recorded for financial accounting purposes at the:
a. Proprietors book values or the fair value of the property at the date of the investment,
whichever is higher
b. Proprietors book values or the fair value of the property at the date of the investment,
whichever is lower.
c. Proprietors book values of the property at the date of the investment.
d. Fair value of the property at the date of the investment.
1.2. When property other than cash is invested in a partnership, at what amount should
the non-cash property be credited to the contributing partners capital account?
a. Contributing partners tax basis.
d. Fair value at the date of contribution.
1.3. An advantage of the partnership as a form of business organization would be

a. Partners do not pay income taxes on their share in partnership income.
b. A partnership is bound by the act of the partners
c. A partnership is created by mere agreements of the partners
d. A partnership may be terminated by the death or withdrawal of a partner.
1.4. When property other than cash i invested in a partnership, at what amount should
the noncash property be credited to the contributing partners capital account?
a. Fair value at the date of contribution
b. Contributing partners original cost
c. Assessed valuation for property tax purposes
d. Contributing partners tax basis
1.5. Partnership capital and drawings are similar to the corporate

a. Paid in capital, retained earnings and dividends accounts
c. Paid in capital and retained earnings accounts
d. Preferred and common stock accounts
PROBLEMS
1.6. Abena and Buendia establish a partnership to operate a used-furniture business

under the name of A and B Furniture. Abena contributes furniture that cost P60,000 and
has a fair value of P90,000. Buendia contributes P30,000 cash and delivery equipment
that cost P40,000 and has a fair value of P30,000. The partners agree to share profits
and losses 60% to Abena and 40% to Buendia.
The peso amount of gain (loss) that will result if the initial noncash contributions of the
partners are recorded at cost rather than fair market value will be
a. P30,000 and (P10,000) to Abena and Buendia, respectively
b. P12,000 and P8,000 to Abena and Buendia, respectively
c. (P18,000) and P18,000 to Abena and Buendia, respectively
d. P 18,000 and (P18,000) to Abena and Buendia, respectively
1.7. On April 30, 2003, Bautista, Jimenez and Laxamana formed a partnership by
combining their separate business proprietorships. Bautista contributed cash of
P100,000. Jimenez contributed property with a carrying amount of P72,000, original
cost of P80,000, and fair value of P160,000. The partnership accepted responsibility
for the P70,000 mortgage attached to the property. Laxamana contributed equipment
with a carrying amount of P60,000, original cost of P150,000, and fair value of 110,000.
The partnership agreement specifies that profits and losses are to be shared equally but
is silent regarding capital contributions.
Which partner has the largest capital account balance as of April 30, 2003?
a. Bautista c. Laxamana
b. Jimenez d. All capital account balances are equal
1.8. G. Macalino and W. Nolasco form a partnership and agree to divide initial capital
equally, even though Macalino contributed P100,000 and Nolasco gave P84,000 in
identifiable assets.
Under the bonus approach to adjust capital accounts, Nolascos unidentifiable assets
should be debited for
a . P8,000 c. P-0-
b . P16,000 d . P46,000
1.9. L. Molina and R. Nepomuceno enter into a partnership agreement in which Molina
is to have a 60% interest in capital and profits and Nepomuceno is to have a 40%
interest in capital and profits. Molina contributes the following:
Cost Fair Value
Land P 20,000 P 40,000
Building 200,000 120,000

Equipment 40,000 30,000
There is a P60,000 mortgage on the building that the partnership agrees to assume.
Nepomuceno contributes P100,000 cash to the partnership. Molina and Nepomuceno
agree that Nepomucenos capital account should equal Nepomucenos P100,000 cash
contribution and that goodwill should be recorded.
Goodwill should be recorded in the amount of

a. P20,000 c. P33,333
b. P30,000 d. P40,000
1.10. On March 1, 2003, Z Roxas and B. Poe decided to combine their business and
form a partnership. The balance sheet of Roxas and Poe on March 1, before adjustment
is presented below.
Roxas Poe
Cash P 9,000 P 3,750
Furniture and fixtures (net) 30,000 9,000
Office Equipment (net) 11,500 2,750
Prepaid Expenses 6,375 3,000
P105,375 P51,500
Z. Roxas, Capital 59,625
B. Poe, Capital 33,500
P105,375 P 51,500
They agreed to provide 3% for doubtful accounts on their accounts receivable and
found Poes furniture to be under depreciated by P900.
If each partners share in equity is to be equal to the net assets invested, the capital
accounts of Roxas and Poe would be:
a. P58,170 and P33,095 respectively
b. P58,320 and P32,945 respectively
c. P59,070 and P32,195 respectively
d. P104,820 and P50,195 respectively
1. Which of the following is not a characteristic of a partnership?

a. The partnership itself pays no income taxes
b. It is easy to form a partnership
c. Any partner can be held personally liable for all debts of the business
d. A partnership requires written Article of Partnership
2. The partnership form of business is:

a. An economic entity
b. A taxable entity
c. A fiscal entity
d. A separate legal entity, just as a corporation is a legal entity
3. Which of the following is not an advantage of partnership over a corporation?

a. Ease of formation
b. Unlimited liability
c. The elimination of taxes at the entity level
d. All of the above
4. A partners withdrawal of assets from a limited liability partnership that is considered a

permanent reduction of in that partners equity is debited to the partners:
a. Drawing account
c. Capital account
d. Loan receivable account
5. For financial accounting purposes, assets of an individual partner contributed to partnership

are recorded by the partnership at:
a. Historical cost
b. Book value
c. Fair market value
d. Lower of cost or market
6. On December 1, 2009, DD and EE formed a partnership with each contributing the following
asset at fair market values:
DD EE
Cash 9,000 18,000
Machinery and Equipment 13,500
Land 90,000
Building 27,000
Office Furniture 13,500
The land and building are subject to a mortgage loan of P54,000 that the partnership will
assume. The partnership agreement provides that DD and EE share profits and losses, 40% and
60%, respectively and partners agreed to bring their capital balances in proportion to the profit
and loss ratio and using the capital balance of EE as the basis. The additional cash investment
made by DD should be:
a. 18,000
b. 85,500
c. 134,100
d. 166, 250
DD, Capital= 9+13.5+13.5=36
EE, Capital= 18+90+27-54=81
81/.60=135
135*.40=56-36=18 A
7. JJ and KK are joining their separate business to form a partnership. Cash and noncash asset are
to be contributed for a total capital of 300,000. The noncash assets to be contributed and
liabilities to be assumed are:
JJ KK
Book Value Fair Value Book Value Fair Value
Inventories 22,500 33,750 60,000 67,500
Equipment 37,500 30,000 67,500 71,250
Accounts Payable 11,250 11,250 7,500 7,500
The partners capital are to be equal after all contributions of assets and assumptions of
liabilities. The total assets of the partnership.
a. 318,750
b. 300,000
c. 281,250
d. 225,000
Equity=Assets-Liabilities
300,000=X-(11,250+7,500)
Assets=X=318,750 A
8. Refer to number 8, the amount of cash that each partner must contribute.
a. JJ=75,000; KK=18750
b. JJ=75,000; KK=11,250
c. JJ=161,250; KK= 157,500
d. JJ= 127,500; KK= 11,250
For JJ; 150,000=Cash to be contrubuted+22,500+33,750+30,000+(-11250)
Cash to be contributed=75,000
For KK; 150,000=Cash to be contributed+67,500+71,250+(-7500)
Cash to be contributed=18,750 A
9. Jones and Smith formed a partnership with each partner contributing the following items:
Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed
by the Jones and Smith partnership. Refer to the above information. What is the balance in each
partners capital account for financial accounting purposes?
C
Jones Smith
Assets at fair value
Jones: 80,000+400,000 480,000
Smith: 40,000+280,000 320,000
Less: Liabilities assumed 120,000 60,000
Capital 360,000 260,000
10. MM, NN, and OO are partners with capital balances on December 31, 2012 of P300,000,
P300,000 and P200,000, respectively. Profits are shared equally. OO wishes to withdraw and it is
agreed that OO is taken certain equipment with second-hand value of P50,000 and a note for
the balance of OOs interest. The equipment are carried on the books at P65,000. Brand new
equipment may cost P80,000. Compute for: (1) OOs acquisition of the second-hand equipment
will result to reduction in capital; (2) the value of the note that will OO 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
B
1. Reduction in Capital:
Equipment at carrying value 65,000
Equipment at secondhand value (fair value) 50,000
Decrease in equipment 15,000

Multiply by: Profit & Loss Ratio of MM, NN,and OO 1/3
Reduction in capital 5,000
2. Notes Payable to OO
Unadjusted Capital of OO 200,000
Less: Share in the decrease of equipment 5,000
Adjusted capital of OO 195,000
Less: Equipment receive at secondhand value 50,000
Value of notes payable 145,000
Incidentally, the juournal entry would be:

OO, Capital 200,000
NN, Capital 5,000
MM, Capital 5,000
Eqipment, carrying value 65,000
Notes Payable 145,000
1. Cat and Dog formed a partnership, each contributing assets to the business. Cat contributed
inventory with a current market value in excess of its carrying amount. Dog contributed real estate
with a carrying amount in excess of its current market value. At what amount should the
partnership record each of the following assets?
Inventory Real estate

a. Market value Market value
b. Market value Carrying amount
c. Carrying amount Market value
d. Carrying amount Carrying amount
2. Recording of Cash Investment
a. Face Value b. Agreed value c. memorandum entry d. none of these
3. Recording of Property Investment
4. Recording of the investment(industry)
5. Which of the following statements are true when comparing corporations and partnerships?
a. Partnership entities provide for taxes at the same rates used by corporations
b. In theory, partnerships are more able to attract capital
c. Like corporations, partnerships have an infinite life
d. Unlike shareholders, general partners may have liability beyond their capital balances
Problems
1. On May 1, 2015, Cat and Meow formed a partnership and agreed to share profits and losses in
the ratio of 3:7, respectively. Cat contributed a parcel of land that cost her P10,000. Meow
contributed P40,000 cash. The land has a fair value of P15,000. Cat insisted that the value of the
land should be P18,000. The partners agreed to value the land at P18,000. What amount should
be recorded in Cats capital account on formation of the new partnership?
a. P18,000 b. P17,400 c. P15,000 d. P10,000
2. On July 1, Manny and Floyd formed a partnership, agreeing to the profit and loss in the ratio of
4:6, respectively. Manny contributed a parcel of land that cost him P25,000. Floyd contributed
P50,000 cash. The land was sold for P50,000 on July 1, for hours after formation of the
partnership. How much should be recorded in Mannys capital account on the partnership
formation?
a. P10,000 b. P20,000 c. P25,000 d. P50,000
3. Bill and Ken enter into a partnership agreement in which Bill is to have a 60% interest in capital
and profits and Ken is to have a 40% interest in capital and profits. Bill contributes the ff:
Cost Fair Value
Land P10,000 P20,000
Building P100,000 P60,000
Equipment P20,000 P15,000
There is a P30,000 mortgage on the building that the partnership agrees to assume. Ken
contributes P50,000 cash to the partnership. Bill and Ken agree that Kens capital account should
equal Kens P50,000 cash contribution and that goodwill should be recorded. Goodwill should be
recorded in the amount of:
a. P10,000 b. P15,000 c. P16,667 d. P20,000

Solution:
Cash contribution of Ken P50,000
Divided by Ken capital interest 40%
Total agreed capital P125,000
Less: Bills Contribution 65,000
Kens agreed capital P 60,000
Less: Kens contribution 50,000
Goodwill P 10,000
For 4 and 5
Cat admits Dog as partner in business. Accounts in the ledger for Cat on November 30, 2015, just before
the admission of Dog, show the following balances:
Cash P6,800
Accounts Receivable P14,200
Merchandise Inventory P20,000
Accounts Payable P8,000
Cat, capital P33,000
It is agreed that or the purposes of establishing Cats 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 P23,000
c. Prepaid salary expenses of P600 and accrued rent expense of P800 are to be recognized.
4. Dog is to invest sufficient cash to obtain a 1/3 interest in the partnership. Cats adjusted capital
before the admission of Dog
a. P28,174 b. P35,347 c. P35,374 d. P36,374
5. The amount of cash investment by Dog
a. P11,971 b. P35,347 c. P17,687 d. P18,790
Solution:
Cat, capital P33,000 Cats capital contribution P35,347
Less: Allowance for Divided by Cats capital interest 2/3
doubtful accounts 426 Total agreed capital P53,061
Accrued rent Multiply by Dogs capital interest x 1/3
expense 800 Dogs cash contribution P17,687
Total P 31,774
Add: Inventory 3,000
Prepaid rent 600
Cats adjusted capital P 35,374

Chapter 1 Partnership Formation Test Banks

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Chapter 1 Partnership Formation Test Banks

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Chapter 1: Partnership Formation

The following are Ernie and Berts Statement of Financial Position:

Cash 50,000 Accounts payable 65,000

1. How much is the adjusted capital balance of Bert upon formation?

Cost Fair value

2. How much is the total asset of the partnership upon formation?

2. A partnership records a partners investment of assets in the business at

3. One of the following is not a characteristic of contract of partnership.

4. One of the following is not a requisite of a contract of partnership. Which is it?

Suggested Answer: (b) 35,000 & 75,000

Suggested Answer: (d) 60,000

Contributed Capital Agreed Capital Increase (Decrease)

Suggested Answer: (b) 20,000 bonus to Redd

Contributed Capital Agreed Capital Increase (Decrease)

Accounts Payable P 178,940 P 243,650

Suggested Answer: (c) 2, 265, 118

A. The capital account of GT will be credited in the amount of P2,250

2. Goodwill represents the excess cost of an acquisition over the:

3. When a partnership is formed, noncash assets contributed by partners should be recorded:

4. A limited liability company (LLC):

5. Transferable interest of a partner includes all of the following except:

2. Which of the following is NOT a feature of a general partnership?

3. A partner's tax basis in a partnership is comprised of which of the following items?

a. I plus II minus III

4. Which of the following accounts could be found in the general ledger of a

5. Which of the following accounts could be found in the PQ partnership's general

ANSWERS & SOLUTIONS (Chapter 1)

Office Equipment P220,000

Note payable ________ _( 60,000) ______

Net asset invested P140,000 P160,000 P

Agreed capitals, equally (P300,000/3) = P100,000

Cash P130,000 P200,000

Computer equipment 50,000

Note payable ________ _( 10,000)

Net asset invested P130,000 P240,000

Goodwill (P240,000 - P130,000) = P110,000

5. A unique feature of partnerships (compared with publicly owned corporations) is that:

a. P18,000 b. P17,400 c. P15,000 d. P10,000

a. P10,000 b. P20,000 c. P25,000 d. P50,000

Use the following question for 3 & 4

a. P280,000 b. P305,000 c. 314,000 d. 370,000

a. P19,000 b. P30,000 c. P40,000 d. P55,000

a. P3,600,000 b. P3,000,000 c. P3,480,000 d. P2,000,000

A. Jones: P 360,000, Smith: P 260,000

2. The business assets of LL and MM appear below:

Accounts Payable P 178,940 P 243,650

Accounts Payable P45,750 P18,000

They agreed to have the following items recorded in their books:

Compute the net (debit) credit adjustment for PP and QQ:

1. Which of the following is not a characteristic of most partnership?

3. An advantage of the partnership as a form of business organization would be

5. Partnership capital and drawings accounts are similar to the corporate

For questions 6-10:

Accounts payable P 178,940 P 243,650

7. How much assets does the partnership have?

Suggested answer (b)

Use following information for question 1 to 5

A and Bs inventory is to be valued at 31,000 and 22,000 respectively.

Balance sheet for A and B before adjustments

Accounts Payable 28,000 20,000

1. The additional investment (withdrawal) made by A:

2. The total assets of the partnership after formation:

3. The total liabilities of the partnership after formation: