PARTNERSHIP: FORMATION AND OPERATION

1. 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.

Answer: A

3. The disadvantages of the partnership form of business organization, compared to corporations,

include

A) the legal requirements for formation.

B) unlimited liability for the partners.
C) the requirement for the partnership to pay income taxes.
D) the extent of governmental regulation.
E) the complexity of operations.

Answer: B

4. The dissolution of a partnership occurs

A) only when the partnership sells its assets and permanently closes its books.
B) only when a partner leaves the partnership.
C) at the end of each year, when income is allocated to the partners.
D) only when a new partner is admitted to the partnership.
E) when there is any change in the individuals who make up the partnership.

Answer: E

5. The partnership of Clapton, Seidel, and Thomas was insolvent and will be unable to pay P30,000 in
liabilities currently due. What recourse was available to the partnership's creditors?

A) they must present equal claims to the three partners as individuals.

B) they must try obtain a payment from the partner with the largest capital account balance.
C) they cannot seek remuneration from the partners as individuals.
D) they may seek remuneration from any partner they choose.
E) they must present their claims to the three partners in the order of the partners' capital account
balances.

Answer: D

6. The partners of Apple, Bere, and Carroll LLP share net income and losses in a 5:3:2 ratio, respectively.
The capital account balances on January 1, 2008, were as follows: The carrying amounts of the assets
and liabilities of the partnership are the same as their current fair values. Dorr will be admitted to the
partnership with a 20% capital interest and a 20% share of net income and losses in exchange for a cash
investment. The amount of cash that Dorr should invest in the partnership is:

Apple, Capital P25,000

Bere, Capital 75,000
Caroll, Capital 50,000
Total Partner’s Capital P150,000

A) P25,000. D) P75,000.
B) P30,000. E) P90,000.
C) P37,500.

Answer: C (P150,000/.8=P187,500. P187,500 – P150,000 = P37,500 to invest)

Use the following information for questions 6, 7 and 8.

A summary balance sheet for the McCune, Nall, and Oakley partnership appears below. McCune, Nall,
and Oakley share profits and losses in a ratio of 2:3:5, respectively.

Assets
Cash P 50,000
Inventory 62,500
Marketable securities 100,000
Land 50,000
Building-net 250,000
Total assets P 512,500

Equities
McCune, capital P 212,500
Nall, capital 200,000
Oakely, capital 100,000
Total equities P 512,500

The partners agree to admit Pavic for a one-fifth interest. The fair market value of partnership land is
appraised at P100,000 and the fair market value of inventory is P87,500. The assets are to be revalued
prior to the admission of Pavic and there is P15,000 of goodwill that attaches to the old partnership.

7. By how much will the capital accounts of McCune, Nall, and Oakley increase, respectively,
due to the revaluation of the assets and the recognition of goodwill?
a. The capital accounts will increase by P25,000 each.
b. The capital accounts will increase by P30,000 each.
 c. P18,000, P27,000, and P45,000.
d. P20,000, P25,000, and P30,000.

Answer c The assets will be valued upward by P90,000 which, allocated on a 2:3:5 basis, yields
P18,000 to McCune, P27,000 to Nall, and P45,000 to Oakely.

8. How much cash must Pavic invest to acquire a one-fifth interest?

a. P117,500.
b. P120,500.
c. P146,875.
d. P150,625.

Answer d After the revaluation, the assets will be recorded at P602,500. If Pavic is admitted
for a one-fifth interest, the P602,500 represents 80% of the total implied capital.
Dividing P602,500 by 80% gives a total capitalization of P753,150 for which
P150,625 is required from Pavic for a 20% interest.

9. What will the profit and loss sharing ratios be after Pavic’s investment?
a. 1:2:4:2.
b. 2:3:5:2.
c. 3:4:6:2.
d. 4:6:10:5.

Answer d Each of the original partners has given up 20% of their interest to Pavic. Their profit and
loss sharing ratios will therefore be 80% of what they were before the admission of
Pavic.

McCune 20% x 80% = 16%

Nall 30% x 80% = 24%

Oakely 50% x 80% = 40%

Pavic = 20%

Expressed as: 4:6:10:5

10. He refers to a partner who contributed not only money and property but also industry to the newly
formed partnership.

a. Industrial Partner
b. Nominal Partner
c. Capitalist-industrial Partner
d. Capitalist Partner

Answer: c
11. 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 partner’s 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.

Answer: a

12. Roberts and Smith drafted a partnership agreement that lists the following assets contributed at the
partnership’s 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

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 partner’s 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.

13. 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 Redd’s initial capital balance in the partnership?
 a. 20,000
b. 25,000
c. 40,000
d. 60,000

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).

14. 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

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.

15. 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 John’s books and P35, 000 in Paul’s are uncollectible.
b. Inventories of P5, 500 n P6, 700 are worthless in John’s and Pail’s respective books.
c. Other assets of P2, 000 and P3, 600 in John’s and Paul’s 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

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

16. 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

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

17. 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 c. 100,000
b. 50,000 d. 140,000
Answer: 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

18. 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 c. 8,000
b. 16,000 d. 46,000

Answer: a

Zero, because under the bonus method, a transfer of capital is only required.

19. 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 c. 120,000
b. 110,000 d. 140,000

Answer: 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

20. 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 c. 110,000
b. 80,000 d. 150,000

Answer: 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

21. 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 c. Option C
b. Option B d. Option D

Answer: a

Jones: (80000+300000) - 120000 + (180000/2) = 350000

Smith: (40000+200000) - 60000 + (180000/2) = 270000

22. Which of the following accounts could be found in the general ledger of a partnership?

a. Option A c. Option C
b. Option B d. Option D

Answer: d

23. On April 30, year 1, Algee, Belger, and Ceda formed a partnership by combining their separate
business proprietorships. Algee contributed cash of P50,000. Belger contributed property with a
P36,000 carrying amount, a P40,000 original cost, and P80,000 fair value. The partnership accepted
 responsibility for the P35,000 mortgage attached to the property. Ceda contributed equipment with
a P30,000 carrying amount, a P75,000 original cost, and P55,000 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. c. Ceda.
b. Belger. 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 P50,000 P45,000 P55,000

Each partner values his contribution to the partnership at its fair market value. The fair market
value becomes the partner’s 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.

24. Abel and Carr formed a partnership and agreed to divide initial capital equally, even though Abel
contributed P100,000 and Carr contributed P84,000 in identifiable assets. Under the bonus
approach to adjust the capital accounts, Carr’s unidentifiable asset should be debited for
a. P 46,000 c. P 8,000
b. P 16,000 d. P 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.
25. Papa and Mama are partners sharing profits in a 30:70 ratio. The following data summarizes 2018
activity:

Partnership net income, 2018 P68,000

Ellis capital, 1/1/2018 90,000
Ellis additional investment in 20018 10,000
Ellis drawings in 2018 12,000
Nossiter capital, 1/1/2018 80,000
Nossiter drawings in 2018 20,000

What amount of net income is allocated to Nossiter’s capital account for 2018?
a. P 26,600 c. P 34,000
b. P 27,600 d. P 47,600

Answer: (d) (68,000×.7)

26. Ellis and Nossiter are partners sharing profits in a 30:70 ratio. The following data summarizes 2018
activity:

Partnership net income, 2018 P 68,000

Ellis capital, 1/1/2018 90,000
Ellis additional investment in 2018 10,000
Ellis drawings in 2018 12,000
Nossiter capital, 1/1/2018 80,000
Nossiter drawings in 2018 20,000

What is the value of Ellis’s capital account at 12/31/2004?

a. P20,400 c. P111,400
b. P108,400 d. P111,400

Answer: (b) (90,000+10,000-12,000+(68,000×.3))

27. 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 c. P 16,000.00
b. P 20,000.00 d. P 26,667.00

Answer: 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.

28. 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 Pablo’s capital account should be:

a. P 290,000.00 c. P 314,000.00
 b. P 305,000.00 d. P 370,000.00

Answer: 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.

29. 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 c. P 355,000
b. P 280,000 d. P 284,000

Answer: 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)
Mac’s contribution P 350,000

30. 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
Accounts Receivable 22,500 22,500
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 partner’s capital are to be equal after all contributions of assets and assumptions of liabilities. The
total assets of the partnership.
 a. 318,750 c. 281,250
b. 300,000 d. 225,000

Answer: a.
ASSETS = LIABILITIES+ CAPITAL
= (11,250+7,500)+300,000
ASSETS= 318,750

31. 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

Answer: a

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

32. 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
Answer: A

33. 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 Ken’s capital account should equal Ken’s
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

Answer: a
Cash contribution of Ken P50,000
Divided by Ken capital interest ÷ 40%
Total agreed capital P125,000
Less: Bill’s Contribution 65,000
Ken’s agreed capital P 60,000
Less: Ken’s contribution 50,000
Goodwill P 10,000

For questions 34 & 35. 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 Cat’s 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.

34. Dog is to invest sufficient cash to obtain a 1/3 interest in the partnership. Cat’s adjusted capital
before the admission of Dog

a. P28,174 b. P35,347 c. P35,374 d. P36,374

35. The amount of cash investment by Dog
a. P11,971 b. P35,347 c. P17,687 d. P18,790
Solution:
Cat, capital P33,000 Cat’s capital contribution P35,347
Less: Allowance for Divided by Cat’s capital interest ÷ 2/3
doubtful accounts 426 Total agreed capital P53,061
Accrued rent Multiply by Dog’s capital interest x 1/3
expense 800 Dog’s cash contribution P17,687
Total P 31,774
Add: Inventory 3,000
Prepaid rent 600
Cat’s adjusted capital P 35,374