MULTIPLE CHOICE PROBLEMS

Partnership Formation:

1. On December 1, 20x5, EE and FF formed a partnership, agreeing to share for

profits and losses in the ratio of 2:3 respectively. EE invested a parcel of land
that cost him P25,000. FF invested P30.000 cash. The land was sold for P50,000
on the same date, three hours after formation of the partnership. How much
should be the capital balance of EE right after formation?

a. P 25,000 c. P 60,000
b. 30,000 d. 50,000 (AICPA)

Answer: (d)

In the formation of a partnership, one or more of the partner will contribute

noncash assets to the business such as inventory, land or equipment, etc.
retaining the recorded cost for such asset would be inequitable to any
partners investing appreciated property. Therefore, the contribution of
noncash assets to a partnership should be recorded based on fair values. In
this case, the fair value of the land would be measured by its sales price on
the date of sale, P50,000.

2. On March 1, 20x5, II and JJ formed a partnership with each contributing the

following assets:
II JJ

Cash……………………………………….. P300,000 P700,000

Machinery and equipment…………… 250,000 750,000
Building…………………………………….. — 2,250,000
Furniture and fixtures……………………. 100,000 —
 The building is subject to mortgage loan of P800,000, which is to be assumed
by the partnership agreement provides that II and JJ share profits and losses
30% and 70%, respectively. On March 1, 20x5 the balance in JJ's capital
account should be?

a. P 3,700,000 c. P 3,050,000
b. 3,140,000 d. 2,900,000
(AICPA)

Answer: (d)

JJ___

Cash ……………………………………………………………………..… P 700,000

Machinery and Equipment……………………………………..…..…. 750,000
Building …………………………………………………………………… 2,250,000
Total assets invested …………………………………………...…..….. P 3,700,000
Less: Mortgage loan ……………………………………...…………... 800,000
Capital balance off JJ on March 1, 20x5 …………...…………... P 2,900,000 (d)

Profits and loss ratios are ignored and does not have any bearing in the
problem, unless the noncash assets are invested and recorded in the
partnership and subsequent adjustments are required to reflect agreed value
or fair values.

3. The same information in Number 2. except that the mortgage loan is not
assumed by the partnership. On March 1 20x5 the balance in JJ's capital
account should be:

a. P3,700,000 c. P 3,050,000
b. 3,140,000 d. 2,900,000
(AICPA)

Answer: (a)
 JJ___

Cash ……………………………………………………………………… P 700,000

Machinery and Equipment ….………………………………………. 750,000
Building …………………..………………………………………………. 2,250,000

Total assets invested ………………………………………………….. P 3,700,000

Less: Mortgage loan …………………………………………………. 0
Capital balance off JJ on March 1, 20x5 …….…………………. 3,700,000 (a)

4. As of July 1, 20x5, FF and GG decided to form a partnership. Their balance

sheets on this date are:

FF GG

Cash……………………………………………… P 15,000 P 37,500

Accounts receivable ………………………… 540,000 225,000
Merchandise inventory……………………… - 202,500
Machinery and equipment………………… 150,000 270,000

Total …………………………………………….. P 705, 000 P 735, 000

Accounts payable………………………….... P 135,000 240,000

FF, Capital …………….………………………. 570,000 -
GG, Capital ………………………………….. - 4 95,000

Total …………………………………………….. P 705, 000 P 735, 000

The partners agreed that the machinery and equipment of FF is under

depreciated by P15,000 and that of GG by P45,000. Allowance for doubtful
accounts is to be set up amounting to P120,000 for FF and P45,000for GG.
The partnership agreement provides for a profit and loss ratio and capital
interest of 60% to FF and 40% to GG. How much cash must FF invest to bring
the partners' capital balances proportionate to their profit and loss ratio?
 a. P52,560 c. 142,560
b. 102,500 d. 172,500 (Adapted)

Answer: (d)

GG’s adjusted capital* ……………………………………………… P 700,000

Divided by: GG’s P&L percentage ….……………………………. 40%
Total agreed capital …………………………………………………. 1,012,500
Multiplied by: FF’s P&L percentage ….……………………………. 60%
FF’s agreed capital …………………………………..………………. 607,500
Less: FF’s adjusted contributed capital .………………………..… 435,000
Additional cash to be invested by FF ……..……………………… P 172,500 (d)

Computation of adjusted contributed capital:

FF GG__
Unadjusted capital ………………………….…….. P570,000 P495,000
Add: (Deduct): adjustments:
Accumulated depreciation……………….…. ( 15,000) ( 45,000)
Allowance for doubtful accounts………. ( 120,000) ( 45,000)
Adjusted contributed capital ..…………….…. P 435,000 P 405,000

5. On August 1, AA and BB pooled their assets to form a partnership, with the

firm to take over their business assets and assume the liabilities. Partners
capitals are to be based on net assets transferred after the following
adjustments. (Profit and loss are allocated equally).
BB's inventory is to be increased by P4,000; an allowance for doubtful
accounts of P1,000 and P1,500 are to be set up in the books of AA and BB
respectively; and accounts payable of P4,000 is to be recognized in AA's
books. The individual trial balances on August 1, before adjustments, follow:

AA BB
Assets P 75,000 P 113,000
Liabilities 5,000 34,500
 What is the capital of AA and BB after the above adjustments?

a. AA, P68,750; BB, P77,250

b. AA, P75,000; BB, P81,000
c. AA, P65,000: BB, P76,000
d. AA, P65,000: BB, P81,000 (Adapted)

Answer: (d)
AA BB______
Assets ………………………………….…….. P75,000 P113,000
Less: Liabilities ……………………….….…. 5,000 34,500
Unadjusted capital………….…….………. 70,000 78,500
Add: (deduct): adjustments:
Increase in inventory……..….…………… 4,000
Allowance for doubtful accounts……. ( 1,000) ( 1,500)
Accounts Payable ………….….……. ( 4,000)
Adjusted capital balance.……………… P 65,000 P 81,000 (d)

6. CC admits DD as a partner in business. Accounts in the ledger for CC on

November 30, 20X5, just before the admission of DD. show the following
balances:

Cash P 6,800
Accounts Receivable 14,200
Merchandise Inventory 20,000
Accounts Payable 8,000
CC, Capital 33,000

It is agreed that for purposes of establishing CC'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.

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

Compute for: (1) CC’s adjusted capital before the admission of DD; and (2)
the amount of cash investment by DD:

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

b. (1) 36,374; (2) 18,487
c. (1) 35,374; (2) 17,687
d. (1) 28,174; (2) 14,087 (Adapted)

Answer: (c)
Unadjusted capital of CC………………………………………… P495,000
Add: (Deduct): adjustments:
Allowance for doubtful accounts (3% x P14,200) ………. ( 426)
Increase in Merchandise inventory (P23,000 – P20,000) 3,000
Prepaid salary…………………………………………………. 600
Accrued rent expense …………….…………………………. ( 800)
Adjusted capital balance of CC …………………………….. P 35,374 (c)
Divided by: capital interest of CC ….………………………..…. 2/3
Total capital of the partnership ………………………………….. 53,061
Less: Adjusted capital balance of CC ………….……………… 35,374
Capital balance of DD …………………………………………….. P 17,687 (c)

7. MM, NN, and OO are partners with capital balances on December 31, 20x5
of P300,000, P300,000 and P200,000, respectively. Profits are shared equally.
OO wishes to withdraw and it is agreed that OO is to take certain equipment
with second-hand value of P50,000 and a note for the balance of OO's
interest. The equipment are carried on the books at P65,000. Brand new
equipment may cost P80,000. Compute for: (1) OO's acquisition on the
second-hand equipment will result to reduction in capital: (2) the value of
the note that will OO get from the partnership's liquidation.
 a. (1) P 15,000 each for MM and NN, (2) P150,000.
b. (1) P 5,000 each for MM, NN and OO, (2) P145,000.
c. (1) P 5,000 each for MM, NN and OO, (2) P195,000.
d. (1) P 7,500 each for MM and NN, (2) P145,000.
(Adapted)

Answer: (b)

(1) Reduction in capital:

Equipment of carrying value ….…………………….……. P65,000
Equipment at second-hand value (fair value..………... 50,000
Decrease in equipment ……………………………………. 15,000
Multiply by: Profit and loss ratio of MM, NN, and OO ….…………. 1/3
Reduction in capital ……………………………………………………. P 5,000(b)

(2) Notes payable to OO:

Unadjusted capital of OO ……………………………………… P200,000
Less: Share in the decrease of equipment ……………….. 5,000
Adjusted capital of OO …………………………………….….. 195,000
Less: Equipment received at second-hand value ………… 50,000
Value at notes payable …………………………….. P145,000 (b)

Incidentally the journal entry would be:

OO, Capital ………………………………………………… 200,000
NN Capital …………………………………………………… 5,000
MM, Capital ………………………………………………… 5,000
Equipment, carrying value ………………………………... 65,000
Notes Payable ……………………………………………..… 145,000

8. 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 partner's capital account for financial accounting purposes?

Jones Smith
A. P 350,000 P 270,000
B. P 260,000 P 180,000
C. P 360,000 P 260,000
D. P 500,000 P 300,000

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

Answer: (c)

Jones Smith

Assets of fair value

Jones: P80,000 + P400,000 ………….… P480,000
Smith: P40,000 + P280,000 …………….. P320,000
Less: Liabilities assumed ………………………. 120,000 60,000
Capital …………………………………………… P360,000 P260,000
9. The business assets of LL and MM appear below.

LL MM

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 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

LL, Capital 641,976 --
MM, Capital -- 738,352
P 1,020,916 P 1,317,002

LL and MM agreed to form a partnership by contributing their respective

assets and equities subject to the following adjustments:

a. Accounts receivable of P20,000 in LL's books and P35,000 in MM's are

uncollectible.
b. Inventories of P5,500 and P6,700 ore worthless in LL's and MM's
respective books.
c. Other assets of P2,000 and P3,600 in IL's and MM's respective books are
to be written off.

The capital account of the partners after the adjustments will be:
 a. LL, P 615, 942; MM, P 717, 894
b. LL, P 640, 876; MM, P 712, 345
c. LL, P 640, 876: MM P 683, 050
d. LL, P 614, 476; MM, P 683, 052
(PhilCPA)

Answer: (c)

LL MM
Unadjusted capital balance…………………………… P641,976 P728,352
Add (deduct): Adjustments:
Uncollectible receivables………………………… (20,000) (35,000)
Write-off of inventories…………………………… (5,500) (6,700)
Write-off of other assets…………………………… (2 ,00) (3,600)
Adjusted capital balance……………………………….. P614,476 P683,052

10. The same information in Number 9, how much total assets does the
partnership have after formation?

a. P 2,337,918
b. 2,237,918
c. 2,265,118
d. 2,365,218 (PhilCPA)

Answer: (c)

Unadjustedtotal assets (P1,020,916 + P1,317,200)………………………… P2,337,918

Add (deduct): Adjustments:
Uncollectible receivables (P20,000 + P35,000)…….………………... (55,000)
Write-off of inventories (P5,500 + P6,700)………...…………..……… (12,200)
Write-off of other assets (P2,000 + P3,600)……………..…………… (5,600)
Adjusted total assets after formation...……………………………………… P2,265,118
11. On March 1, 20x5, PP and QQ decide to combine their businesses and form a
partnership. Their balance sheets on March 1, before adjustments showed
the following:

PP QQ
Cash P 9,000 P 3,750
Accounts receivable 18,500 13,500
Inventories 30,000 19,500

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 P 51,500

Accounts Payable P 450,750 P 18,000

Capital 59,625 33,500

Total P 105,375 P 51,500

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

1. Provide 2% allowance for doubtful accounts.

2. PP's furniture and fixtures should be P31.000, while QQ's Office
equipment is under-depreciated 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 amounted to:

For PP ………………………………….. P 29,500

 For QQ ………………………………… 21, 000

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

PP QQ
a. P 2,870 P 2,820
b. P (2,870) P (2,820)
c. P (870) P 180
d. P 870 P (180)

Answer: (c)

Debit (credit) adjustments to capital accounts: PP QQ

Allowance for doubtful accounts:
PP: 2% x P18,500………………………………… P(370)
QQ: 2% x P13,500 P(270)
Furniture and fixture (P31,000 – P30,000) 1,000
Office equipment (250)
Accrued rent expense (1,000)
Accrued salary expense (800)
Inventory adjustments:
PP: (P29,500 – P30,000)……………………… (500)
QQ: (P21,000 – P19,500)……………………… 1,500
Net adjustments…………………………………………….. P (870) P 180

12. The same information in Number 11, compute the total liabilities after
formation:

a. P 61,950 c. P 65,550
b. P 63,750 d. P 63,950

Answer: (c)

Unadjusted total liabilities (P45,750 + P18,000)……………………… P63,750

Add (deduct): adjustments:
Accrued rent expense…………………………………………. 1,000
Accrued salary expense…………………………….…………. 800
Adjusted total liabilities after formation …………………………… P65,550

13. The same information in Number 11, compute the total assets after
formation:

a. P 157,985
b. P 156,875
c. P 160,765
d. P 152,985

Answer: (a)

Unadjusted total assets (P105,375 + P 51,500)……………………… P156,875

Add (deduct): adjustments:
Allowance for doubtful accounts (P370 + P270)………….. (640)
Furniture and fixtures…………………………………………… 1,000
Office equipment………………………………………………… (250)
Inventory (P1,500 – P500)……………………………………… 1,000
Adjusted total assets after formation …………………………………. P157,985

14. On April 30, 20x5, XX, YY and ZZ formed a partnership by combining their
separate business proprietorships. XX contributed cash of P75,000. YY
contributed property with P54,000 carrying amount, a P60,000 original cost,
and P120,000 fair value. The partnership accepted responsibility for the
P52,500 mortgage attached to the property. LL contributed equipment with
a P45,000 carrying amount, P112,500 original cost, and P82,500 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, 2015, capital balance?
 a. XX c. ZZ

b. YY d. All capital account balances are equal

(AICPA)
Answer: (c)

XX YY ZZ
Cash…………………………………………………….... P75,000
Property………………………………………………….. P120,000
Equipment………………………………………………. P82,500
Less: Mortgage assumed…………………………….. 52,500
Capital balances……………………………………… P75,000 P67,500 P82,500

Items 15 to 17 are based on the following data:

On January 1, 20x4, Jackson and Kendall formed a partnership. Jackson, who

has many years of experience in this line of business, contributed P100,000 in
cash. Kendall contributed assets having the following book values and fair
market values:

Book value Market value

Merchandise P 15,000 P 25,000
Building 40,000 150,000
Equipment 60,000 85,000

The partnership assumed a mortgage of P 240,000 on the building. Capital

accounts are set equal to net assets invested.

15. The increase in capital of Kendall:

a. None c. by P 160,000
b. by P 100,000 d. by P 220,000

Answer: (b)

Cash 100,000
Merchandise 25,000
Building 150,000
Equipment 85,000
Mortgage Payable 40,000
Capital, Jackson 100,000
Capital, Kendall 220,000

16. The partners have an equal interest in the initial total partnership capital and
the bonus method is used, the increase in capital of Jackson:
a. None c. by P160,000
b. by P100,000 d. by P220,000

Answer: (c)

Cash P 100, 000

Merchandise 25, 000
Building 150, 000
Equipment 85, 000
Mortgage Payable P40, 000
Capital, Jackson 160, 000
Capital, Kendall 160, 000

17. The partners have an equal interest in the initial total partnership capital, and
the goodwill method is used, the increase in capital of Jackson:
a. None c. by P160,000
b. by P100,000 d. by P220,000

Answer: (d)
Cash 100,000
Merchandise Inventory 25,000
Building 150,000
Equipment 85,000
Goodwill 120,000
 Mortgage Payable 40,000
Capital, Jackson 220,000
Capital, Kendall 220,000

Partnership Operations:

18. JJ and KK are partners who share profits and losses in the ratio of 60%: 40%,
respectively. JJ's salary is P60, 000 and P30, 000 for KK. The partners are also
paid interest on their average capitol balances. In 20x5, JJ received P30,000
of interest and KK, P12, 000. The profit and loss allocation is determined after
deductions for the salary and interest payments. If KK's share in the residual
income (income after deducting salaries and interest) was P60,000 in 20x5,
what was the total partnership income?
a. P192, 000 c. P282,000
b. 345,000 d. 387,000 (Adapted)
Answer: (c)

JJ KK Total
Salary P 60, 000 P30, 000 P 90, 000
Interest 30,000 12,000 42, 000
Balance or Residual Profit 60,0001 150,0002
P282, 000
1 Given

2 P60,000 ÷ 40% profit and loss ratio = P 150,000

19. The Partnership has the following accounting amounts:

(1) Sales = P70,000

(2) Cost of Goods Sold = P40,000
(3) Operating Expenses = P10,000
(4) Salary allocations to partners = P13,000
(5) Interest paid to banks = P2,000
(6) Partners' withdrawals = P8,000
The partnership net income (loss) is:
 a. P20, 000 c. P 5,000
b. 18,000 d. (3,000) (Adapted)
Answer: (b)

Sales P 70, 000

Less: Cost of Goods Sold 40,000
Gross Profit P 30, 000
Less: Operating Expenses 10, 000
Operating Income P 20, 000
Less: Other Expenses: Interest Expense 2, 000
Net Income P 18, 000

20. Lancelot is trying to decide whether to accept a salary of P40, 000 or a salary
of P25, 000 plus a bonus of 10% of net income after salary and bonus as a
means of allocating profit among the partners. Salaries traceable to the
other partners are estimated to be P100, 000. What amount of income
would be necessary so that Lancelot would consider the choices to be
equal?
a. P165, 000 c. P265,000
b. 290,000 d. 305,000 (Adapted)
Answer: (b)

Bonus = 10% (NI – Salaries – Bonus)

P15, 000 = .10 (NI – (P100, 000 + P25, 000) – P15, 000
P15, 000 = .10 (NI – P140, 000)
P15, 000 = .10NI – P14, 000
P29, 000 = .10NI
P29, 000/.10 = NI
NI = P290, 000

21. Peter and Ronald are partners. They have shared profits and losses 65/35 for
a number of years. Peter has indicated that he is going to reduce his
involvement in the partnership so the profit and loss ratio is being modified to
45/55. At the date of the change in the profit and loss ratio, the partnership
 own vacant land with a market value of P300,000 and a book value of
P100,000. Peter and Ronald compile a list of assets with market and book
value differences. Two years after the change in the profit and loss ratios,
the land is sold for P450,000. How much of the gain is allocated to Peter?
a. P157, 500 c. P227, 500
b. P197, 500 d. P287, 500
Answer: (b)

= P300, 000 – P100, 000 (.65) + P450, 000 – P300, 000 (.45)
= P200, 000 (.65) + P150, 000 (.45)
= P130, 000 + P67, 500
= P197, 500

22. Jennifer and Robert are partners who are changing their profit and loss ratios
from 60/40 to 45/55. At the date of the change, the partners choose to
revalue assets with market value different from book value. One asset
revalued is land with a book value of P50, 000 and a market value of P120,
000. Two years after the profit and loss ratio is changed the land is sold for
P200.000. What is the amount of change to Robert's capital account at the
date the land is sold?
a. P32, 000 c. P60, 000
b. P44, 000 d. P82, 500

Answer: (b)
= P200, 000 – P120, 000 (.55)
= P80, 000 (.55)
= P44, 000

23. Shawn is a managing partner in a local business. Part of his profit allocation is
a bonus based on the store's operating income. The bonus is 8 percent of
operating income in excess of P200, 000 after deducting the bonus. If
operating income for the year is P250, 000, what is Shawn's bonus (rounded
to the nearest peso)?
a. P 3,703 c. P20,000
 b. P40, 000 d. P40,000

Answer: (a)

Bonus = .08 (P250, 000 + P200, 000) – B)

= .08 (P50, 000 – B)
= 4 - 0 .08 B
1 + .08 B =4
1.08 B =4
B = 4/1.08
B = 3, 703

24. James has a bonus as part of his partner profit allocation. The bonus is based
on the partnerships net income. James receives a bonus equal to 5 percent
that the net income exceeds P150,000. If the net income in the current year
is P180,000, how much bonus does James receive?
a. P30,000 c. P 7,500
b. P 9,000 d. P 1,500
Answer: (d)
Bonus =.05 (P180, 000-P150, 000)
=.05(30, 000)
= P 1,500

25. Cheryl is the manager of a local store. She is also a partner in the company
and she receives a bonus as part of the profit and loss allocation. Cheryl's
bonus is based on the increase in revenues recorded during the period. The
bonus arrangement is that Cheryl receives 1 percent of net income for every
full percentage point growth for revenues in excess of a 5 percent revenue
growth. During the most recent period, revenues grew from P500,000 to
P540,000 and net income grew from P98,000 to P120,000. How much bonus
does Cheryl receive for this period?
a. P 2,000 c. P 3,600
b. P 1,100 d. P 6,000
Answer: (c)
Bonus = {[(P540,000 – 500,000)/P500,000]-.05) P 120,000
= (40, 000/500, 000)-.05) P 120,000
= (0.08-.05) P 120,000
= (.03) P 120,000
= P 3,600

26. Nick, Joe, and Mike are partners. The company has P150,000 net income for
the period. How is this income divided to the partners if the following profit
and loss allocation process is followed?
Nick Joe Mike
Weighted average capital P200, 000 P350,000 P180,000
Salary 25,000 15,000 30,000
Bonus .1 (NI - P100 000)
Residual profit/loss ratios .25 .45 .30
Return on invested capital 9%
Nick Joe Mike

a. P43,000 P46,500 P60,500

b. P45,325 P50,685 P53,990
c. P50,000 P50, 000 P50,000
d. P44,075 P48,435 P57,490

Answer: (d)
Nick Joe Mike Total
Interest on Capital
P200, 000 × .09 P18, 000
P350, 000 ×.09 P31, 000
P180, 000×.09 P16, 000 P65, 700
Salary P25, 000 15,000 35,000 75,000
Bonus .1(P150, 000-P100, 000) 5,000 5,000
Residual
 P4, 300 × .25 1,075
P4, 300 ×.45 1,935
P4, 500 × .30 1,290 4,300

Totals P44, 075 P48,435 P57,490 P150,000

27. Cab and Jo are considering forming a partnership whereby profits will be
allocated through the use of salaries and bonuses. Bonuses will be 10% of
net income after total salaries and bonuses. Cab will receive a salary of P30,
000 and a bonus. Jo has the option of receiving a salary of P40, 000 and a
10% bonus or simply receiving a salary of P52, 000. Both partners will receive
the same amount of bonus.

Determine the level of net income that would be necessary so that Jo would
be indifferent to the profit sharing option selected.
a. P240, 000 c. P 94,000
b. 300,000 d. 334,000

Answer: (d)

To equate P52,000 to P40,000 plus bonus , the bonus should amount to P12,000
(P52,000-P40,000) to be indifferent under the two profit sharing options . Since
Cab would receive the same bonus, the total bonus would have to be P24,000
(P12,000 × 2). Based on foregoing, the following equation should be developed:

Bonus = 10% (Net income – Salaries – Bonus)

P24,000 =.10 [NI – (30,000 + P40,000) - 24,000]
P24,000=.10[NI -94,000]
P24,000=.10NI-9,400
P33,400=.10NI
P33,400/,10=NI
NI = P334,000 (d)

Or Alternatively:

Bonus = P52,000-40,000 =P12,000 × 2 =P24,000

P24,000 =.10 (NI – Salaries – Bonus)
 P24,000 =.10 (NI- 70,000-P24,000)
P24,000 =.10 (9,400
P 33,400 =.10 Nl
NI = P334,000

28. The partnership agreement of XX, YY & ZZ provides for the year-end
allocation of net income in the following order:

• First, XX is to receive 10% of net income up to P200,000 and 20% over

P200,000.
 Second, YY and ZZ each are to receive 5% of the remaining income
over P300,000.
 The balance of income is to be allocated equally among the three
partners.

The partnership's 20x5 net income was P500,000 before any allocations to
partners. What amount should be allocated to XX?
a. P202,000 c. P206,000
b. 216,000 d. 220,000 (AICPA)

Answer: (b)

XX YY ZZ Total
XX First P200,000 × 10%................
P20,000 P 20,000
Over P200,000: (500,000-
P200,000) × 20% ………. 60,000 60,000
YY and ZZ: 5% of remaining income
Over P300,000: (P500,000 – 20,000-
P60,000 - P300,000) × 5% P6,000 P6,000 12,000
Balance : Allocate Equally…..… 136,000 136,000 136,000 408,000

P216,000 142,000 P142,000 P500,000

29. The partnership agreement of RR and SS provides that interest at 10% per
year is to be credited to each partner on the basis of weighted average
capital balances. A summary of the capital account of SS for the year
ended December 31, 20x5, is as follows:
 Balance, January 1 ......................................................... P420,000
Additional investment, July 1 ………………………….… 120,000
Withdrawal, August 1 ……………………………………. (45,000)
Balance, December 31 ...................................................... 495,000
What amount of interest should be credited to SS's capital account for 20x5?
a. P 45,750 c. P 46,125
b. 49,500 d. 51,750 (AICPA)

Answer: (c)
The weighted-average capital is computed as follows:

January 1- July 1 : P420,000 × 6 months……………………… P2,520,000

July 1 – August 1 : P 540,000 × 1 month ………………………. 540,000
August 1 –December 31 : P 495,000 × 5 months……………… 2,475,000

Divided by: ………………………….…………………………………… 12 months

Weighted Average capital…………………………………………… P 461,250

Multiply by : Interest rate per year…………………………………… 10%
Amount of Interest per year…………………………………………… P 46,125 (c)

30. AA.BB, and CC are partners with average capital balances during 20x5 of
P360,000, P180.000, and P120,000. Respectively, Partners receive 10% interest
on their average capital balances. After deducting salaries of P90,000 to AA
and P60,000 to CC the residual profit or loss is divided equally. In 20x5 the
partnership sustained a P99,000 loss before interest and salaries to partners.
By what amount should AA's capital account change?
a. P 21,000 increase c. P105,000 decrease
b. 33,000 decrease d.126,000 increase
(AICPA)
Answer: (a)
 AA BB CC Total

Interest on Average Capital

AA: P360,000 × 10%................. P36,000
BB:P180,000× 10%...................... P18,000
CC:P120,000 ×10%.................... P12,000 P66,000
Salaries…………………………….. 90,000 60,000 150,000
Balance or Residual : Equally…… .(105,000) (105,000 (105,000) (315,000)

Increase (decrease)……………… P21,000 P(87,000) P(3,000) P(99,000)

(a)

31. AA and DD created a partnership to own and operate a health-food store.

The partnership agreement provided that AA receive a salary of P10,000
and DD a salary of P5,000 to recognize their relative time spent in operating
the store. Remaining profits and losses were divided 60:40 to AA and DD,
respectively. Income for 20x5, the first year of operations, of P13,000 was
allocated P8,800 to AA and P4,200 to DD.

On January 1, 20x6, the partnership agreement was changed to reflect the

fact that DD could no longer devote any time to the store's operations. The
new agreement allows AA a salary of P18.000, and the remaining profits and
losses are divided equally. In 20x6 an error was discovered such that the
20x5 reported income was understated by P4,000. The partnership income of
P25,000 for 20x6 included the P4,000 related to year 20x5.
In the reported net income of P25,000 for the year 20x6. AA and DD would
have:
AA DD AA DD .
a. P 21,900 P 3,100 c. P 0 P 0
b. 17,100 17,100 d. 12,500 12,500
(Adapted)

Answer: (a)
АА DD Total
Salary ................................................. P18,000 P18,000
Balance: Equally……………………... 1,500 1,500 3,000
Income for year 20x6 only ................ P19,500 P1,500 P21,000
Income for year 20x5 (60:40) ............ 2,400 1,600 4,000
Reported income for year 20x6......... P21,900 P3,100 P25,000

32. On January 1, 20x5, DD and EE decided to form a partnership. At the end of

the year, the partnership made a net income of P120,000. The capital
accounts of the partnership show the following transactions.

DD, Capital EE, Capital

Dr. Cr. Dr. Cr.
January 1 ………………… – P40, 000 – P25,000
April 1 ……………………… P5, 000 – – –
June 1 ……………………… – – – 10,000
August 1 …………………… – 10,000 – –
September 1 ……………… – – P3, 000 –
October 1 ……………………… – 5,000 1,000 –
December 1 …………………… – 4,000 – 5,000

Assuming that an interest of 20% per annum is given on average capital

and the balance of the profits is allocated equally, the allocation of profits
should be:
a. DD, P60,000; EE, P59,400 c. DD, P67,200; EE, P52,800
b. DD, P61,200; EE, P58,800 d. DD, P68,800; EE, P51,200
(PhilCPA)
Answer: (b)

DD EE Total
Interest on Average Capital:
DD. 20% x P 42,000". ……………... P 8,400
EE: 20% x 30,000…………………… P 6,000 P 14,400
Balance: equally .................................... 52,800 52,800 105,600
P61,200 P 58,800 P 120,000 (b)
Average Capitals:
1 DD:
1/1 - 4/1 : P40.000 x 3.............. P120.000
4/1 - 8/1: P35,000 x 4................. 140,000
8/1 - 10/1: P45.000 x 2 ................ 90,000
10/1 - 12/1: P50,000 x 2 ............ 100,000
12/1 - 12/31 : P54,000 x 1............. 54,000
Divided by: ............................... 12 months
Weighted - average capital... P 42, 000
2 EE

1/1 - 6/1: P25,000 x 5 ............... P125,000

6/1 - 9/1: P35,000 x 3............. 105,000
9/1 - 10/1: P32.000 x 1……… 32,000
10/1 - 12/1: P31,000 x 2……… 62,000
12/1 - 12/31 : P36.000 x 1… 36,000
P360,000
Divided by:……………… ……12 months
Weighted - average capital... P 30,000

33. The partnership of DD and BB was formed and commenced operations on

March 1, 20x5, with DD Contributing P30,000 cash and BB investing cash of
P10,000 and equipment with an agreed upon valuation of P20,000. On July
20x5, BB invested an additional P10,000 in the partnership, DD made a
capital withdrawal of P4,000 on May 2, 20x5 but reinvested the P4,000 on
October 1, 20x5. During 20x5, DD withdrew P800 per month and BB, the
managing partner, withdrew P1,000 per month. These drawings were
charged to salary expense. A pre-closing trial balance taken at December
31, 20x5 is as follows:
Debit Credit .
Cash ...………………………………… P 9,000
Receivable – net ..…………………… 15,000
Equipment – net ...…………………… 50,000
Other assets ................................................. 19,000
Liabilities .…………………………….. P 17,000
DD, capital ………………………………… 30,000
BB, capital ................................................... 40,000
Service revenue .………………………… 50,000
Supplies expense ......................................... 17,000
Utilities expense .……………………………… 4,000
Salaries to partners...................................... 18,000

Other miscellaneous expenses ………… 5,000

.
Total ………………………………………. P137,000 P137,000

Compute for the share of DD and BB in the partnership net income assuming
monthly salary allowances P800 and P1,000 for DD and BB, respectively; interest
allowance at a 12% annual rate on average capital balances and remaining
profits allocated equally.
a. DD, P 10,520; BB, P 13,480 c. DD, P 10,800; BB, P 13,200
b. DD, P 12,000; BB, P 12,000 d. DD, P 10,600; BB. P 13,400
(Adapted)

Answer: (d)
DD BB Total
Salary Allowances P8,000 P10,000 P18,000
Interest on 2,800 3,600 6,400
Average Capital
Balance (Equally) (200) (200) (400)
P10,600 P13,400 P24,000 (d)
Net Income of P24,000 would be computed as follows:
Service Revenue…………………………………………… P50,000
Less: Expenses:
Supplies……………………………………………… P17,000
Utilities……………………………………………….. 4,000
Other Miscellaneous expenses………………… 5,000 26,000
Net Income………………………………………………… P24,000
*DD: P800 x 10 = P8,000
*BB: P1,000 x 10 = P10,000

***Interest on Average Capital:

DD: P30,000 x 2 = P60,000
P26,000 x 5 = P130,000
P30,000 x 3 = P90,000
P280,000
10-month average capital: P280,000/10 = P28,000 x 12% x 10/12 = P2,800
Annual average capital: P280,000/12 = P23,333x 12% = P2,800

BB: P30,000 x 4 = P120,000

P40,000 x 6 = P240,000
P360,000
10-month average capital: P360,000/10 = P36,000 x 12% x 10/12 = P3,600
Annual average capital: P36,000/12 = P30,000x 12% = P3,600

34. AA and BB formed a partnership in 20x5 and made the following investments
and capital withdrawals during the year:

АА BB
Investments Draws Investments Draws
March 1 ………………………………… P30, 000 P20, 000
June 1 ……………………………..…….. P10, 000 P10, 000
August 1 ………………………………… 20,000 2,000
December 1 …………………………… 5,000

The partnership's profit and loss agreement provides for a salary of which P30,000
was paid to each partner for 20x5. AA is to receive o bonus of 10% on net
income after salaries and bonus. The partners are also to receive interest of 8%
on average annual capital balances affected by both investments and
drawings. Any remaining profits are to be allocated equally among the partners.

Assuming net income of P60,000 before salaries and bonus, determine how the
income would be allocated among the partners:
a. AA, P 31,138; BB, P 28,862 c. AA, P 30,633; BB. P 29,367
b. AA, P 33,537; BB, P 26,463 d. AA, P 30,684; BB, P 29,316
(Adapted: Fischer & Taylor)
Answer: (d)

AA BB Total
Salaries P30,000 P30,000 P60,000
Bonus* - - -
Interest on 2,167 800 2,967
Average Capital
**
Balance (Equally) (1,483) (1,484) (2,967)
P30,684 P29,316 P60,000 (d)
*No Bonus, since the basis of such computation would be zero.
**Interest on Average Capital:
AA: P30,000 x 3 = P90,000
P20,000 x 2 = 40,000
P40,000 x 4 = 160,000
P35,000 x 1 = 35,000
P325,000
10-month Average Capital: P325,000/10 = P32,500 x 8% x 10/12 = P2,167
Annual Average Capital: P32,500/12 = P27,083 x 8% = P2,167
BB: P20,000 x 3 = P60,000
P10,000 x 2 = 20,000
P8,000 x 5 = 40,000
P120,000
35. Partner A first contributed P50, 000 of capital into an existing partnership on
March 1, 20x5. On June 1, 20x5, the partner contributed another P20, 000. On
September 1, 20x5, the partner withdrew P15, 000 from the partnership.
Withdrawals in excess of P10, 000 are charged to the partner's capital
account. The annual weighted average capital balance is
a. P62, 000 c. P60, 000
b. 51, 667 d. 48, 333
(Adapted - Fischer & Taylor)
Answer: (b)

The Annual Weighted Average Capital would be:

March 1: P50,000 x 3 = P150,000
June 1: P70,000 x 3 = P210,000
September 1: P65,000 x 4 = P260,000
P620,000
Divided by: Months per annum 12 months
P 51,667

36. WW and RR share profits and losses equally. WW and RR receive salary
allowances of P20, 000 and P30, 000 respectively, and both partners receive
10% interest on their average capital balances. Average capital balances
are calculated at the beginning of each month regardless of when the
capital contributions and capital withdrawals were made, and partners
drawings are not used in determining the average capital balances. Total
net income for 20x5 is P120, 000
WW RR
January 1 capital balances.......................... P100,000 P120,000
Yearly drawings (P1,500 a month)............... 18,000 18,000
Permanent withdrawals of capital
June 3 .................................................... (12,000)
May 2...................................................... (15,000)
 Additional investments of capital:
July 3...................................................... 40,000
October 2.............................................. 50,000
What is the weighted average capital for WW and RR respectively for 20x5?
a. P110,667 and P119,583 c. P100, 000 and P120, 000
b. P105.333 and P126,667 d. P126,667 and P105,333
(Adapted-Patterson/Shoulders)

Answer: (a)

The weighted average capital would be:

WW:
January P100,000 x 6………………….. P600,000
July P88,000 x 1 ………………….. 88,000
August P128,000 x 5 …………………. 640,000
P1,328,000
Divided by: Months per annum 12 months
P110,667
It should be noted that the number of months in the computation includes the current
month before the date of investment or date of withdrawal) since the counting should
start of the beginning of the month (let's say June 3, therefore the month of June should
be included in the counting to compute the average capital for the P100.000)

RR:

January P120,000 x 5 (Jan. – May) ……………………… P 600,000

June P105,000 X5 (June - Oct.) ……………………… 525,000

November P155.000 x 2 (Nov. - Dec.) ……………………... 310,000

P1.435.000

Divided by: Months per annum …………………………….. 12 months

P 119.583 (a)

Drawings are ignored as stated in the problem.

37. HH, MM. and AA formed a partnership on January 1, 20x5 and contributed
P150,000, P200,000. and P250,000, respectively. Their articles of co-
partnership provide that the operating income be shared among the
partners as follows: as salary, P24,000 for HH, P18,000 for MM, and P12,000 for
AA interest of 12% on the average capital during 20x5 of the three partners
and the remainder in the ratio of 2:4:4. respectively.

The operating income for the year ending December 31, 20x5 amounted to
P176,000. HA contributed additional capital of P30,000 on July 1 and made
a drawing of P10.000 on October 1: MM contributed additional capital of
P20,000 on August l and made a drawing of P10,000 on October 1: and, AA
made a drawing of P30,000 on November 1

The partners' capital balances on December 31, 20x5 are:

a. HH, P179,680: MM, P229,360; and AA, P239,360

b. HH, P179,760: MM, P229,520; and, AA, P239,520
c. HH, P189,680; MM, P239,360; and, AA, P269,360
d. HH, P223,180: MM, P272,060: and, AA, P280,760
(PhilCPA)
Answer: (d)

HH MM AA Total

Capital, January 1, 20x5 P150.000 P200,000 P250.000 P600.000

Add: Investment 30,000 20,000 -- 50,000

Net Income 53.180 62.060 60.760 176,000

Total P233.180 P282,060 P310.760 P826.000

Less: Withdrawals 10.000 10.000 50.000

Capital, December 31. P223,180 P272,060 P280.760 P776,000

20x5
 HH ММ AA Total

Salary P 24,000 P 18,000 P 12,000 P 54,000

Interest on Average
Capital*
HH: 12% x P162.500 19.500

MM: 12% x P205,833 24.700

AA: 12% x P245.000 29,400 73.600

Balance : 2:4:4 9,680 19,360 19.360 48.400

P 53.180 P 60,060 P 60,760 P176.000

*Average Capitals:

HH:

1/1 - 7/1: P150.000 x6 ………………………………………………….. P 900,000

7/1 - 10/1: P180,000 x 3 ……………………………………………….. 540,000

10/1 - 12/31 : P170,000 x 3 ……………………………………………. 510,000

P 1,950,000

Divided by: Months per annum …………………………………….. 12 months

Weighted-average capital …………………………………………. P 162,500

MM:

1/1 - 8/1: P200,000 x 7 ………………………………………………… P 1,400,000

8/1 - 10/1: P220.000 x 2……………………………………………….. 440,000

10/1 - 12/31 : P210,000 x 3 …………………………………………… 630,000

P2.470.000

Divided by: Months per annum ……………………………………. 12 months

Weighted average capital …………………………………………. P 205.833

AA

1/1 - 11/1: P250,00 x 10 ……………………………………………… P 2.500.000

11/1 - 12/31 : P220,000 x 2 ………………………………………….. P 440,000

P 2.940,000

Divided by: Months per annum ……………………………………………. 12 months

Weighted average capital …………………………………………………. 245.000

38. Merlin, a partner in the Camelot Partnership has a 30% participation in

partnership profits and losses. Merlin's capital account has a net decrease of
P1,200,000 during the calendar year 20x5. During 20x5, Merlin withdrew
P2,600,000 charged against his capital account) and contributed property
valued at P500,000 to the partnership. What was the net income of the
Camelot Partnership for year 20x5?
a. P3,000,000
c. P 7,000,000
b. 4.666,667
d. 11,000,000
(AICPA)
Answer: (a)

Withdrawals……………………………………………………...…… P (2,600,000)
Investment………………………………………………………..…… 500,000
Share in net income (balancing figure) …………………………. 900,000
Net (Decrease) Increase ………………………………………………. P (1,200,000
Net income of the partnership: P90,000 ,30% …………………… P 3,000,000

39. On January 2, 20x5, BB and PP formed a partnership BB contributed capital

of P175,000.00 and PP, P25,000.00. They agreed to share profits and losses
80% and 20%, respectively. PP is the general manager and works in the
 partnership full time and is given a salary of P5,000.00 a month; an interest of
5% of the beginning capital (of both partner) and a bonus of 15% of net
income before the salary, interest and the bonus.

The profit and loss statement of the partnership for the year ended
December 31, 20x5 is as follows:
Net Sales........................................................................... P875,000
Cost of goods sold ......................................................... 700,000
Gross profit....................................................................... P175,000
Expenses (including the salary, interest and the bonus) 143,000
Net income................................................................... P 32,000
The amount of bonus to PP in 20x5 amounted to:
a. P13,304 c. P18,000
b. 16,456 d. 20,700
(PhilCPA)

Answer: (c)

Bonus = .15 (NI before salaries, interest and bonus)

B = .15 (NI after salaries, interest and bonus + salaries + interest +

bonus)
B = .15 [P32,000 + (5,000 x 12) + (5% x P200,000) + B]
B = .15 (P32,000 +P60,000 + P10,000 + B)
B = .15 (P102,000 + B)
B = P 15,300 + .15B
B = .15 B = P 15,300
.85 B = P 15,300
B = P 15,300/.85
B = P 18,000 (c)
 40. On January 1, 20x5, A, B, C and D formed Bakya Trading Co. a partnership
with capital contributions as follows: A. P50,000: B. P25,000: C. P25,000: and D.
P20,000. The partnership contract provided that each partner shall receive a
5% interest on contributed capital, and that A and B shall receive salaries of
P5,000 and P3,000, respectively. The contract also provided that C shall
receive a minimum of P2,500 per annum an D a minimum ofP6,000 per
annum, which is inclusive of amounts representing interest and share of
remaining profits. The balance of the profits shall be distributed to A, B, C,
and D in a 3:3:2:2 ratio.

What amount must be earned by the partnership, before any charge for
interest and salaries, so that A may receive an aggregate of P12,500 including
interest, salary and share of profits
a. P16,667 d. P30,667
b. 30,000 d. 32,333
(PhilCPA)
Answer: (d)

A B C D Total
5% interest on capital* P 2,500 P 1,250 P 1,250 P1,000 P6,000
Salaries 5,000 3,000 - - 8,000
Balance (3:3:2:2) 5,000 5,000 3,333 3,333 16,666
Additional profit - 1,667 1,667
P12,500 P9,250 P4,583 P6,000 P32,333 (d)

*A: P50,000 x 5% = P2,500

B: P25,000 x 5% = 1,250
C: P25,000 x 5% = 1,250
D: P20,000 x 5% = 1,000
 First, determine who among the partners will receive a fixed amount, then,
compute for the residual amount, i.e. for AA P12,500 – P2,500 – P5,000 resulting
to a share in the residual profits of P5,000. The P5,000 share in residual profits of
AA represents 30%, therefore capitalize P5,000 by 30% to arrive at P16,666 which
will be allocated to all partners based on their profits and loss ratio.

Second, determine who among the partners will receive a minimum

amount. Any partner who receives an amount lower than the minimum amount
is required to have an additional profit, i.e. for partner DD, which in DD’s case
P1,667 is needed to satisfy the minimum amount provided therein. Any partner
who receive an amount equal, or more than the minimum amount obviously
does not need an additional profit.

41. AA, BB and CC are partners with average capital balances during 20x5 of
P472,500, P238,650. and P162,350, respectively. The partners receive 10%
interest on their average capital balances: after deducting salaries of
P122,325 to AA and P82,625 to CC, the residual profits or loss is divided
equally.

In 20x5, the partnership had a net loss of P125,624 before the interest and
salaries to partners.

By what amount should AA's and CC's capital account change - increase
(decrease)
AA СС AA CC
a. P30,267 P(40,448) c. P(40,844) P31,235
b. 29,476 17,536 d. 28,358 32,458
(PhilCPA)
Answer: (a)

AA BB CC Total
10% interest on average capital* P47,250 P23,865 P16,235 P87,350
Salaries 122,325 - 82,625 204,950
Balance: Equally (139,308) (139,308) (139,308) (417,924)
Increase (Decrease) P30,267 P(115,443) P(40,448) P(125,624) (a)

* AA: 10% x P472,500 = P47,250

BB: 10% x P238,650 = P23,865
CC: 10% x P162,350 = P16,235

42. The same information in Number 41, except the partnership had a loss of
P125,624 after the interest and salaries to partners, by what amount should
BB's capital account change - increase (decrease)
a. P (115,443) c. P(41,875)
b. 23,865 d. (18,010)

Answer: (d)

AA BB CC Total
10% interest on average capital P47,250 P23,865 P16,235 P87,350
Salaries 122,325 - 82,625 204, 950
Balance: Equally (41,875)* (41,875)* (41,874)* (125,624)
P85,200 P(18,010) P56,985 P166,676 (d)

*Not rounded due to discrepancy of P1.

43. XX. YY and ZZ formed a partnership on January 1, 20x5. Each contributed

P120,000. Salaries were to be allocated as follows:
XX YY ZZ
P30, 000 P30, 000 P45, 000
 Drawings were equal to salaries and be taken out evenly throughout the
year. With sufficient partnership net income, XX and YY could split a bonus
equal to 25 percent of partnership net income after salaries and bonus in no
event could the bonus go below zero).

Remaining profits were to be split as follows: 30% for XX: 30% for YY, and 40%
for ZZ. For the year, partnership net income was P120,000.
Compute the ending capital for each partner:
a. XX, P155,100: YY, P155,100: ZZ, P169,800
b. XX, P126,000: YY, P126,0000: ZZ, P124,500
c. XX, P125,100: YYP125,100, ZZ, P124,800
d. XX, P125,500: YY, P125,500: ZZ, P124,000
(Adapted)
Answer: (c)

XX YY ZZ Total
Capital, January 1, 20x5 P120,000 P120,000 P120,000 P360,000
Add: Net Income
Salaries P30,000 P30,000 P45,000 P105,000
Bonus* 1,500 1,500 - 3,000
Balance: 30%: 30%: 40% 3,600 3,600 4,800 12,000
Share in Net Income P35,100 P35,100 P49,800 P120,000
Less: Drawings – Personal 30,000 30,000 45,000 105,000
P5,100 P5,100 P4,800 P15,000
Capital, December 31, 20x5 P125,100 P125,100 P124,800 P375,000 (c)

*Bonus = 25% (NI – Salaries – Bonus)

B = .25 (P120,000 – P105,000 – B)
B = P3,750 - .25 B
1.25 B = P3,750
B = P3,000; P1,500 for XX and YY.
 44. CC, PP, and AA, accountants, agree to form a partnership and to share
profits in the ratio of 5:3:2. They also agreed that AA is to be allowed a salary
of P28,000, and that PP is to be guaranteed P21,000 as his share of the profits.
During the first year of operation, income from fees are P180,000 while
expenses total P96,000. What amount of net income should be credited to
each partner's capital account?
a. CC, P28,000, PP, P16,800, AA, P11,200
b. CC, P25,000, PP, P21,000, AA, P38,000
c. CC, P24,000. PP, P22,000. AA, P38,000
d. CC, P25,000, PP, P21,000, AA, P39,000
(Adapted)

Answer: (b)

CC PP AA Total

Salary……………………….. P28,000 P28,000

Balance (P84,000 – P28,000), .5:3:2 …… P28,000 P16,800 11,200 56,000
Additional profit to PP (P21,000 – (3,000) 4,200 (1,200) -
P16,800)
P25,000 P21,000 P38,000 P84,000* (b)

*Net Income would be:

Fees……………………………………………………………………….. P180,000

Less: Expenses …………………………………………………………....

96,000
P 84,000

It should be noted that the additional profit given to PP actually came

from CC and AA based on their respective revised P&L ratio (5:2). The P4,200,
additional profit should not be added to total net income because by doing so,
it would be tantamount to distorting the net income of P84,000.
 On the hand, assuming the P4,200 would be added to the net income of
P84,000, the total net income will now be P88,200, but an adjustment of P4,200
should be reflected to make it P84,000, and such adjustments will be shared
accordingly by CC and AA (5:2). Mathematically, the final results remain the
same.

45. Hunt, Rob, Turman, and Kelly own a publishing company that they operate
as a partnership. The partnership agreement includes the following:
Hunt receives a salary of P20,000 and a bonus of 3% of income after all
bonuses.

Rob receives a salary of P10,000 and a bonus of 2% of income after all

bonuses.
All partners are to receive 10% interest on their average capital balances.
The average capital balances are as follows:
Hunt ......... P50,000
Rob........... 45,000
Turman .... 20,000
Kelly .......... 47,000

Any remaining profits and loss are lo be divided equally among the partners.
Determine how a profit of P105,000 would be allocated among the partners.
a. Hunt, P41,450: Rob, P29,950: Turman, P15,450: Kelly, P18,150
b. Hunt, P28,000: Rob, P16,500: Turman, P 2,000: Kelly, P 4,700
c. Hunt, P39,700: Rob, P29,200: Turman, P16,700: Kelly, P19,400
d. Cannot be determined.
(Adapted)
Answer: (a)

HUNT ROB TURMAN KELLY TOTAL

Salaries P20,000 P10,000 - - P30,000
Bonus* 3,000 2,000 - - 5,000
10% Interest on Average 5,000 4,500 2,000 4,700 16,200
Capital
Balance
(equally) 13,450 13,450 13,450 13,450 53,800
P41,450 P29,950 P15,450 P18,150 P105,000
*Bonus= (3% + 2%) (Net Income-Bonus)
B= 5% (P105,000 – B)
= P5,250 – 0.5B
1.05B = P5,250
B= P5,250/ 0.5

= P5,000, therefore HUNT should receive P3,000 (5,000 X3/5), while ROB will
receive P2,000 (5,000 X 2/5)

46. RR and PP share profits after the provision of annual salary allowances of
P14,400 and P13,200, respectively in the ratio of 6:4. However, if partnership's
net income is insufficient to provide for said allowances in full amount the
net income shall be divided equally between the partners. In 20x5, the
following errors were discovered: Depreciation for 20x5 is understated by
P2,100, and the inventory on December 31, 20x5 is overstated by P11,400.
The partnership net income for 20x5 was reported to be P19,500. The capital
accounts of the partners should be increased (decreased) by:
a. RR, P(6,540): PP, P16,540) c. RR, P(6,960): PP, P 6,540
b. RR. P 3,000: PP.P 3,000 d. RR, P16,750): PP. P( 6,750)
(Adapted)
Answer: (d)
Correcting the allocated net income:

RR PP TOTAL
Correct allocation of net income,
P3,000 P3,000 P6,000
equally.. P3,000
Allocation of net income per books.. 9,750 9,750 19,500
Adjustments increased (decreased)… P(6,750) P(6,750) 13,500
*The adjusted or corrected net income for 20x5 would be:
Unadjusted net income (per books) P(19,500)
 Add (deduct): Adjustments
Understatement of depreciation (2,100)
Overstatement of ending inventory (11, 400)
Adjusted net income P6,000

47. JJ and KK are partners sharing profits 60% and 40% respectively. The average
profits for the past two years are to be capitalized at 20% per year (for
purposes of admitting a new partner) in determining the aggregate capital
of JJ and KK after adjusting the profits for the following items omitted from
the books:
Omissions of Year-End 20x5 20x6
Prepaid Expense.................... P1,600
Accrued Expense................... 1,200
Deferred income.................... P1,400
Accrued Income ................... 1,000
Other pertinent information are as follows:
20x5 20x6
Net income of partnership .............................P14,400 P13,600
Capital accounts, end of the year:
JJ ............................................................ 45,400 54,000
KK ........................................................... 45,000 55,000

The aggregate capital of JJ and KK after capitalizing the average profits at

20% per annum is:
a. P67,765 c. P69,000
b. 72,105 d. 71,000
(PhilCPA)
Answer: (d)
 20x5 20x6
Unadjusted net income P14,400 P13,600
Add (deduct): adjustments
Prepaid Expense (20x5) (1,600) (1,600)
Accrued Expense (20x5) (1,200) (1,200)
Deferred Income (20x6) (1,400)
Accrued Income (20x6) 1,000
Adjusted Net Income P14,800 P12,800

Total Adjusted Net Income (P14,800

+ P12,800) P27,600
Divided by 2
Average Net Income P13,800
Divided by (capitalized at) 20%
Aggregate Capital P69,000

48. MM, NN and OO partners, share profits on a 5:3:2 ratio. On January 1,20x6,
PP admitted into the partnership with a 10% share in profits. An old partners
continue to participate in profits in their original ratio.

For the year 20x6, the net income of the partnership was reported as P12.500.
However, it was discovered that the following items omitted in the firm's
books:
Unrecorded at year end 20x5 20x6
Prepaid expense..................................... P800
Accrued expense................................... P600
Unearned income .................................. 700
Accrued income .................................... 500

The new profit and loss ratio for N, and (2) the share of partner in the 20x6
net income:
a. (1) 30% (2) P2,214 c. (1) 27% (2) P2,286
b. (1) 27% (2) P2,214 d. 11) 30% (2) P2,286
(PhilCPA)
Answer: (b)
(1) Profit and Loss Ratio:

OLD NEW
MM 50% X 90% 45%
NN 30% X 27%
OO 20% X 10% 18%
PP - 10%
100% 100% 100%

(2) Reported Net Income P12,500

Add (deduct): adjustments
a.Prepaid Expenses (20X5) (800)
b. Accrued Expense (20x6) (600)
c. Unearned Income (20x5) 700
d. Accrued Income (20x6) 500
Adjusted Net Income P12,300
Multiply by P%L Ratio of OO 18%
Share of OO in Net Income P2,214

49. A, B, and care partners in an accounting firm. Their capital account

balances at year-end were A P90,000: B P110,000 and CP50,000. They share
profits and losses on a 4:4:2 ratio, after the following special terms:

1. Partner C is to receive a bonus of 10% of net income after the bonus.

2. Interests of 10% shall be paid on that portion of a partner's capital in
excess of P100.000.
3. Salaries of P10,000 and P12.000 shall be paid to partners A &C respectively
Assuming a net income of P44,000 for the year, the total profit share of
Partner C was:
a. P 7,800 C. P19,400
b. 16,800 d. 19,800
(PhilCPA)
Answer: (c)

A B C TOTAL
Bonus* P4,000 P4,000
Interest: 10% (110,000-
P100,000) P1,000 P1,000
Salaries P10,000 12,000 22,000
Balance: 4:4:2 3,400 17,000
19,400 P44,000
*Bonus= 10% (NI-Bonus)
B= 0.10 (P44,000-B)
= P4,400-0.10 B
1.10B=P4,400
B= P4,000

50. X, Y and Z, a partnership formed on January 1, 20x5 had the following initial
investments:
X - P100, 000
Y - 150,000
Z - 225,000

The partnership agreement states that profits and losses are to be shared
equally by the partners after consideration is made for the following:
-Salaries allowed to partners: P60, 000 for X, P48,000 for Y and 36,000 for Z
-Average partner's capital balances during the year shall be allowed 10%
Additional information:
-On June 30, 20x5 X invested an additional P60.000
-Z withdrew P70.000 from the partnership on September 30, 20x5.
-Share in the remaining partnership profit was P5, 000 for each partner.
The total partnership capital on December 31,2005 was:
a. P405,000 c. P480,000
b. 671,500 d. 672,750
(PhilCPA)
Answer: (d)
 TOTAL
Capital, January 1, 20x5 P475,000
Add: investment 60,000
Net Income 207,750
Total 742,750
Less: Withdrawals 70,000
Capital, December 31,
20x5 672,750
*Net Income
X Y Z TOTAL
Salaries P60,000 P48,000 P36,000 P144,000
Interest on Ave. Capital:
X: 10% x P130,000 13,000
Y: 10% x P150,000 15,000
Z: 10% x P207,750 20,750 48,750
Balance 5,000 5,000 5,000 15,000
P207,750
Average Capital:
X: P100,000 x 6= P600,000 Z: P225,000 x 9= P2,025,000
P160,000 x 6 = P960,000 P155,000 x 3= P465,000
P1, 560,000/12= P130,000 P2,490,000/12= P207,500

51. X and Y are in partnership, sharing profits equally and preparing their
accounts to 31 December each year. On 1 July 20x5, Z joined in the
partnership, and from that date profits are shared X 40% Y 40%, and Z 20%.
In the year ended 31 December 20x5, profits were:
6 months to 31 June 20x5 …………………………………………. P200,000
6 months to 31 December 20x5 .……………………….……….. 300,000

It was agreed that X and Y only should bear equally the expense for a bad
debt of P40,000 written-off in the six months to 31 December 20xS in arriving
at the P300,000 profit. Which of the following correctly states X's profit share
for the year
a. P216,000 c. P220,000
b. 200,000 d. 224,000
(ACCA)
Answer: (a)

X Y Z TOTAL
First 6 months
Equally 100,000 100,000 200,000

Second 6 months
Bad debts expense
(equally) -20,000 -20,000 -40,000
Balance (40%:40%:20%) 136,000 136,000 68,000 340,000
300,000
Share in Profit 216,000 500,000

52. S and T are in partnership and prepare their accounts to 31 December each
year. On 1 July 20x5, U joined the partnership. Profit sharing arrangements
are:

6 months to 6 months to 31
30 June 20x5 December 20x5
Salary……………….. S P15,000 P25,000
Share of balance in profit S 60% 40%
T 40% 40%
U 20%

The partnership profit for the year ended 31 December 20x5 was P350,000
accruing evenly over the year. What are the partners' total profit shares for
the year ended 31 December 20x5?

S T U
a. P196,000 P124,000 P30,000
b. 217,000 108,000 25,000
c. 155,000 130,000 65,000
d. 175,000 145,000 35,000
(ACCA)
Answer: (a)

First 6 months S T U Total

Salaries 15,000 15,000
Balance (60%:40%) 96,000 64,000 160,000
175,000
 Second 6 months
Salaries 25,000 25,000
Balance 60,000 60,000 30,000 150,000
(40%:40%:20%)
________ _______ _______ 175,000

196,000 124,000 30,000 375,000

53. AA and BB entered into a partnership as of March 1, 20x5 by investing

P125,000 and P75,000, respectively. They agreed that AA, as the managing
partner, was to receive a salary of P30,000 per year and a bonus computed
at 10% of the net profit after adjustment for the salary; the balance of the
profit was to be distributed in the ratio of their original capital balance.
On December 31, 20x5, account balances were as follows:

Cash…………………… P70,000 Accounts payable.. P 60,000

Accounts Receivable.. 67,000 AA, capital………. 125,000
Furniture and fixtures.. 45,000 BB, capital ……… 75,000
Sales returns………….. 5,000 AA, drawing…….. ( 20,000 )
Purchases……………... 196,000 BB, drawing…….. ( 30,000 )
Operating Expenses… 60,000 Sales…………….. 233,000

Inventories on December 31, 20x5 were as follows: supplies, P2,500,

merchandise, P73,000. Prepaid insurance was P950 while accrued expenses
were P1, 550. Depreciation rate was 20% per year.

The partners' capital balances on December 31, 20x5, after closing the net
profit and drawing accounts, were:

AA BB AA BB
a. P135,940 P47,960 c. P139,680 P48,680
b. P139,540 P49,860 d. P142,350 P47,670
(PhilCPA)
Answer: (b)

AA BB Total
Capital, March 1, 20x5 P 125,000 P 75,000 P 200,000
Add: Net Income 34,540 4,860 39,400
Total P 159,000 P 79,860 P 239,400
 Less: Drawings 20,000 30,000 50,000
Capital, December 31, 20x5 P 139,540 P 49,860 P 189,400

Allocation of Net Income

AA BB Total
Salary (10 months) P 25,000 P - P 25,000
Bonus 1,440 - 1,440
Balance: 125:75 8,100 4,860 12,960
34,540 4,860 39,400

Sales P 233,000
Less: Sales returns 5,000
Net Sales P 228,000
Less: Cost of goods sold:
Inventory, March 1 P -0-
Add: Purchases 196,000
Cost of goods available for sale P 196,000
Less: Inventory, December 31 73,000 123,000
Gross profit P 105,000
Less: Operating Expenses [P 60,000- P2,500 – P
950 65,000
+ P 1,550 + (20% x P 45,000 x 10/12)]
Net Income P 39,400

Bonus = 10% [NI - Salaries]

B = .10 [P39,000 – (P30,000 x 10/12)]

B = .10 (P14,400)
B = P 1,440

54. There and Craig are partners. Their current profit and loss ratios (70/30) are
being changed to (60/40). The partners decide to adjust their capital
accounts at the date of the change in the profit and loss ratios to reflect the
difference between market value and book value of assets and liabilities. At
the date of the change, land has a market value of P250,000 and a book
value of P120,000. How much will Craig's capital account be adjusted at the
date of the change in the profit and loss ratios?
a. P52,000 increase c. P52,000 decrease
b. P13,000 increase d. P13,000 decrease
Answer: (b) – (P 250,000 – P 120,000) (.70 - .60)

55. James and Bruce are partners. They have shared profits and losses 70/30 for
several years. The partnership profit allocation agreement is currently being
modified to 60/40. At the date of the change, the partners choose to revalue
assets with market value different from book value. One asset revalued is a
building with a book value of P370,000 and a market value of P520,000. One
year after the profit and loss ratio is changed the building is sold for P650,000.
What is the amount of change to Bruce's capital account at the date the
building is revalued?
a. P105,000 c. P45,000
b. P 91,000 d. P39,000
Answer: (c) – (P 650,000 – P 370,000) (.30)

56. Using the same information in No. 55, what is the amount of change to
Bruce's capital account at the date the building is sold?
a, P91,000 c. P39,000
b. P78,000 d. P52,000
Answer: (d) – (P 650,00 – P 520,000) (.40)

Items 57 and 58 are based on the following information:

57. Johnson and Pritchard are partners. They are changing the profit and loss
ratios from the current 60/40 to 70/30. At the date of the change, vacant
land owned by the partnership has a book value of P50,000 and a market
value of P60,000. The partners choose to prepare an itemized list of assets
with market values different from book values. If the land is sold in the future
for P80,000, how much of the gain will be assigned to Johnson?
a. P18,000 c. P21,000
b. P20,000 d. P27,000
Answer: (b) – (P 60,000 – P 50,000) (.60) + (P 80,000 – P 60,000) (.70)
58. If the land is sold in the future for P80,000, how much of the gain will be
assigned to Pritchard?
a. P9,000 c. P12,000
b. P10,000 d. P13,000
Answer: (b) – (P 60,000 – P 50,000) (.40) + (P 80,000 – P 60,000) (.30)

59. Karen and Andrea are currently changing their partnership profit and loss
ratios from 75/25 to 60/40. They have created a list of assets that have
market and book value differences. One of the assets is a building with a
P300,000 market value and P200,000 book value. Two years after changing
the profit and loss ratios, the building is sold for P380,000. How much of the
profit is allocated to Karen?
a. P108,000 c. P135,000
b. P123,000 d. P183,000

Answer: (b) – (P 300,000 – P 200,000) (.75) + (P 380,000 – P 300,000) (.60)

60. Eric and Phillip have been partners for several years. During that time they
have shared profits and losses (60/40). They are currently revising the profit
and loss ratios to 70/30). Eric and Phillip decide to adjust the capital
accounts at the date of the change to reflect the difference between
market value and book value of assets and liabilities. At the date of the
change, the partnership owns a building with a book value of P350,000 and
a market value of P600.000. How much will Eric's capital account be
adjusted at the date of the change in the profit and loss ratios?
a. P25,000 increase c. P25,000 decrease
b. P50,000 increase d. P50,000 decrease

Answer: (c) – (P 600,000 – P 350,000) (.70 -.60)

Assignment of Interest to a Third Party:

61. Capital balances and profit and loss sharing ratios of the partners in the BIG
Entertainment Gallery are as follows:

Betty, capital (50%) …………………………….. P140,000

Iggy, capital (30%) ……………………………... 160,000
Grabby, capital (20%) ………………………….. 100,000

Total………………………………………........... P400,000

Betty needs money and agrees to assign half of her interest in the
partnership to Yessir for P90,000 cash. Yessir pays directly to Betty. Yessir does
not become a partner.

What is the total capital of the BIG Partnership immediately after the
assignment of the interest to Yessir?
a. P310,000 c. P490,000
b. 200,000 d. 400,000
(Adapted)
Answer: (d)

A partnership is not dissolved when a partner assigns his or her interest in

the partnership to a third party because such an assignment does not in
itself change the relations among partners. Such assignment only entities
the assignee to receive the assigning interest partner’s interest in future
partnership profits and in partnership assets in the event of liquidation. The
assignee does not become a partner, however, and does not obtain the
right to share in management of the partnership. If the assignee does not
become a partner, the only change required on the partnership books is
for transfer of the capital interest of the assignor partner to the assignee.
The assignment by Betty to Yessir of his 50% interest in the BIG
Entertainment Company is recorded are follows;
Betty, capital (P 140,000 x 50%) 70,000
Yessir, capital 70,000

The amount of the capital have based is equal to the recorded amount
of Betty’s capital at the time of the assignment, and it is independent of
the consideration received by Betty for her 50% interest. If the recorded
 amount of Betty’s is P 70,000, then the amount of the transfer entry is P
70,000, regardless of whether Yessir pays Betty P 70,000 or some other
amount. Therefore, the capital of the partnership after the assignment of
interest remains the same at P 400,000.

62. Jenna is about to purchase some of Cynthia's partnership interest. Cynthia

currently has partnership equity of P84,500. If Jenna pays Cynthia P30,000 for
30 percent of her capital, what amount will be recorded in the partnership
accounting records?

Jenna Cynthia
a. P30,000 credit P25,350 debit
b. P25,350 credit P25,350 debit
c. P30,000 credit P30,000 debit
d. P25,350 debit P25,350 credit

Answer: (b) – P84,500 x 30%. If the problem is silent, book value method is used.

Partnership Dissolution: Admission of a New Partner - Purchase or Investment

63. Presented below is the condensed balance sheet of the partnership of KK,
LL and MM who share profits and losses in the ratio of 6:3:1, respectively:

Cash …………….. P 85,000 Liabilities ………. P 80,000

Other assets …….. 145,000 KK, capital ……... 252,000
LL, capital ……… 126,000
MM, capital ……. 42,000

Total ……………. P 500,000 Total ……………. P 500,000

The partner agree to sell NN 20% of their respective capital and profit and
loss interests for a total payment of P90,000. The payment by NN is to be
made directly to the individual partners. The capital balances of KK, LL, and
MM, respectively after admission of NN are:
 a. P198,000; P 99,000; P33,000.
b. P201,600; P100,800; P33,600.
c. P216.000; P108,000; P36,000.
d. P255,600; P127,800; P42,600.
(AICPA)
Answer: (b)

No goodwill is to be recognized in cases of admission of new partner,

therefore, book value method is used.
The capital balances after admission are as follows:

KK: P 252,000 X 80% = P 201,600

LL: P 126,000 X 80% = 100,800
MM: P 42,000 X 80% = 33,600 (b)

64. Using the same information in No. 58, assuming that implied goodwill (or
revaluation of assets) is to be recorded prior to acquisition by NN. The
capitals of KK, LL, and MM, respectively after admission of NN are:

a. P198,000; P 99,000; P33.000 c. P216,000; P108,000; P36.000

b. P201,600; P100,800; P33.600 d. P255,600; P127,800; P42,600

Answer: (c)

Amount paid ........................................................................................ ₱ 90,000

Less: Book value of interest acquired:
(₱ 250,000 + ₱ 126,000 + ₱ 42,000) x 20%........................... 84,000
Excess .................................................................................................... ₱ 6,000
Divided by: ........................................................................................ 20%
Goodwill ................................................................................................ ₱ 30,000
 KK: [₱ 252,000 + (₱ 30,000 x 60%)] X 80% = ................................... ₱ 216,000
LL: [₱ 126,000 + (₱ 30,000 x 30%)] x 80% = .................................... ₱ 108,000
MM: [₱ 42,000 + (30,000 x 10%)] x 80% = ........................................ ₱ 36,000 (c)

65. XX, YY and ZZ are partners who share profits and losses in the ratio of 5:3:2
respectively. They agree to sell a 25% of their respective capital and profits
and losses ratio for a total payment directly to the partners in the amount of
P140,000.00. They agree that goodwill or revaluation of assets of P60,000 is to
be recorded prior to admission of AA. The condensed balance sheet of the
XYZ partnership is as follows:

Cash …………….. P 60,000 Liabilities ………. P 100,000

Non-cash assets .. 540,000 XX, capital ……... 250,000
YY, capital ...…… 150,000
ZZ, capital ...……. 100,000

Total ……………. P 600,000 Total ……………. P 600,000

The capital of XX, YY and ZZ respectively after the payment and admission of
AA are:
a. P187,500; P112,500; and P75,000 c. P280,000; P168,000; and P112,000
b. P210,000; P126,000; and P84,000 d. P250,000; P150,000; and P100,000

Answer: (b)

The goodwill or revaluation of asset of ₱ 60,000 can be proven by the

following computation:
Amount paid .................................................................................... ₱ 140,000
Less: Book value of interest acquired:
(₱ 250,000 + 150,000 + ₱ 100,000) x 25%............................. ₱ 125,000
Excess .................................................................................................. ₱ 15,000
 Divided by: .......................................................................................... 25%
Goodwill / asset adjustments ........................................................... ₱ 60,000

XX: [₱ 250,000 + (₱ 600,000 x 50%)] X 75% = ................................. ₱ 210,000

YY: [₱ 150,000 + (₱ 60,000 x 30%)] x 75% = .................................... ₱ 126,000
ZZ: [₱ 100,000 + (60,000 x 20%)] x 75% = ........................................ ₱ 84,000 (b)

66. On June 30, 20x5, the balance sheet of Western Marketing, a partnership is
summarized as follows:

Sundry assets …………………………………..... P150,000

West, capital……………………………………... 90,000
Tern, capital………….………………………….. 60,000

West and Tern share profit and losses at a 60:40 ratio, respectively. They
agreed to take in Cuba as a new partner, who purchases 1/8 interest of
West and Tern for P25,000. What is the amount of Cuba's capital to be taken
up in the partnership books if book value method is used?

a. P12,500 c. P25,000
b. 18,750 d. 31,250
(Adapted)

Answer: (b)

Amount paid ...................................................................................... ₱ 25,000

Less: Book value of interest acquired:
1
₱ 150,000 x ............................................................................. ₱ 18,750 (b)
8

Gain of West and Tern ..................................................................... ₱ 6,500

67. PP contributed P24,000 and CC contributed P48,000 to form a partnership
and they agreed to share profits in the ratio of their original capital
contributions. During the first year of operations, they made a profit of
P16,290; PP withdrew P5, 050 and CC P8, 000. At the start of the following
year, they agreed to admit GG into the partnership. He was to receive a
one-fourth interest in the capital and profits upon payment of P30, 000 to PP
and CC, whose capital accounts were to be reduced by transfers to GG's
capital account of amounts sufficient to bring them back to their original
capital ratio.
How should the P30,000 paid by GG be divided between PP and CC?
a. PP, P9,825; CC, P 20,175
b. PP, PI5,000; CC, P15, 000
c. PP, P10,000; CC, P20,000
d. PP, P 9,300; CC, P20,700

(Adapted)

Answer: (d)
PP CC Total
Capital balances before net income ............... ₱ 24,000 ₱ 48,000 ₱72,000
1 2
Net income (24:48) 0r ( 3 : 3) .............................. 5,430 10,860 16,290

Drawings ............................................................... ( 5,050) ( 8,000) (13,050)

Capital balance before admission ................... ₱ 24,830 ₱ 50,860 ₱75,240

Amount paid ........................... ................................................. ₱ 30,000

1
Less: Book value of interest acquired: (₱ 75,240 x 4......... ₱ 18,810

Gain of PP and CC....... ......................................................... ₱ 11,910

Therefore, the ₱ 30,000 cash should be allocated as follows:

PP CC Total
Capital balances before admission ............... ₱ 24,380 ₱ 50,860 ₱75,240
 Required capital balances
1 2
[P & L ratio - ( 3 : 3) of

₱56,430 (₱ 75,240 - ₱18,810)]................. 18,810 37,620 56,430

Transfer of capital to needed to
bring back to original capital ratio .................. ₱ 5,570 ₱ 13,240 ₱18,810
1 2
Add: Personal gain (refer above) - 3 : ............ 3,730 7,460 11,190
3

Personal cash distribution .................................. ₱ 9,300 ₱ 20,700 ₱ 30,000 (d)

68. The capital accounts of the partnership of NN, VV and JJ on June 1, 20x5 are
presented below with their respective profit and loss ratios:

NN ............................................................P139, 200 1/2

VV………………………………………….. 208, 800 1/3
JJ……………………………………………... P96, 000 1/6

On June 1, 20x5, LL is admitted to the partnership when LL purchased, for

P132,000, a proportionate interest from NN and JJ in the net assets and
profits of the partnership. As a result of a transaction LL acquired a one-fifth
interest in the net assets and profits of the firm. What is the combined gain
realized by NN and JJ upon the sale of a portion of their interest in the
partnership to LL?

a. P0
b. P 43,200
c. P62,400
d. P82, 000
(AICPA)

Answer: (b)

Amount paid ........................... .......................................................... ₱ 132,000

 Less: Book value of interest acquired:
1
(₱ 139,200 + ₱ 208,800 + ₱ 96,000) x .............................. ₱ 88,800
5

Gain ...................................................................................................... ₱ 43,20 (b)

The problem is simpler than it appears at first glance because it states that
LL acquired a one fifth interest in the firm directly from NN and W and no
goodwill to be recorded. In other words, this was a transaction between
partners.

69. Sam and Ray are partners with capital accounts of P150,000 and P225,000,
respectively. They are considering allowing Richard to purchase 30 percent
of Ray's equity. At the date of the proposed transaction, Sam and Ray want
to revalue the partnership's assets and allocate any differences based on
their 40/60 profit sharing agreement. Assume that the net market versus book
value differences is P100,000. What amount would Richard pay for the 30
percent interest?

a. P67, 500
b. P76, 500
c. P97, 500
d. The amount cannot be determined from the information
provided
(AICPA)

Answer: (d)
The amount that Richard will pay Ray depends on many factors and
cannot be determined from the information provided here.

70. On January 31, 20x5, partners of Lon Mac & Nan LLP, had the following loan
and capital account balances (after closing entries for January):

Loan receivable from Lon ...............................................P 20.000 dr

Loan payable to Nan ........................................................60,000 cr
Lon, capital....................................................................... 30,000 dr
Mac, capital ..................................................................... 120,000 cr
Nan, capital....................................................................... 70.000 cr
 The partnership's income sharing ratio was Lon, 50%; Mac, 20%, and Nan,
30%. On January 31, 20x5, Ole was admitted to the partnership for a 20%
interest in total capital of the partnership in exchange for an investment of
P40,000 cash. Prior to Ole's admission, the existing partners agreed to
increase the carrying amount of the partnership's inventories to current fair
value, a P60,000 increase. The capital account to be credited to Ole:
a. P60,000 c. P52,000
b. P40,000 d. P46.000
Adapted)
Answer: (c)

Total agreed capital of the new partnership (equal to total

contributed capital*).............................................................. ₱ 260,000
Multiplied by: interest acquired ....................................................... 20%
Capital account to be credited to Ole ............................................. ₱ 52,0

*Total contributed capital: (₱ 120,000 + ₱ 40,000 cash investment + ₱

30,000 adjustment to fair value) = ₱ 260,000.

71. MM and OO are partners with capital balances of P50,000 and P70,000
respectively, and they share profits and losses equally. The partners agree to
take PP into the partnership for a 40% interest in capital and profits. While MM
and OO each retain a 30% interest. PP pays P60.000 cash directly to MM and
OO for his 40% interest and goodwill implied by PP's payment is recognized
on the partnership books. If MM and OO transfer equal amounts of capital to
PP, the capital balances after PP's admittance will be:

a. MM, P35,000; OO, P55.000; PP, P60,000

b. MM, P45,000; OO, P45.000; PP, P60,000
c. MM, P36,000; OO, P36,000; PP, P48,000
d. MM, P26,000; OO, P46000; PP, P 48,000

Answer: (a)
 Amount paid P60,000
Less: Book Value of interest acquired:
(P50,000 + P70,000) x 40% P48,000
Excess P12,000
Divided by: 40%
Goodwill P30,000

MM: [P50,000 + (P30,000 x 50%)] – (1/2 x P60,000) = P35,000

OO: [P70,000 + (P30,000 x 50%)] – (1/2 x P60,000) = P55,000
PP: Amount paid = P60,000

MM OO PP Total

Capital Balances before admission P50,000 P70,000 - P120,000

(equally)
Goodwill (equally) 15,000 15,000 - 30,000

P65,000 P85,000 P- P150,000

Admission by purchase (transfer ½ of 30,000 30,000 60,000 -

P60,000)
Capital balances after admission P35,000 P55,000 P60,000 P150,000
(a)
Or alternatively: (a)

MM OO PP Total

Capital Balances after admission P35,000 P55,000 P60,000 P150,000

(equally)
Cash settlement 10,000 (10,000) - -

Capital balance after cash settlement P45,000 P45,000 P60,000 P150,000

(b)
Profit and loss ratio 30% 30% 40% 100%

72. Using the same information in Number 71, and the partner's decided to have
a cash settlement among themselves right after the admission of PP. i.e., the
 capital balance should be made in accordance with the new profit and loss
ratio. What would be the capital balances after such transaction?
a. MM, P35,000; OO, P55.000; PP, P60,000
b. MM, P45,000; OO, P45.000; PP, P60,000
c. MM, P36,000; OO, P36,000; PP, P48,000
d. MM, P26,000; OO, P46000; PP, P 48,000
(Adapted)

Answer: (b)

73. The following condensed balance sheet is presented for the partnership of LL,
PP, and QQ, who share profits and losses in the ratio of 4:3:3, respectively:

Cash…………………………………………………... P 90,000
Other assets............................................................ 830,000
LL, loan ................................................................... 20,000
P 940,000

Accounts payable……………………………….. P 210,000

QQ, loan…………………………………………. 30,000
LL, capital……………………………………….. 310,000
PP, capital……………………………………….. 200,000
QQ, capital………………………………………. 190,000
P 940,000

Assume that the assets and liabilities are fairly valued on the balance sheet
and that the partnership decides to admit FF as a new partner, with a 20%
interest. No goodwill or bonus is to be recorded. How much should FF
contribute in cash or other assets?

a. P140,000 c. P175,000

b. P142,000 d. P177,500

(AICPA)

Answer: (c)
Total agreed capital of the new partnership P875,000
(P310,000 + P200,000 + P190,000/80%)
Less: Contribution of old partners (LL, PP, and QQ) 700,000
Cash Investment of FF P175,000
(c)

Or, alternatively:

Total agreed capital of the new partnership P875,000

Multiplied by: capital interest of FF 20%
P175,000 (c)

Take note that the loans to or from partners are ignored in the admission
of a new partner because the focus will be more on capital interest than total
interest.

74. CC and DD are partners who share profits and losses in the ratio of 7:3,
respectively. On October 21, 20x2, their respective capital accounts were as
follows:

CC…………………………………………….. P35,000
DD…………………………………………….. 30,000

P 65,000
On that date they agreed to admit EE as a partner with a one-third interest in
the capital and profits and losses, and upon his investment of P25,000. The
new partnership will begin with a total capital of P90,000. Immediately after
EE's admission, what are the capital balances of CC, DD, and EE,
respectively?

a. P30,000; P30,000; P30,000; c. P31,667; P28,333; P30,000;

b. P31,500; P28,500; P30,000; d. P35,000; P30,000; P25,000;

(AICPA)

Answer: (b)
Total agreed capital of the new partnership P90,000
Less: Contributed capital (P35,000 + P30,000 + P25,000) 90,000
P 0

Following the admission of EE, the partnership began with a total capital
of P90,000, and EE received a 1/3 interest; therefore, his capital must be credited
for P30,000 (P90,000 x 1/3). But EE contributes only P25,000 so the P5,000
difference represents bonus (P30,000 – P25,000) must be debited and allocated
to the old partners in the ratio of 7:3:

CC [P35,000 – (70% x P5,000)] P31,500

DD [P30,000 – (30% x P5,000)] 28,500
EE (P90,000 x 1/3) 30,000
P90,000 (b)

75. The capital accounts for the partnership of LL and MM at October 31, 20x5
are as follows:
LL, capital…………………………………………..... P 80,000
MM, capital............................................................. 40,000
P 120,000

The partners share profits and losses in the ratio of 3:2 respectively. The
partnership is in desperate need of cash, and the partners agree to admit NN
as a partner with one-third in the capital and profits and losses upon his
investment of P30,000. Immediately after NN's admission, what should be the
capital balances of LL, MM and NN respectively, assuming bonus is to be
recognized?

a. P50,000; P50,000; P50,000. c. P66,667; P33,333; P50,000

b. P60,000; P60.000; P60,000. d. P68,000; P32.000; P50,000

(AICPA)

Answer: (d)
Since bonus method is recognized, the total agreed capital of the partnership
should be equal to the total contributed capital. Therefore, the bonus would be
computed as:

Total agreed capital (P120,000 + P30,000) P150,000

Multiplied by: NN’s capital interest 1/3
Agreed capital to be credited to NN P50,000
Contributed/invested capital of NN 30,000
Bonus to NN (new partner) P20,000

The bonus to NN will be deducted to LL and MM:

LL: [P80,000 – (P20,000 x 3/5)] P68,000

MM: [P40,000 – (P20,000 x 2/5)] 32,000
NN 50,000
Total agreed capital P150,000
(d)

76. OO and TT are partners with capital balances P60,000 and P20,000,
respectively. Profits and losses are divided in the ratio of 60:40. OO and TT
decided to form a new partnership with GG, who invested land valued at
P15,000 for a 20% capital interest in the new partnership. GG's cost of the
land was P12,000. The partnership elected to use the bonus method to
record the admission of GG into the partnership. GG's capital account
should be credited for:

a. P12,000 c. P16,000

b. P15,000 d. P19,000

(AICPA)

Answer: (d)

Since bonus method is recognized, the total agreed capital of the partnership
should equal the total contributed capital.
Total agreed capital (P60,000 + P20,000 + P15,000) P95,000
Multiplied by: GG’s capital interest 20%
Agreed capital to be credited to GG P19,000
(d)

The investment made by GG is in the form of non-cash assets; therefore,

they should be recorded based on agreed value (or fair value).

77. The partnership of Marissa and Olga is being dissolved, and the assets and
equities at book value and fair value and profit and loss ratios at January1,
20x5 are as follows:
Book Value Fair Value
Cash……………………………………….. P 20,000 P 20,000
Accounts receivable –net……………… 100,000 100,000
Inventories………………………………… 50,000 200,000
Plant assets-net…………………………..... 100,000 120,000
P 270,000 P 440,000

Accounts payable....................................... P 50, 000 P 50,000

Manssa, capital (50%)…………………... 120,000
Olga, capital (50%)……………………… 100,000
P 270,000

Marissa and Olga agree to admit Trent into the partnership for a one-third
interest. Trent invests P95,000 cash and a building to be used in the business
with a book value to Trent for P100,000 and a fair value of P120,000.
Compute the capital balance of Olga after the admission, assuming that
the assets are revalued and goodwill is recognized.
a. P175,000 c. P195,000

b. P155,000 d. P205,000

(Adapted)

Answer: (d)
 Total agreed capital [(P95,000 + P120,000) / 1/3] P645,000
Less: Total contributed capital 605,000
Goodwill to old partners P40,000

Marissa: P120,000 + (P440,000, FV – P270,000, BV) x ½ P205,000

Olga: P100,000 + (P170,000 x ½) 185,000
Total contributed capital of Marissa and Olga P390,000
Add: Contribution of Trent (P95,000 + P120,000) 215,000
Total contributed capital P605,000

Therefore, the capital of Olga after the admission of Trent would be:
Olga: P185,000 + (P40,000 x ½) = P205,000 (d)

78. AA and BB entered into a partnership on May 31,20x5, contributing cash of

P48,000 and P32,000, respectively and agreeing to divide earnings in the ratio
of their initial investments after allowing annual salary allowance of P12,000
each. On December 31, 20x5, the income summary account had a credit
balance of P34,000, while the drawing accounts showed debit balances of
P14,000 for AA and P10,000 for BB.

At the beginning of the next year, CC was admitted into the firm as a new
partner with a 33-1/3% interest for a capital credit equal to his cash
investment of P60,000. AA and BB then effected a private cash settlement
between themselves in order to make the capital balances conform to a
new profit-sharing ratio of 4:2:3, respectively, with salary allowances
scrapped. How much of the amount of the private cash settlement effected
between the old partners?
a. P5,000 c. P12,000
b. P9,000 d. P15,000
(Adapted)
Answer: (b)
Determining whether there’s goodwill or bonus:

Total Agreed Capital (P60,000/ 0.33 or

1/3%) P180,000
Less: Total Contributed Capital
Initial Investments (P48,000+P32,000) P80,000
Net Income 34,000
Drawings (P14,000+ P10,000) (24,000)
Contributed Capital of AA and BB P90,000
Investment of CC 60,000 (150,000)
Goodwill to old partners (AA and BB) P30,000
Total agreed capital differs from total contributed capital, therefore goodwill
exists.
Private cash settlement:

AA BB CC TOTAL
Initial investments, 5/31/x4 P48,000 P32,000 P- P80,000
Net Income* 19,000 15,000 - 34,000
Drawings (14,000) (10,000) - (24,000)
Capital Balance, 12/31/x4 P53,000 P37,000 - P90,000
Additional investment 60,000 60,000
Goodwill(78) 18,000 12,000 - 30,000
Total Agreed Capital P71,000 P49,000 P60,000 P180,000
Required capital balance (P%L
Ratio 4:2:3) 80,000 40,000 60,000 180,000
Private cash settlement P9,000 P(9,000) - -

Allocation of Net Income: AA BB TOTAL

Salary Allowances (7 mos. Only) P7,000 P7,000 P14,000
Balance (48:32) 12,000 8,000 20,000
P19,000 P15,000 P34,000
Entry for private cash settlement in the books of the partnership:
BB, Capital 98,000
AA, Capital 98,000
79. AA, BB, and CC are partners sharing profits in a 5:32 ratio, and with capital
balances of P95.000P80.000, and P60.000 respectively, on December 31,
20x3. The partners decided to admit DD as a new partner on January 1, 20x6.
DD will contribute cash of P80,000 to the partnership and also pay P10,000 for
15% of BB's share. DD is to have a 20% share in profits. After the admission of
DD, the total capital will be P330.000 and DD's capital will be P70,000. After
the admission of DD. BB's capital balance would be:

a. P72,600 c. P79,100

b. P74,600 d. P81,100

(Adapted)

Answer: (c)

AA BB CC DD TOTAL
Capital Balances before
the admission of DD P95,000 P80,000 P60,000 P - P235,000
Admission by purchase:
book value
15% x P80,000 (12,000) 12,000
Admission by investment P80,000 P80,000
Total Contributed Capital P95,000 P68,000 P60,000 P92,000 P315,000
Bonus to Old Partners
(5:3:2) 11,000 6,600 4,400 (22,000)** -
Goodwill to Old (5:3:2) 7,500 4,500 3,000 - 15,000***
Total Agreed Capital P113,500 P79,100 P67,400 P70,000* P330,000
*Given per problem
**Transfer of capital, therefore bonus
***Total agreed capital differs from total contributed capital, therefore goodwill

80. Jesse, Joseph, and Leslie are partners with capital accounts of P70,000,
P120,000, and P90,000, respectively. The partnership share profits and losses
 45%, 30%, and 25%, respectively. They are considering allowing Hans to join
the partnership by investing directly into the partnership. The partners intend
to revalue the assets before Hans' admission. Neither bonus nor goodwill are
required. If the asset's market value exceeds book value P150,000, how much
will Hans invest to acquire a 20% equity interest in the partnership?

a. P107,500 c. P86,000

b. P100,000 d. P70,000

Answer: (a)
{(P70,000 + P120,000 + P90,000 + P150,000)/ 0.80) (0.20)} = P107,500

81. Sandra and Joshua are partners. They have capital account balances of
P250,000 and P200,000, respectively, and they share profits and losses
70/30. The partners are considering admitting Judy as a new partner with
a 25 percent equity interest for an investment in the partnership of
P180,000. Before admission, Sandra and Joshua will revalue the
partnership's assets. If the net increase in the partnership's assets is
P125,000, what will be the balance in Sandra's capital account
immediately before Judy's admission?

a. P262,500 c. P528,500

b. P337,500 d. P575,000

Answer: (b)
P250,000 + P87,500 = P337,500

82. The following are capital account balances and profit and loss ratios of the
partners in Precious Company.
 P&L
Capital Ratio
LL……………………………… P2,250,000 2
OO……………………………... 750,000 1

They agree to admit RR as a partner with a 25% interest in capital upon her
investment of P1,000,000. LL, OO and RR are to share profits 5:32, respectively.
Subsequently, TT joins the partnership by investing P1,200,000 for a 20%
interest in profits and capital, the old partners are to share profits in their
original ratio. Assuming the goodwill method is used, how much is the
goodwill to be recorded upon the admission of IT?
a. P800.000 c. P400,000
b. P600.000 d. P240,000
(PhilCPA)

Answer: (a)

Admission of RR: Total agreed capital = Total contributed capital, therefore no

goodwill arises

Total Agreed Capital (P1,000,000/25% or

P3,000,000/75%) P4,000,000
Less: Total Contributed Capital
(P2,250,000 + P750,000 + P1,000,000) 4,000,000
P -0-

Admission of TT: Goodwill is computed

Total Agreed Capital (P1,200,000 / 20%) P6,000,000

Less: Total Contributed Capital (P4,000,000 +
P1,200,000) (5,200,000)
Goodwill P800,000

83. RR and XX formed a partnership and agreed to divide initial capital equal
even though RR contributed P 25, 000 and XX contributed P 21, 000 in
identifiable assets. Under the bonus approach to adjust the capital
accounts. XX's unidentifiable assets should be debited for
 a. P 11, 500
b. 4, 000
c. 2, 000
d. 0
(AICPA)
Answer: (d)

Under the bonus method, unidentifiable assets (i.e., goodwill) are not
recognized. The total resulting capital is the FMV of the tangible investments of
the partners. Thus, there would be no unidentifiable assets recognized by the
creation of this new partnership.

84. In the AD partnership. Allen's capital is P 140, 000 and Daniel's is P 40, 000 and
they share income in a 3:1 ratio respectively. They decide to admit David to
the partnership. Each of the following questions is independent of the others.
Allen and Daniel agree that some of the inventory is obsolete. The inventory
account is decreased before David is admitted. David invests P 40, 000 for a
one-fifth interest. What is the amount of inventory written down?

a. P 4, 000
b. P15, 000
c. P10, 000
d. P20, 000
Answer: (d)

Total Agreed Capital after the admission of

David:
(P40,000 x 5) P200,000
Less: Contribution/Investment of David 40,000
Capital Balances of AD before the admission
of David P160,000
Capital Contribution (P140,000 + P40,000) P180,000
Reduction of Inventory P20,000

85. Using the same information in No. 84, David directly purchases a one-fifth
interest by paying Allen P 34, 000 and Daniel P 10, 000. The land account is
 increased before David is admitted. By what amount is the land account
increased?

a. P40,000
b. P20,000
c. P36,000
d. P10,000

Answer: (a)
Amount paid: ( P34,000 + P 10,000 ) ………………………………. P 44,000
Less: Book value of interest acquired:
(P 140,000 + P40,000) x 1/5…………………………………… P 36,000
Excess ………………………………………………………………….. P 8,000
Divided by / capitalized at ……………………………………………… 1/5
Amount of land to be increased…………………………………….. P 40,000

86. MM and NN are partners who have capitals of P6, 000 and P4, 800 and share
profits in the ratio of 3:2. OO is admitted as a partner upon investing cash of
P5, 000, with profits to be shared equally.

Assume that OO is allowed a 25% interest in the firm. (1) the capital balance
of MM after the admission of OO using goodwill method, and (2) how much
will NN gain or lose by the use of bonus method over goodwill method.

a. (1) P7,120; (2) NN will lose P140

b. (1) P7,120: (2) NN will gain P1,260
c. (1) 28,520 (2) NN will lose P1,260
d. (1) P8,520: (2) NN will gain P140
(Adapted)

Answer: (d)
(1) Goodwill method: Using the capital balance of new partner as a basis of
computing total agreed capital.
Total agreed capital (P5,000 ÷ 25%)………………………………. P20,000
Less: Total contributed capital (P6,000 + P4,800 + P5,000)…….. 15,800
…………………………….. P 4,200
Therefore, the capital balances after the admission of OO:
 MM: [P6,000 + (P4,200 x 3/5)]……………………………. P 8,520 (a)
NN: [P4,800 + (P4,200 x 2/5)]…………………………… 6,480
OO ……………………………………………………………… 5,000
Total agreed capital ………………………………………… P 20,000
(2) If bonus method is used, the capital balances would be:
Total agreed capital (P6,000 + P4,800 + P5,000)……….. P15,800
Multiply by: OO’s capital interest…………………………. 25%
Agreed capital to be credited to OO……………………. P 3,950
Contributed/Invested capital of OO……………………… 5,000
Bonus to MM and NN (old partner)………………………… P 1,050
The bonus would be added to MM and NN:
MM: [P60,000 + (P1,050 x 3/5)]………………………………. P 6,630
NN: [P4,800 + (P1,050 x 3/50)]……………………………… 5,220
OO ………………………………………………………………. 3,950
Total agreed capital…………………………………………… P 15,800
For the purpose of comparing the bonus and goodwill, there are two
alternatives presented:
Alternative 1- If goodwill is found to exist:
MM NN OO
Goodwill Method is used………………………… P8,520 P6,480 P5,000
Bonus method is used…………………………….. P6,630 P5,22 P3,950
Add: Goodwill (allocate equally)……………… 1,4000 1,400 1,400
P8,030 P6,620 P5, 350
(Gain) Loss -Bonus method ……………………... P490 P(140) P350 (D)

Alternative 2- If goodwill is not realized and written-off as a loss:

MM NN OO
Goodwill Method is used………………………… P8,520 P6,480 P5,000
Less; written-off of goodwill
 (allocate equally)…………………………… 1,4000 1,400 1,400
P7,120 P5,08 P3,600
Bonus method is used 6,630 5,220 3,950
(Gain) Loss -Bonus method ……………………... P490 P(140) P350

The bonus method adheres to the historical cost concept and it is often used in
accounting practice. It is objective that it establishes total capital of the new
partnership of an amount based on actual consideration received from the new
partner. The bonus method indirectly acknowledges the existence of goodwill
by giving bonus to either old or new partner.
The goodwill method result in the recognition of an asset implied by a
transaction rather than recognizing an asset actually purchased. Historically,
goodwill has been recognized only when purchased so that a more objective
measure of its value is established. Therefore, opponents of the goodwill method
contend that goodwill is not determined objectively and other factors may
have influence the amount of investment required from the new partners.

Although either method can be used in achieving the required interest for the
new partners, the two methods offer the same ultimate results only:
1. When the incoming partner’s percentage share of profit and loss
and percentage interest in assets upon admission are equal, and
2. When the former partners continue to share profits and losses
between themselves in the original ratio.
If these conditions are not fully met, however, results will be different.

87. AA and BB are partners who have capital of P600, 000 and P480, 000 sharing
profits in the ratio of 3:2. CC admitted as a partner upon investing P500, 000
for 25% interest in the firm profits to be shared equally. Given the choice
between goodwill and bonus method, CC will

a. Prefer bonus method due to CC's gain of P35,000

b. Prefer bonus method due to CC's gain of P140,000
c. Prefer goodwill method due to CC's gain of P140,000
d. Be indifferent for the goodwill and bonus methods are the
same
 (Adapted)

Answer: (a)
Goodwill Method: using the capital of the new partner as a basis of computing
total agreed capital:
Total agreed capital (P500,000 ÷ 25%)………………………….. P2,000,000
Less: Total contributed capital (P600,000 + P480,000
+ P500,000)………………………………………………………… 1,580,000
Goodwill to old partners…………………………………………….. P420,000

Therefore, the capital balances after the admission of CC:

AA: [P600,000 + (P420,000 x 3/5)]…………………………………… P852,000
BB: [P480,000 + (P420,000 x 2/5)]…………………………………….. 648,000
CC…………………………………………………………………………. 500,000
Total agreed capital………………………………………………….. P2,000,000

Bonus Method:
Total agreed capital (P600,000 + P480,000 + P500,000)……….. P1,580,000
Multiplied by: CC’s capital interest………………………………… 25%
Agreed capital to be credited to CC……………………………. P395,000
Contributed or invested capital of CC…………………………… 500,000
Bonus to AA and BB (old partners) P105,000

The bonus would be added to AA and BB:

AA: [P600,000 + (P105,000 x 3/5)]…………… ………………... P663,000

BB: [P480,000 + (P105,000 x 2/5)]……………………………….. 522,000
CC…………………………………………………………………….. 395,000
Total agreed capital………………………………………………. P1,580,000
Retirement or Withdrawal of a Partner

88. On June 30, 2013, statement of financial position for the partnership of CC,
MM, and PP, together with their respective profit and loss ratios were as
follows:
Assets at cost…………………………………………………………P 180, 000

CC, loan………………………………………………………………. 9, 000

CC, capital (20%)…………………………………………………… 42, 000
MM, capital (20%)………………………………………………….. 39, 000
PP. capital (60%)……………………………………………………. 90, 000
Total……………………………………………………………….. P 180, 000

CC decided to retire from the partnership. By mutual agreement, the assets

are to be adjusted to their fair value of P216, 000 at June 30, 20x5. It was
agreed that the partnership would pay CC P61, 200 cash for CC's
partnership interest, including CC's loan which is to be repaid in full. No
goodwill is to be recorded After CC's retirement, what is the balance of MM's
capital account?

a. P 36, 450
b. 39, 000
c. 45, 450
d. 46, 200
(AICPA)

Answer: (c)

Amount paid…………………………………………………… P61,200

Less: Book value of interest of CC (20%)………………….. 58,200
Bonus to retiring partner……………………………………… P3,000

*Total interest of CC
 Loans ………………………………………………………. P9,000
Capital …………………………………………………….. P42,000
Add: Share in the adjustment of asset
(P216,000-P180,000) x 20%.................................... 7,200 49,200
Total interests…………………………………………….... P58,200

Therefore the capital balance of MM would be:

MM: [P39,000 + (P216,000 – P180,000) x 20%-

(P3,000 x 2/8)]…………………………………………….… P45,450

**New profit and loss ratio:

MM: 2/8
PP: 6/8

89. The December 31, 20x5, statement of financial position of the BB, CC, and
DD partnership is summarized as follows:

Cash .............................. P100, 000 CC, loan ................ P100,

000

Other assets at cost..... 500, 000 BB, capital ............. 100,

000
CC, capital……….. 200, 000
___________ DD, capital……….. 200, 000
P 600, 000 P 600, 000

The partners share profits and losses as follows: BB, 20%: CC, 30%; and DD,
50%, CC is retiring from the partnership and the partners have agreed that
"other assets" should be adjusted to their fair value of P600.000 at December
31. 20x5. They further agree that CC will receive P244, 000 cash for his
 partnership interest exclusive of the loan, which is to be paid in full. No
goodwill implied by CC's payment will be recorded. After CC's retirement,
the capital balances of BB and DD, respectively, will be:

a. P 116, 000 and P 240, 000

b. P 101, 714 and P 254, 286
c. P 100, 000 and P 200, 000
d. P 73, 143 and P 182, 857
(Adapted)

Answer: (a)
BB: P100,000 + (P600,000-P500,000) x 20%= P120,000 –(P14,000 x 2/7)= P116,000
CC:P200,000 + (P600,000-P500,000) x 30%= P230,000
DD:P200,000 + (P600,000-P500,000) x 50%= P250,000- (P14,000 x 5/7)= P240,000

Amount paid…………………………………………………… P240,000

Less: BV of interest of
CC………………………………………………………………… 230,000
Bonus ti retiring partner………………………………………. P14,000

90. On June 30, 20X5, the condensed balance sheet for the partnership of DD FF
and GG, together with their respective profit and loss sharing percentages
was as follows:
Assets, net of liabilities…………………………………………….. P 320, 000
DD, capital (50%)………………………………………………….. P 160, 000
FF, capital (30%)…………………………………………………… 96, 000
GG, capital (20%)..................................................................... 64, 000
P 320, 000

DD decided to retire from the partnership and by mutual agreement is to be

paid P180, 000 out of partnership funds for his interest. Total goodwill or
adjustment in assets implicit in the agreement is to be recorded. After DD's
retirement, what are the capital balances of the other partners?
FF GG
 a. P 84, 000 P 56, 000
b. 102, 000 68, 000
c. 108, 000 72, 000
d. 120, 000 80, 000
(AICPA)

Answer: (c)
Amount paid……………………………………………………………… P180,000
Less: BV interest of DD(50%)…………………………………………….. 160,000
Excess / Partial goodwill………………………………………………… P20,000
Divide by:,………………………………………………………………… 50%
Total goodwill…………………………………………………………. P40,000

Therefore, the capital of the remaining partners:

FF: [P96,000 + (P40,000 x 30%)………………………………… P108,000

GG:[P64,000 + (P40,000 x 20%)………………………………. 72,000

The interest and profit/loss ratio are assumed to be the same.

When a partner withdraws, the partnership agreement should be consulted to
determine if any guidelines have been established that would influence the
procedure. The withdrawal of partner requires a determination of the fair market
value of the partnership entity and a measurement of partnership income to the
date of withdrawal. Also, in many cases, the equity of retiring partner may not
be equal to the partner’s capital balance as a result of (1) the existence of
accounting errors, (2) differences between fair market value and the recorded
book value of assets. , and (3) unrecorded assets such as goodwill.
If accounting errors are discovered, they should be treated as prior period
adjustments and corrected by adjusting the capital balances of the partners.
Theoretically, an error should be allocated to partners’ capital balances
according to profit / loss ratio that existed when error is committed. Therefore, it
is necessary the identify the period in which it is traceable. This practice can
become complicated, and a well-designed partnership agreement should
include procedures for dealing with the correction of errors.
91. PP, RR and SS were partners with capital balances as of January 1, 20x5, of P
20, 000, P30, 000 and P40, 000 respectively, sharing profit and losses on a
5.3:2 ratio

On July 1, 20x5 PP withdraw from the partnership. Partners agreed that at the
time of withdrawal, certain inventories had to be revalued at P14, 000 from
its cost of P10,000. For the six month period ending June 30, 20x5, the
partnership generated a net income of P28, 000. Further, partners agreed to
pay PP, P39 000 for his interest and that the remaining partners' capital
accounts, would be adjusted for whatever goodwill the settlement would
generate. The payment of PP included a goodwill of:

a. P 3, 000
b. 5, 000
c. 10, 000
d. 8, 500
(Adapted)

Answer: (a)

Amount paid……………………………………………….. P39,000

Less: Book value of interest of PP (50%)…………………. 36,000
Partial goodwill (to PP)…………………………………….. P3,000
Total interest of PP:
Capital ………………………………………………… P20,000
Add: Share in adjustment of asset 2,000
Share in net income (P28,000) x 50%......... 14,000
P36,000

Partial goodwill is preferred over total goodwill because it represents goodwill

that is actually paid for. On the other hand, total goodwill is also allowed, since
the standard allows both partial and goodwill method.

92. The condensed balance sheet of the partnership of EE, FF and GG with
corresponding profit and loss sharing percentage as of June 30, 20x5 was as
follows:
 Net assets....................................................................................... P 480, 000
EE, capital (50%)………………………………..……………………. P 240, 000
FF, capital (30%)………………………………………… …………. 144, 000
GG, capital (20%)…………………………………………… …….. 96, 000
P 480, 000

As of said date, EE retired from the partnership. By mutual agreement, he

was paid P270, 000 for his interest in the partnership. Partial goodwill of
adjustment in assets was to be recorded. After EE’s retirement, the total net
assets of the partnership was:

a. P 300, 000
b. 210, 000
c. 240, 000
d. 270, 000
(Adapted)
Answer: (c)
Amount paid……………………………………………………………… P270,000
Less: Book value of interest of EE (50%)…………………………….. 240,000
Partial goodwill………………………………………………………….. P 30,000
The entry to record the retirement would be:
EE, Capital……………………………………………............ 240,000
Goodwill…………………………………………………….. 30,000
Cash…………………………………………………. 270,000
Therefore, the net assets of the partnership after EE’s retirement would be:
Net assets, before retirement………………………………………. P480,000
Partial goodwill…………………………………….…………………. 30,000
Cash paid……………………………………………………………... (270,000)
P240,000 (c)

93. Using the same information in Number 92, except that total goodwill or
adjustments in assets was to be recorded. What will be the total net assets of
the partnership after EE's retirements?
 a. P 300, 000
b. 210, 000
c. 240, 000
d. 270, 000
(Adapted)
Answer: (d)
Amount paid………………………………………………………………… P270,000
Less: Book value of interest of EE (50%)…………………………….….. 240,000
Excess / Partial goodwill..………………………………………………... P 30,000
Divided by (capitalized at)…………………………..………………… 50%
Total goodwill…………………………..………………………………... P 60,000
The entry to record the retirement would be:
EE, Capital……………………………………………............ 240,000
Goodwill…………………………………………………….. 60,000
Cash…………………………………………………. 270,000
FF, capital (P60,000 × 30%)…………………... . 18,000
GG, capital (P60,000 × 20%)………………….. 12,000

Therefore, the net assets of the partnership after EE’s retirement would be:
Net assets, before retirement………………………………………. P480,000
Partial goodwill……………………………………….………………. 60,000
Cash paid……………………………………………………………... (270,000)
P270,000 (d)

94. A. Smith, a partner in an accounting firm, decided to withdraw from the

partnership. Smith's share of the partnership profits and losses was 20%. Upon
withdrawing from the partnership he was paid P88, 800 in final settlement for
his interest. The total of the partners' capital accounts before recognition of
partnership goodwill prior to Smith's withdrawal was P252, 000. After his
 withdrawal the remaining partners' capital accounts excluding their share of
goodwill, totaled P192.000. The total goodwill of the firm was:

a. P 144, 000
b. 168, 000
c. 192, 000
d. 300, 000
(AICPA)
Answer: (a)
Amount paid………………………………………………………………….... P88,800
Less: Book Value of interest of Smith (20%)
Total partner’s capital before withdrawal….………….… P252,000
Less: Total partner’s capital after withdrawal………. 192,000 60,000
Excess / Partial good will………………………………………………………. P28,800
Divided by (capital at)…………………………………………………………. 20%
Total goodwill……………………………………………………….………. P144,000 (a)

95. Bob. Claire, and Jack are partners who share profits and losses 30 percent,
25 percent, and 45 percent, respectively. Bob informed Claire and Jack that
he is withdrawing from the partnership. The partners' capital accounts at the
date of Bob's withdrawal are P150, 000, P135, 000, and P225, 000,
respectively. The partnership agreement states that the goodwill, if any of
the withdrawing partner will be recognized for all partners immediately prior
to the withdrawal of any partner. In this instance, the partners determine
that the goodwill associated with Bob is P22, 500. Assuming that Bob's equity
is purchased by a new partner (Deborah) approved by Claire and Jack.
What is the amount of Deborah's initial capital account?

a. P150,000
b. P170,000
c. P172,500
d. The amount cannot be determined because the amount
Deborah paid for Bob's equity is not known
Answer: (c) -- P150,000 + P22, 5000
96. Claire and Jack are partners who share profits and losses 30 percent, 25
percent, and 45 percent, respectively. Bob informed Claire and Jack that he
is withdrawing from the partnership. The partners' capital accounts at the
date of Bob's withdrawal are P150,000, P135,000, and P225,000 respectively.
The partnership agreement states that the goodwill, if any, of the
withdrawing partner will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that
the goodwill associated with Bob is P22,500. Assuming that Bob's equity is
purchased by Claire (60 percent) and Jack (40 percent), what is the amount
of Claire's capital account at the date of Bob's withdrawal?

a. P307,500
b. P238,500
c. P186,750
d. P180,000
Answer: (b) – P135,000 + (P150,000 + P22,500) (.60)

97. Bonnie, Gwen, and Sally are partners with capital account balances of P350,
000. P280, 000, and P200, 000 respectively. Sally informed Bonnie and Gwen
that she is withdrawing from the partnership. The partners' share profits and
losses 45 percent. 30 percent, and 25 percent, respectively. The partnership
agreement states that the goodwill, if any, of the withdrawing partner will be
recognized at the date of withdrawal. In this instance, the partners
determine that the goodwill associated with Sally is P40, 000. Assuming that
Sally's equity is purchased by Bonnie (60 percent) and Gwen (40 percent),
what is the amount of Gwen's capital account at the date of Sally's
withdrawal?

a. P494,000
b. P446,000
c. P424,000
d. P376,000
Answer: (c) – P280,000 + (P200,000 + P40,000) (.40)

98. Bonnie, Gwen, and Sally are partners with capital account balances of
P350,000, P280,000, and P200,000 respectively. Sally informed Bonnie and
Gwen that she is withdrawing from the partnership. The partners' share profits
 and losses 45 percent, 30 percent, and 25 percent, respectively. The
partnership agreement states that the goodwill of the partnership will be
recognized at the date of withdrawal. In this instance, the partners
determine that the partnership's goodwill/revaluation of assets P150,000
Assuming that Sally's equity is purchased by a new partner (Mary) approved
by Bonnie and Gwen, what is the amount of Mary's initial capital account?

a. P 87,500
b. P237,500
c. P350,000
d. The amount cannot be determined because the amount Mary
paid for Sally's equity is not known
Answer: (b) – P200,000 + (P150,000 × .25)

99. If the bonus method is used to account for the retirement. Erica's capital
balance subsequent to Fredric's retirement will be:
a. P105,000 c. P134,250
b. P127,500 d. P150,000
Answer: (a)

Erica’s capital balance is reduced by (35%/70%) × P45,000 bonus to Fredric, or

P22,500.
Therefore, the capital of Erica amounted to PO 125,500 = P150,000 – P22,500

100. If the excess payment is attributed entirely to goodwill and the partial
goodwill approach is used, goodwill will be recognized at:
a. P 45,000 c. P100,000
b. P 55,000 d. P150,000
Answer: (a) – Goodwill = P145,000 – P100,000 = P45,000

101. If the excess payment is attributed entirely to goodwill, and the total
goodwill approach is used. Gustav's capital balance after Fredric's
departure will be:
 a. P200,000 c. P263,000
b. P252,500 d. P275,000
Answer: (b)
P45,000/30%= P150,000 total goodwill/implied
Gustav’s share of goodwill = 35% x P150,000 = P52,500
P200,000 + P52,500 = P252,500

102. Using the partial goodwill approach, Erica's capital balance, after Fredric's
departure, will be:
a. P127,500 c. P150,000
b. P134,250 d. P165,750
Answer: (c)

103. CC, DD and EE shared profit and losses based on 5:3:2. EE was allowed to
withdraw from the partnership on 31 December 20x5 with P600.000 cash as
full settlement. The condensed balance sheet of the partnership as of that
date was as follows:
Assets
Due from EE ........................………………………………..P 250,000
Goodwill ...........…………………………………………………..2,000,000
Other assets ..........………………………………………………4.750,000
Total assets ......………………………………………………………………P7.000.000

Liabilities and Capital

Liabilities.…………………………………………………………..P2.000.000
Due to DD……………………………………………………………750,000
CC, capital......…………………………………………………..1,750,000
DD, capital………………………………………………………..1,500,000
EE, capital ...............………………………………………….1,000,000
Total liabilities and capital.………………………………………….P7,000,000

Using the partial adjustment of goodwill method, the new capital balances of
the remaining partners after EE;s withdrawal are:
a. CC, P1,842,750 and DD, P1,556,250
b. CC, P1,375,000 and DD, P1,275,000
c. CC, P2,000,000 and DD, P1,650,000
d. CC,P1,750,000 and DD, P1,500,000 (Adapted)
Answer: (d)
Amount paid ........................................................................................P600,000
Less: Book value of interest of EE (20%)
(P1,000,000 – P250,000) .....................................................................750,000
Deficit- to be deducted to existing goodwill ........................................(P150,000)

A partner who is anxious to withdraw may be willing to accept less than the
balance reported on his or her capital. Willingness to accept such a reduced
amount may arise from the realization that a forced sale of the firm’s asset may
result in loss and decrease in interest as freat or greater than which can be
affected through agreement. When a withdrawing partner agreed to accept
less than the amount reported in his or her capital account, such diference may
be viewed.
1.)As a bonus accruing to continuing partners

2.) Where goodwill has been previously recorded as an offset against the
goodwill balance
EE, Capital ..............................................................1,000,000
Cash...................................................................................600,000
Due from EE.......................................................................250,000
Goodwill..............................................................................150,000
The capital balance of the remaining partners will still be the same
CC ............................................................................................1,750,000
DD ...........................................................................................1,500,000
104. Using the same information in Number 103, except that the entire shrinkage
in asset method or total adjustment in goodwill is used, the new capital
balance of the remaining partners after EE's withdrawal are:
a. CC, P1,843,750 and DD, P1,556,250
b. CC, P1,375,000 and DD, P1,275,000
c. CC, P2,000,000 and DD, P1,650,000

d. CC. P1,750,000 and DD, P1,500,000

Adapted)

Answer: (b)
Amount paid ..........................................................................P 600,000
Less: Book value of interest of EE (20%) ................................P 750,000
Deficit ....................................................................................(P150,000)
Divided by: ............................................................................ 20%
Negative goodwill to be deducted to existing goodwill.........(P 750,000)
The entry to record the retirement would be:
CC, Capital .................................................................... P 375,000
DD, Capital .................................................................... . 225,000
EE, Capital ......................................................................1,000,000
Cash................................................................................................. 500,000
Due from EE .................................................................................... 250,000
Goodwill...........................................................................................750,000
Or, alternatively:
CC, Capital (P750,000 x 50%).....................................................375,000
DD, Capital (P750,000 x 30%) ..................................................225,000
EE, Capital (P750,000 x 20%) ...................................................150,000
Goodwill..............................................................................................750,000
EE, Capital (P1,000,000 – P150,000)................................... 850,000
Cash..............................................................................................600,000
Due from EE ................................................................................ 250,000
The capital balance of the remaining partner would be:
CC: (P 1,750,000 – P375,000) .................................................................P 1,375,000
DD: (P1,500,00 – P225,000) ....................................................................P 1,275,000

105. Bonnie, Gwen, and Sally are partners with capital account balances of
P350,000, P280,000, and P200,000 respectively. Sally informed Bonnie and
Gwen that she is withdrawing from the partnership. The partners' share
profits and losses 45 percent, 30 percent, and 25 percent, respectively. The
partnership agreement states that the goodwill, if any, of the withdrawing
partner will be recognized at the date of withdrawal. In this instance, the
partners determine that the goodwill associated with Sally is P40,000.
Assuming that Sally's equity is purchased by Bonnie (60 percent) and Gwen
(40 percent), what is the amount of Bonnie's capital account at the date of
Sally's withdrawal?
a. P376,000 c. P464,000
b. P424,000 d. P494,000
Answer: (d)
P 350,000 + (P200,000 + 40,000) (.60)

106. The partners' capital (income-sharing ratio in parentheses) of Nunn, Owen

Park & Quan LLP on May 31, 20x5, were as follows:
Nunn (20%) ..………………………………………………………………….P 60,000
Owen (20%).…………………………………………………………………….80,000
Park (20%)………………………………………………………………………..70,000
Quạn (40%) ……………………………………………………………………..40,000

Total partners' capital (20%).......…………………………………..P250,000

On May 31, 20x5, with the consent of Nunn, Owen, and Quan:

a. Sam Park retired from the partnership and was paid P50,000 cash in full
settlement of his interest in the partnership

b. Lois Reed was admitted to the partnership with a P20,000 cash

investment for a 10% interest in the net assets of Nunn, Owen and Quan
The capital account to be credited to Reed is:
a. P22,000 c. P20,000
b. 27,000 d. 25,000 (Adapted)

Answer: (a)

Total capital before retirement.........................................................................

P250,000
Less: Retirement of Park ................................................................................... P70,000

Add: Bunos to remaining partners due to retirement od Park.......................... P

20,000

Capital balance before the admission of Reed ................................................ P

200,000

Add. Cash investment of Reed .......................................................................... P

20,000

Total agreed, capital of the partnership ( equal to the contributed capital).....P

220,000

Multiplied by: interest acquired .........................................................................__

10%__

Capital account to be credited to Reed ............................................................. P

22,0000

107. AA,BB, and CC are partners sharing profits in the ratio of 3:2:1.respectively.
Capital accounts are P50,000, P30,000 and P20,000 on December 31, 20x5,
when CC decides to withdraw. It is agreed to pay P30,000 for CC's interest.
Profits after the retirement of CC are to be shared equally.
 (1) The capital balance of BB after retirement of CC, using total goodwill
approach, and (2) assume the usage of bonus, partial, and total goodwill
approach for the retirement, which of these methods will be preferred by
ВB?
a. (1) P50,000: (2) Bonus method
b. (1) P20,000: (2) Bonus method
c. (1) P30,000: (2) Partial goodwill

d. (1) P50,000: (2) Total goodwill

(Adapted)

Answer: (a)
(1) Amount paid ............................................................................................. P 30,000
Less: Book value of interest of CC(1/6) .......................................................... P 20,000
Partial Goodwill .............................................................................................. P 10,000
Divided by (capitalized at) ............................................................................... ___1/6_
Total Goodwill .................................................................................................P 60,000
Therefore , the capital balance of BB after the retirement of CC:
BB: P30,000 + (2/6 x P60,000).........................................................................P 50,0000

(2)
Bonus method
Amount paid ..................................................................................................... P 30,000
Less: Book value of interest of CC ................................................................... P 20,000
Bonus retiring partner ....................................................................................... P 10,000
Therefore, the capital balance of the remaining partners using bonus method:
AA: P 50,000 – (3/5 x P10,000).......................................................................P 44,000
BB: P 30,000 – ( 2/5 x P10,000).......................................................................P 26,000
Capital of the remaining partners will be still be the same since the goodwill is
applicable only to retiring partner.
AA...................................................................................................P 50,000
BB ...................................................................................................P 30,000
Total goodwill
AA: P50,000 + (3/6 x P60,000)........................................................ P80,000
BB: P30,000 + (2/6 x P60,000) ........................................................P 50,000

Business Combination: Each Partnership Has Undervalued Tangible Assets and

Goodwill

108. The partnership of A, B, C. and D has agreed to combine with the

partnership of X and Y. The individual capital accounts and profit and loss
sharing percentage of each partner follow:
P & L Sharing %
Capital Accounts NOW Proposed
A.………………………………………… P 50,000 40 28
B.………………………………………….. 35,000 30 21
C.………………………………………….. 40,000 20 1.4
D.………………………………………… 25,000 10 7
150,000 100 70
X.……………………………….…….. P 60,000 50 15
Y.……………………………………. 40,000 50 15

P100,000 100
30

A, B, C, and D's partnership has undervalued tangible assets of P20,000 and

X and Y partnership has undervalued Tangible assets of P8,000. All the
partners agree that:
 (a) the partnership of A,B,C, and D possesses goodwill of P30,000 and
(b) the partnership of X and Y possesses goodwill of P10,000.

The combined businesses will continue to use the general ledger of A,B,C,
and D. Assume that tangible assets are to be revalued and goodwill is to be
recorded. Compute the amount of goodwill recognized in the partnership
books:
a. Zero c. P40,000
b. P30,000 d. 68,000
(Adapted: Advanced Accounting by Pahler)

Answer: (c)

Goodwill of A, B and C Partnership........................................................ P30,

000
Goodwill of X and Y Partnership............................................................. P10,
000

Total goodwill..................................................................................... P40, 000

(c)

109. Using the same information in No. 108, compute the capital balances of A
and X respectively:
a. A, P70,000; X.P69,000 c. A, P58,000: X, P64,000
b. A,P62,000; X, P65,000 d. A, P50,000; X, P60,000

Answer: (a)
A X

Unadjusted Capital Balances.................................... P50, 000 P60, 000

Undervalued Tangible Assets:

A: 20,000 x 40% ........................................................... P8, 000

X: 10,000 x 50% ........................................................... P4, 000
 Goodwill:

A: 30,000 x 40% ......................................................... P12, 000

B: 10,000 x 50% .......................................................... P5, 000

Adjusted Capital Balances....................................... P70,000 P69, 000

110. Using the same information in No. 109 except that bonus method is to be
used with respect to undervalued assets and goodwill. Compute the
amount of goodwill recognized in the books:
a. Zero c. P40,000
b. P30,000 d. 68,000

Answer: (a) - Zero, since bonus method was used to account for the
undervalued tangible assets and goodwill.

111. Using the same information in No. 82 except that bonus method is to be
used with respect to undervalued assets and goodwill. Compute the capital
balances of A and X, respectively:
a. A, P70,000: X,P69,000 c. A. P58,000; X. P64,000
b. A, P50,000; X, P60,000 d. A, P50,960; X, P58,800
Answer: (d)
A: 50,000 + (2,400 x 40%)........................................................................ P50, 960
X: 60,000 + (2,400 x 50%)......................................................................... P58, 800

*The P2, 400 bonus to A, B, C and D were calculated as follows:

Bonuses to A, B, C and D: This is the portion of A, B, C and D’s

undervaluation that X and Y might share in if realized or allocated as
bonus.
 Undervalued tangible assets of P20,000 x 30% (X and Y’s new
profit and loss sharing percentage)................................................. P6, 000
Goodwill of P30,000 x 30% (X and Y’s new profit and loss
sharing percentage)....................................................................... P9, 000

Total Bonus to A, B, C and D .................................................................. P15, 000

Bonuses to X and Y: This is X and Y’s undervaluation that A, B, C and D might

share in if realized or allocated as bonus.

Undervalued tangible assets of P8,000 x 70% (A, B, C and D’s new

profit and loss sharing percentage)............................................... P5, 600
Goodwill of P10,000 x 70% (A, B, C and D’s new profit and loss
sharing percentage)........................................................................ P7,000

Total Bonus to X and Y.............................................................................. P12, 000

Net Bonus to A, B, C and D........................................................................ P2, 400

Proof of Net Bonus to A, B, C and D to Achieve Equity

(1) Assume full realization of items not recognized on the books:
A, B, C and D:
Undervalued Assets............................................................................ P20, 000
Goodwill.............................................................................................. P30, 000
Total...............................................................................................P50, 000
X and Y:
Undervalued Assets............................................................................. P8, 000
Goodwill............................................................................................... P10, 000
Total...............................................................................................P18, 000
Total............................................................................................................. P68, 000

(2) Allocation of P68, 000 assumed to be realized:

A, B, C and D X and Y
70% 30%
70% of P68, 000.................................................... P47, 600
30% of P68, 000.................................................... P20, 400
Amounts not recognizer on the books.............. P50, 000 P18, 000
P2, 400 (P2, 400)

Incorporation of a Partnership

112. Roy and Gil are partners sharing profits and losses in the ratio of 1:2
respectively. On July 1, 20x5, they decided to form the R&G Corporation by
transferring the assets and liabilities from the partnership to the Corporation
in exchange of its shares. The following is the post-closing trial balance of
the partnership:
Debit Credit
Cash.…………………………………………. P 45,000
Accounts Receivable (net) .……………. 60,000
Inventory…………………………………... 90,000
Fixed Assets (net) .........………………… 174,000
Liabilities ..........…………………………… P 60,000
Roy, Capital ............………………………….. 94,800
Gil, Capital.............…………………………… 214,200
P369,000 P369.000

It was agreed that adjustments be made to the following assets to be

transferred to the corporation:
Accounts Receivable .........………………………………............... P 40,000
Inventory………………………………………………………………… 68,000
Fixed Assets ......................………………………………………… 180,800

The R&G Corporation was authorized to issue P100 par preference shares
and P10 partner ordinary share. Roy and Gil agreed to receive for their
equity in the partnership 720 ordinary share each, plus even multiples of 10
shares for their remaining interest. The total number of shares of preference
and ordinary share issued by the Corporation in exchange of the assets and
liabilities of the partnership are:
 Preference Share Ordinary Share Preference Share Ordinary Shore
a. 2,540 shares 1,500 shares c. 2,642 shares 1,440 shares
b. 2,592 shares 1,440 shares d. 2,642 shares 1,550 shares
(PhilCPA)

Answer: (b)
Total Roy Gil
Capital, Before Adjustment............... P309, 000 P94, 800 P214, 200
Less: Net Adjustment*........................... 35, 400 11, 800 23, 600

Capital, After Adjustment.................... P273, 600 P83, 000 P190, 600

Less: Portion covered by ordinary share
par P10 (720 share to each partner).. P14, 400 P7, 200 P7, 200
Portion to be covered by preference
share par P100..................................... P259, 200 P75,800 P183, 400

Shares to be issued:
Preference Share................................. P2, 592 P758 P1, 834
Ordinary Share.................................... P1, 440 P720 720

FV, P40, 000 + P68, 000 + P180, 600 – BV, P60, 000 + P90, 000 + P174, 000

113. Partners Art and Tony, who share equally in profits and losses, have the
following balance sheet as of December 31, 20x5:
Cash ........................... P120,000 A/payable ............ P172,000
A/Receivable ........….. 100,000 Accum. dep'n ...... 8,000
Inventory .........……… 140,000 Art, capital……… 140,000
Equipment.............… 80,000 Tony, capital.......... 120,000
Total………………………. P440,000 Total………… P440,000

They agreed to incorporate their partnership with the new corporation

absorbing the net assets after the following adjustments: provision of
allowance for bad debts of P10,000; restatement of the inventory at its
current fair value of P160,000and; recognition of further depreciation on the
equipment of P3,000. The corporation's capital stock is to have a par value
 of P100, and the partners are to be issued corresponding total shares
equivalent to their adjusted capital balances. The total par value of the
shares of capital stock that were issued to partners Art and Tony was
a. P260,000 c. P273,000
b. 267,000 d. 280,000
(PhilCPA)

Answer: (b)
Unadjusted Capital Balances (P140,000 + P120,000)...................... P260, 000
Add (deduct) : adjustments :
Allowance for doubtful accounts.................................................. (10, 000)
Revaluation of inventory (P160,000 - P140,000)................................ 20, 000
Additional Depreciation.................................................................. ( 3, 000)
Adjusted capital balances equivalent to
the total shares issued.................................................................... P267,000(b)

114. JJ & KK partnership's balance sheet at December 31, 20x5, reported the
following:
Total assets ..…………………………………......... P100,000
Total liabilities………………………………………. 20,000
JJ, capital…………………………………………….. 40,000
KK, capital…………………………………………… 40,000

On January 2, 20x6, JJ and K dissolved their partnership and transferred all

assets and liabilities to a newly-formed corporation. At the date of
incorporation, the fair value of the net assets was P12,000 more than the
carrying amount on the partnership's books, of which P7,000 was assigned to
tangible assets and P5,000 was assigned to goodwill. JJ and KK were each
issued 5,000 shares of the Corporation's P1 par value ordinary share.
Immediately following incorporation, share premium/additional paid-in-
capital in excess of par should be credited for:
a. P68,000 c. P77,000
b. 70,000 d. 82,000
(AICPA)
Answer: ( d )
Carrying value of net assets (P100,000 – P20,000)......................... P80, 000
Add: Adjustments to reflect fair value........................................... P12, 000

Fair value of net assets....................................................................... P92, 000

Less: Common stock, P1 par (5,000 x 2 x P1).................................. P10, 000
Additional Paid-in Capital / Share Premium................................. P82, 000 (d)

MULTIPLE CHOICE THEORIES

1. Which one of the following is a characteristic of a general partnership?

a) All partners must agree to legal agreements or they are nonbinding.

b) Each general partner is personally liable for all of the partnership

obligations.

c) Each partner is entitled to reasonable remuneration for conducting

partnership

business.

d) Partnership income is separately taxed.

Answer: a

2. In a limited partnership, the entity ceases to legally exist when

a) A.an existing partner retires or dies.

b) a new partner enters the partnership

c) a limited partner transfers his/her interest.

d) a general partner is no longer present.

Answer: D
3. Partnership net income is defined as

a) the interest allocation to the partners, based on weighted average

invested capital.

b) partnership income after deducting partner salaries and interest

c) partnership income after deducting partner salaries.

d) partnership income before deducting salaries and interest.

Answer: b

4. Which of the following is false regarding the measurement of

partnership income?

a) Partnerships employ the same revenue and expense recognition

criteria as corporations.

b) Salaries to partners are deducted as expenses in measuring

partnership income.

c) Interest allocated to partners is not deducted as an expense in

measuring partnership income.

d) Partnerships do not report income tax expense.

Answer: d

5. A partnership's income-sharing ratio

a) applies to partnership income after salaries and interest are

deducted

b) applies to partnership income before salaries are deducted but after

interest is deducted
c) applies to partnership income after salaries are deducted but before
interest is deducted.

d) applies to partnership income before both salaries and interest are

deducted.

Answer: d

6. Which of the following business entity forms is (are) required to

maintain their financial information in accordance with Generally
Accepted Accounting Principles?

a) Corporations

b) Corporation and Partnership

c) Partnership and Proprietorships

d) Corporation Partnerships, and Proprietorships

Answer: c

7. Which of the following is not a similarity that exists between

proprietorships and partnerships?

a) Neither requires approval by a state to form

b) b. Both can use an accounting method that does not conform to

GAAP

c) C. Owners put the company's income on the owner's individual tax

return

d) d. All of the above are similarities of proprietorships and

partnerships

Answer: b
8. Which of the following is not an area where there are differences when
comparing partnerships and corporations

a) The ease of formation

b) The level of owner legal liability

c) The ease of ownership transferability

d) All of the above are areas where partnerships and corporations differ

Answer: c

9.Which of the following is not a difference when comparing

partnerships and corporations?

a) Corporations must conform to GAAP whereas partnerships are not

required to conform to GAAP

b) Partnerships and corporations neither are required to attain state

approval to form

c) Partners have unlimited liability while corporation shareholders

generally do not have unlimited liability

d) Corporations are required to pay income tax while partnerships are

not required to pay income taxes

Answer: d

10. What theory of equity is applicable for partnerships

a) Proprietary theory

b) Entity theory

c) A mix of proprietary and entity theory

d) Partnership theory
 Answer: c

11. Which of the following is not an example of the proprietary theory of

equity?

a) Partners do not have claims to specific assets

b) Individual partners are liable for all debts of the partnership

c) A partner's income tax includes the partner's share of partnership

net income, and the partnership does not pay income taxes

d) Salaries of partners are viewed as distributions of income, not

components of net income

Answer: c

12. Which of the following is not an example of the entity theory of

equity?

a) Continuity of the partnership when admission or withdrawal of

partners occurs

b) A partnership can enter into contracts

c) Assets contributed to the partnership retain the existing tax basis to

the partner contributing

d) Partnership creditors have priority claim to partnership assets and

the creditors of partners have priority claim to the partner's assets in
the event of liquidation

Answer: c

13. Which of the following statements is correct with regard to the

creation of initial capital account balances on a partnership's financial
records?
a) The capital accounts can be created for any peso amount agreed by
all partners

b) The market value of noncash assets must be considered when creating

the initial capital balances

c) Each partner's capital account must have a non-zero value assigned

to it

d) All of the above statements are correct

Answer: a

14. Which of the following statements is not true with regard to assigning
the carrying value of noncash assets contributed to those assets at the
date of a partnership's formations?

a) Use of the noncash asset's historical cost can result in the

misstatement of the partners' capital accounts

b) Assigning the historical cost to noncash assets contributed to a

partnership may require the partnership agreement to address
profit/loss distribution that will occur when the contributed asset is
sold

c) Assigning the historical cost to noncash assets contributed to a

partnership will not cause partner taxable income to differ from the
partner's share of partnership income

d) All of the above statements are correct

Answer: c

15. Which of the following statements is correct with regard to the

contribution of assets and associated liabilities to a partnership?

a) Liabilities associated with assets contributed to a partnership remain

the liability of the contributing partner
b) Liabilities associated with assets contributed to a partnership become
the liability of the partnership

c) Liabilities associated with assets contributed to a partnership become

the liability of both the contributing partner and the partnership

d) Assets may not be contributed to a partnership if there is a liability

associated with the asset

Answer: b

16. When can the bonus method be applied?

a) When o partnership is formed

b) When a new partner is added to the partnership

c) when an existing partner retires from the partnership

d) The bonus method can be applied in all three of the above

circumstances

Answer: c

17. The goodwill/revaluation method always results in which of the

following?

a) A change in the peso value assigned to two or more partners' capital

accounts

b) A decrease in a partner's capital account

c) An increase in a partner's capital account

d) An increase in a partner's capital account and a decrease in at least

one partners capital account

Answer: d
18. Which of the following statements is correct with regard to drawing
accounts that may be used by a partnership

a. Drawing accounts are closed to the partners' capital accounts at the

end of the

accounting period

b. Drawing accounts establish the amount that may be taken from the
partnership

by a partner in a given time period

c. Drawing accounts are similar to Retained Earnings in a corporation

d. Drawing accounts appear on the balance sheett as a contra-equity

account

Answer: c

19. Which of the following interest component calculation bases is least

susceptible to

manipulation when allocating profits and losses to partners?

a) Beginning capital account balance

b) Average of beginning and ending capital account balances

c) Weighted average capital account balance

d) Ending capital account balance

Answer: b

20. Which component of the partnership profit and loss allocation

compensates partners for the routine time and effort expended in the
business?

a) Interest on capital balance

b) Bonus

c) Salary

d) Residual interest

Answer: b

21. Which component of the partnership profit and loss allocation is most
commonly offered to the partner who manages the business

a) Interest on capital balance

b) Bonus

c) Salary

d) Residual interest

Answer: b

22. Which of the following statements is true with regard to partnership

residual profit and loss ratios?

a) A partner's residual profit ratio must be the same as the loss ratio

b) Residual profit and loss ratios can be changed by agreement

c) The residual profit and loss ratio must always be applied

d) All of the above are true statements

Answer: b

23. Which of the following should be done when the partnership profit
and loss ratios are changed?

a) The book and market value of assets and liabilities should be

evaluated
b) The capital accounts should be modified to reflect the new profit and
loss ratios

c) The creditors should be informed that the profit and loss ratios have
been changed

d) The partners must draft new articles of partnership.

Answer: a

24. Which of the following occurs every time a new partner is admitted
to a partnership or an existing partner leaves the partnership?

a) Dissolution

b) Termination

c) Dissolution and termination

d) None of the above occurs

Answer: d

25.Which of the following forms of new partner admission will not result
in a change in the partnership's net assets?

a) Purchase of an ownership Interest directly from the partnership

b) Purchase of an ownership interest directly from an existing partner

c) Either of the above

d) Neither of the above

Answer: c

26. When a new partner Joins a partnership by investing assets into the
partnership, what method may be used to record the admission of the
new partners?
a) Revaluation of existing assets

b) Recognition of goodwill

c) Application of the bonus method

d) Any of the three or a combination may be applied

Answer: d

27. Which method of recording the admission of a new partner into a

partnership potentially

results in the existing partners' capital accounts changing in value

a) Bonus method

b) Goodwill method

c) Either bonus method or goodwill/revaluation method

d) Existing partners' capital accounts never change when a new

partner is admitted into a partnership

Answer: d

28. A partnership is formed with three equal partners. However, each

partner invests a different amount of net assets. Which of the following
statements is true?

a) Under the bonus method, all partners will have equal initial capital
balances.

b) Under the goodwill method, each partner will have a different initial
capital balance.

c) Because the investments are unequal, setting each partner's capital

balance equal to the amount invested cannot be used.
d) The capital balances will be equal no matter which method - bonus,
goodwill or fair value of investment - is used.

Answer: b

29. Which of the following is true regarding the admission of a new

partner by purchase of an existing partnership interest?

a) Using the transfer of capital interests approach, total partnership

capital increases.

b) Using the transfer of capital interests approach, partnership capital

of existing partners does not change.

c) Using the revaluation or total adjustments in asset/implied goodwill

approach, recognized adjustment in asset/goodwill equals the new
partner's investment divided by his/her capital percentage.

d) Using the revaluation or total adjustments in asset/implied goodwill

approach, the recognized adjustment in asset/goodwill is shared
among only the existing partners.

Answer: c

30. Which of the following statements is false concerning a comparison of

the bonus and goodwill methods of recording admission of a new partner
by investment of new capital?

a) The goodwill method will typically result in a larger total

partnership capital than the bonus method.

b) When the investment by the new partner exceeds that partner's

share of the, firm's total capital, the existing partners will receive
either a bonus or goodwill, depending on whether the bonus or
goodwill method is used
c) Both the bonus and goodwill methods deal with the presence of
unrecorded assets, is indicated by the amount invested by the new
partner,

d) While the bonus method recognizes a new basis of asset valuation

when a new partner invests assets in the partnership, the goodwill
method does not.

Answer: a

31. Which of the following will occur when the existing partners
contribute goodwill and a new partner is admitted to the partnership?

a) The existing partner's capital accounts will be decreased

b) The existing partner will receive cash from the partnership

c) The partnership's total assets will be increased

d) The new partner will be required to reduce his/her profit and loss
sharing ratio

Answer: a

32. Which of the following statements is false with regard to the goodwill
recognized for a new partner entering a partnership?

a) The new partner's capital account balance will exceed the amount
invested

b) The existing partners capital accounts will remain unchanged

c) The amount invested by the new partner will be less than his/her
proportion of the partnership's book value before goodwill is
recognized

d) The three partners will have equal capital account balances when the
transaction is completed
 Answer: b

33. Which of the following statements presents a reason that goodwill

may be recorded with regard to a new partner at the date of that
partner's admission to the partnership?

a) The existing partnership is worth more than the appraised value of

the tangible net assets

b) The new partner has a strong desire to become a member of the

partnership

c) The total value of the new partner's contribution to the partnership

is greater than the value of the identifiable net assets contributed

d) The new partner's residual interest in profits and losses is greater

than 30 percent

Answer: d

34. What portion of the partnership's assets must be revalued when a

partner withdraws from the partnership?

a) The withdrawing partner's share must be revalued

b) All of the partnership's assets must be revalued

c) Any or all of the partnership's assets may be revalued but none have
to be revalued

d) Partnership assets may not be revalued when a partner withdraws

Answer: d

35. Who may acquire the ownership interest of a partner who is

withdrawing from a partnership?

a) Existing partners
b) New investor

c) The partnership

d) All of the above

Answer: b

36. If existing partners acquire the equity of a withdrawing partner, in

what manner do they divide the equity?

a) In any manner they choose

b) Equally

c) Proportionate to their residual profit and loss ratios

d) Existing partners are not permitted to acquire the equity of a

withdrawing partner

Answer: a

37. Which of the following must exist to create the potential for a retiring
partner to have a bonus recognized at the date of withdrawal?

a) The retiring partner must be paid more than the book value of his
equity

b) The existing partners must decide to not admit a new partner to the
partnership

c) The retiring partner's equity must be acquired by the partnership

d) All of the above are necessary for a bonus to be recognized

Answer: d
38. In what manner do the remaining partners share in the bonus paid
to a withdrawing partner?

a) In proportion to their residual profit and loss ratios

b) Equally

c) In proportion to their capital account balances

d) The partner with the greatest capital account is assigned the bonus

Answer: a

39. Which of the following statements is true with regard to o

withdrawing partner

a. A bonus must be paid to the retiring partner

b. A bonus may be paid lo the retiring partner

C. A bonus must be paid to the refining partner or to the remaining

partners

d. Recognizing a bonus is not appropriate when a partner retires

Answer: c

40. What change occurs to continuing partners' capital accounts when a

withdrawing partner is assigned goodwill/revaluation of asset at the
date of withdrawals?

a) Continuing partners' capital accounts decease by their profit and loss

ratio proportion of the goodwill assigned to the withdrawing partner

b) Continuing partners' capital accounts increase

c) Continuing partners' capital accounts do not change

d) Goodwill cannot be recognized with regard to withdrawing partners

 Answer: d

41. What amount of goodwill can be recognized at the date a partner

withdraws from a partnership?

a) The withdrawing partner's portion of goodwill

b) The continuing partners portion of goodwill

c) Goodwill may not be recognized at the date a partner withdraws

d) Either the withdrawing partner's portion of goodwill/revaluation or

the goodwill/revaluation attributable to the entire partnership

Answer: a

42. Which of the following is true regarding the admission or o new

partner by purchase of an existing partnership interest?

a) Using the transfer of capital interests approach, total partnership

capital increases

b) Using the transfer of capital interests approach partnership capital

of existing partners does not change.

c) Using the revaluation or total adjustments in asset//implied goodwill

approach recognized adjustment in asset/goodwill equals the new
partner's investment divided by his/her capital percentage.

d) Using the revaluation or total adjustments in asset/implied goodwill

approach, the recognized adjustment in asset/goodwill is shared
among only the existing partners.

Answer: d

43. D. E and F are partners who share income in a 5.4:3 ratio. Each has a
capital balance of P60.000. D retires from the partnership and is paid
P95,000. In recording the retirement no entry was made to E's capital
account. Which method of recording the retirement was used?

a) Bonus

b) Partial goodwill

c) Total goodwill

d) Transfer of assets

Answer: a

44. M who has a 40 percent interest in a partnership, retires and

receives a settlement payment that is P10.000 less than her capital
balance. Which of the following statements is correct?

a) Under the bonus method, the capital of the remaining partners will
increase

b) Under the partial goodwill method, partnership assets will be written

up by P10,000.

c) Under the total goodwill method, partnership assets will be written

down by P10,000

d) Under the bonus partial goodwill, and total goodwill methods, the
capital of the remaining partners will change.

Answer: b

45. When the partnership agreement does not specify how to value a
retiring partner's interest, this valuation will be

a) based on a process agreed to by all partners.

b) based on the book value of the capital interest.

c) based on outside appraisal of the partner's Interest.

d) based on five times earnings over the last three years.

Answer: a

46. Which of the following statements supports the use of the partial
goodwill method (aside

from the total goodwill) to record the retirement of a partner?

a) A change in partnership interests requires a revaluation of all assets

to fair value.

b) Retirement is not an arm's length transaction.

c) The partial goodwill method mirrors goodwill valuation for corporate

mergers.

d) The retirement transaction provides evidence for inferring the total

fair value of a partnership

Answer: d

47. Which statement is false regarding the method used to report the
retirement of a partner when the partnership pays the retiring partner
an amount which is greater than the value of his/her capital account?

a) The bonus method requires no revaluation of partnership assets.

b) If the payment to the retiring partner seems excessive in relation to

the market value of the partnership, the total goodwill method should
not be used.

c) The partial goodwill method requires no revaluation of partnership

assets.

d) The total goodwill approach values total goodwill based on the

goodwill attributable to the retiring partner.

Answer: c
48. If a partnership pays the retiring partner an amount which is
greater than the value of his/her capital account.

a) the total goodwill and partial goodwill approaches result in

recognition of goodwill and tangible assets may be written up but not
written down.

b) the total goodwill and partial goodwill approaches always result in

recognition of goodwill

c) the total goodwill and partial goodwill approaches may involve

revaluation of tangible assets.

d) the total goodwill approach always results in recognition of more

goodwill than the partial goodwill approach.

Answer: b

49. Which of the following would be a cause of a capital deficiency to a

partner?

a) A partner has borrowed money from the partnership

b) A partner has lent money to the partnership.

c) The partnership has incurred a gain for the year.

d) Partnership assets are liquidated for more than book value.

Answer: c

50. If an individual partner is insolvent and the partnership is being

liquidated, a creditor may petition the court to specify that any
partnership payments to which the individual partner becomes entitled
shall be made to the creditor. This specification is called

a) charging order.
b) foreclosure

c) rule of dual priorities.

d) right of offset

Answer: d

51. When an individual partner uses performance assets to pay

partnership creditors, this payment is recorded as

a) an Investment of capital in the part

b) a liability to the partnership

c) a receivable owing to the partnership

d) a reduction in a partnership asset.

Answer: a

52.Which statement is true concerning the safe payment and cash

distribution plan approaches to liquidation?

a) Both approaches are used in simple liquidations

b) The safe payment approach determines how the current available

cash is distributed, but not future payments.

c) The sate payment approach is more conservative than the cash

distribution plan

d) The safe payment approach uses the right of offset, but the cash
distribution plan does not

Answer: a
53. Which statement below is false concerning liquidation of a
partnership

a) All assets can be sold at fair value in a single transaction 10 a

competitor or to others who wish to continue the business.

b) Assets can be sold at distress prices in a single transaction to an

interested party

c) Assets can be sold piecemeal over an extended period of time to

interested parties

d) Assets must be liquidated solely through sale transactions.

Answer: b

54. Which of the following is not a responsibility of an accountant during

a partnership liquidation?

a) To protect the creditors

b) To manage the liquidation process in a manner that results in the

greatest amount of cash collected

c) To distribute the most cash to the partner with the greatest capital
account

d) To ensure that partner distributions do not jeopardize payments to

creditors

Answer: d

55. To accomplish a partnership liquidation, the accountant should

understand

a) The rights of the partners

b) The rights of the partnership's creditors

c) The rights of the partners' creditors

d) All of the above

Answer: c

56. Which of the following is not correct with regard to creditor claims
against partnership and individual partners

a) Partnership creditors can have claims against partnership assets and

individual partner assets

b) Partnership creditors can have claims against partnership assets and

Individual partner assets only to the extent that the partner has a
deficit capital account balance

c) Partner creditors can have claims against Individual partner assets

and partnership assets to the extent of the partner's capital account
balance

d) All of the above

Answer: d

57. Which of the following is not a possible claim against a partner's

personal assets?

a) Personal creditors of other partners

b) Other partners, if the partner in question has a deficit capital

account

c) Personal creditors of partner in question

d) Partnership creditors it claim is not fully paid from partnership

assets

Answer: b
58. Which of the following is not a part of the partnership liquidation
process?

a) Allocation of any remaining profit or loss to partners' capital

accounts

b) Liquidation of noncash assets

c) Closing of the accounting records

d) Recognition of market value adjustments of assets and liabilities

Answer: b

59. Which of the following describes a partnership lump-sum liquidation?

a) Keeping the partnership assets and liabilities separate from the

partners' personal assets and liabilities

b) The sale of all noncash assets and payment of liabilities before a

single distribution to partners

c) A series of interim distributions to partners while the sale of noncash

assets and the payment of liabilities is occurring

d) The combining of a partner's capital account with loans to/from the

partnership

Answer: b

60. Which of the following describes a partnership installment

liquidation?

a) Keeping the partnership assets and liabilities separate from the

partners' personal assets and liabilities
b) The sale of all noncash assets and payment of liabilities before a
single distribution to partners

c) A series of interim distributions to partners while the sale of noncash

assets and the payment of liabilities is occurring

d) The combining of a partner's capital account with loans to/from the

partnership

Answer: c

61. Which of the following is not correct with regard to a partnership

Statement of Realization and Liquidation?

a) Gains and losses are allocated to capital accounts

b) The statement details all business transactions during the

partnership liquidation

c) Residual profit and loss ratios are typically used to make allocations
to partners' capital accounts

d) Balance sheet and income statement accounts appear on the

statement

Answer: d

62. Which of the following might not be required of a supervising

accountant during a partnership installment liquidation?

a) Pay liabilities as quickly as possible

b) Determine the amount of distribution that can be made to partners

during the liquidation

c) Protect the creditors' Interest

d) Estimate cash flows over the remaining life of the partnership

 Answer: b

63. Which of the following is an assumption an accountant would make

when assisting with a partnership installment liquidation

a) That remaining assets can be sold at book value

b) That partners have sufficient resources to make contributions should

a deficit capital account occur

c) That the business will not generate a positive cash flow during the
remainder of its life

d) That the partners will all receive equal amounts of cash when
distributions are made

Answer: b

64. Which of the following is true with regard to a partnership

liquidation when a deficit balance occurs in a partner's capital account?

a) The liquidation stops until the partner with the deficit invests enough
to cover the shortfall

b) All the partners invest additional money into the partnership based
on their profit and loss residual ratios

c) The partner with the deficit capital account balance must Invest an
amount equal to the deficit or the other partners must share the
deficit in proportion to their respective profit and loss residual ratios

d) Creditor liabilities are reduced by the amount of the partner's deficit

capital account balance

Answer: c
65. Why might a particular partner have a deficit occur in his/her
capital account during partnership liquidation?

a) The partner with the deficit may have the greatest profit and loss
residual ratio

b) The partner with the deficit may have made the greatest
withdrawals from the partnership

c) The partner with the deficit may have the smallest profit and loss
residual ratio

d) Both a. and b. are correct

Answer: b

66. Which of the following statements is correct with regard to a cash

distribution plan prepared for a partnership liquidation?

a) It guarantees to partners the amounts of distributions that will be

made

b) It informs the partners of the allocation that will occur when cash
distributions are made

c) It informs the partners when cash distributions will be made

d) Cash distribution plans are not prepared for a partnership

liquidation

Answer: b

67. Which of the following is not part of the calculation to determine the
loss absorption

power when preparing a cash distribution plan?

a) Loans to partners by the partnership or loans to the partnership by

partners
b) Partner capital account balances

c) Partner profit and loss residual ratios

d) All of the above are considered when calculating the loss absorption
power

Answer: d

68. When making a distribution to partners during a partnership

liquidation, the partner who should receive the first allocation of the
distribution is the one who has which of the following?

a) The largest capital account balance

b) The largest loss absorption power

c) The smallest capital account balance

d) The smallest loss absorption power

Answer: b

69. When is it possible to use a schedule of safe payments during a

partnership liquidation?

a) When partners share profits differently than they share losses

b) When one or more partners enter the liquidation with a deficit

capital account balance

c) When either a or b occur

d) A schedule of safe payments is not used for a partnership liquidation

Answer: d

70. Which of the following assumptions is made when a schedule of safe

payments is prepared?
a) All of the noncash assets will be sold for book value

b) Profits and losses are shared equally among the partners

c) Partnership capital will earn a 10 percent rate of return

d) Capital account deficits will not result in additional investments into

the partnership

Answer: c