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Chapter 11
Partnership Formation

PROBLEM 1: TRUE OR FALSE

1. FALSE - ₱2
2. FALSE – fair value
3. TRUE
4. TRUE
5. TRUE
6. FALSE - ₱40
7. TRUE
8. FALSE – I should pay you ₱50
9. TRUE
10. TRUE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. Solution:

Mr. A Ms. B
Cash 20,000 30,000
Inventory 20,000
Building 60,000
Furniture & fixture 40,000
Mortgage payable (10,000)
Adjusted capital balances 60,000 100,000

Date Cash 50,000

Inventory 20,000
Building 60,000
Furniture & fixture 40,000
Mortgage payable 10,000
A, Capital 60,000
B, Capital (800K – 200K) 100,000
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2. Solution:

Actual Bonus
contributions method
A 600,000 (1,100,000 x 40%) 440,000
B 500,000 (1,100,000 x 60%) 660,000
Total 1,100,000 1,100,000

Date Cash 600,000

Inventory 500,000
A, Capital (600,000 - 160,000 bonus) 440,000
B, Capital (500,000 + 160,000 bonus) 660,000

3. Solutions:

A B C Partnership
Cash 500,000 200,000 100,000 800,000
Accounts receivable 700,000 700,000
Inventories 900,000 900,000
Equipment 2,000,000 2,000,000
Mortgage payable (800,000) (800,000)
Net contribution 1,200,000 1,400,000 1,000,000 3,600,000
Equal interest (3.6 ÷ 3) 1,200,000 1,200,000 1,200,000 3,600,000
Cash receipt (payment) - 200,000 (200,000) -

Requirement (a): C pays B ₱200,000.

Requirement (b):
Date Cash 800,000
Accounts receivable 700,000
Inventory 900,000
Equipment 2,000,000
Mortgage payable 800,000
A, Capital 1,200,000
B, Capital 1,200,000
C, Capital 1,200,000
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4. Solution:

A B C Partnership
Cash 500,000 200,000 100,000 800,000
Accounts receivable 700,000 700,000
Inventories 900,000 900,000
Equipment 2,000,000 2,000,000
Mortgage payable (800,000) (800,000)
Net contribution 1,200,000 1,400,000 1,000,000 3,600,000
Equal interest (3.6 ÷ 3) 1,200,000 1,200,000 1,200,000 3,600,000
Add’tl. (W/drawal) - 200,000 (200,000) -

Answer: B withdraws ₱200,000, while C provides additional

₱200,000.

PROBLEM 3: JOURNAL ENTRIES

1. Solution:

A B
Cash 500,000 30,000
Inventory 10,000
Land 600,000
Equipment 50,000
Mortgage payable (100,000)
Adjusted capital balances 550,000 540,000

Date Cash 530,000

Inventory 10,000
Land 600,000
Equipment 50,000
Mortgage payable 100,000
A, Capital 550,000
B, Capital (800K – 200K) 540,000
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2. Solution:

Actual Bonus
contributions method
A 600,000 (1,000,000 x 30%) 300,000
B 400,000 (1,000,000 x 70%) 700,000
Total 1,000,000 1,000,000

Date Cash 600,000

Machinery or Equipment 400,000
A, Capital (600,000 - 300,000 bonus) 300,000
B, Capital (400,000 + 300,000 bonus) 700,000

3. Solutions:
A B C Partnership
Cash 600,000 800,000 400,000 1,800,000
Accounts receivable 700,000 700,000
Inventories 900,000 900,000
Building 1,400,000 1,400,000
Accounts payable (300,000) (300,000)
Net contribution 1,300,000 2,200,000 1,000,000 4,500,000
Equal interest (4.5 ÷ 3) 1,500,000 1,500,000 1,500,000 4,500,000
Cash receipt (payment) (200,000) 700,000 (500,000) -

Requirement (a): A pays B ₱200,000; C pays B ₱500,000.

Requirement (b):
Date Cash 1,800,000
Accounts receivable 700,000
Inventory 900,000
Building 1,400,000
Accounts payable 300,000
A, Capital 1,500,000
B, Capital 1,500,000
C, Capital 1,500,000
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4. Solution:
A B C Partnership
Cash 600,000 800,000 400,000 1,800,000
Accounts receivable 700,000 700,000
Inventories 900,000 900,000
Building 1,400,000 1,400,000
Accounts payable (300,000) (300,000)
Net contribution 1,300,000 2,200,000 1,000,000 4,500,000
Equal interest (4.5 ÷ 3) 1,500,000 1,500,000 1,500,000 4,500,000
Add’tl. (W/drawal) (200,000) 700,000 (500,000) -

Answer: A invests additional ₱200,000; B withdraws ₱700,000; C

invests additional ₱500,000.

PROBLEM 4: MULTIPLE CHOICE

1. C
2. C
3. B
Solution:
A B
Cash 600,000
Inventory 20,000
Land 700,000
Equipment 50,000
Accounts payable (20,000 x ½) (10,000)
Adjusted capital balances 660,000 700,000
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4. B
Solution:
A B Partnership
Cash 400,000 - 400,000
Accounts receivable
(100K – 30K) 70,000 - 70,000
Equipment
(700K+ 50K) 750,000 750,000
Loan payable (250,000) (250,000)
Net contributions 470,000 500,000 970,000

5. A - The asset contributions and related liabilities are recorded

at fair values. Only the corresponding capital credits will
increase or decrease under the bonus method.

6. B
Solution:
Actual Bonus
contributions method
A 600,000 (2,500,000 x 60%) 1,500,000
B 1,900,000 (2,500,000 x 40%) 1,000,000
Total 2,500,000 2,500,000

7. A
Solutions:
A B C Partnership
Cash 750,000 1,000,000 500,000 2,250,000
Accounts receivable 875,000 875,000
Inventories 1,125,000 1,125,000
Building 1,750,000 1,750,000
Accounts payable (375,000) (375,000)
Net contribution 1,625,000 2,750,000 1,250,000 5,625,000
Equal interest 1,875,000 1, 875,000 1,875,000 5,625,000
Cash receipt (payment) (250,000) 875,000 (625,000) -
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8. A
9. B
10. D
Solution:
A B C Partnership
Cash 750,000 1,000,000 500,000 2,250,000
Accounts receivable 875,000 875,000
Inventories 1,125,000 1,125,000
Building 1,750,000 1,750,000
Accounts payable (375,000) (375,000)
Net contribution 1,625,000 2,750,000 1,250,000 5,625,000
Equal interest 1,875,000 1, 875,000 1,875,000 5,625,000
Additional (W/drawal) (250,000) 875,000 (625,000) -

Answer: A should provide additional ₱250,000; B should

withdraw ₱875,000; C should provide additional ₱625,000.

PROBLEM 5: CLASSROOM ACTIVITY

1. Solution:
Partner 1 Partner 2
Cash 200,000 1,800,000
Inventories 1,200,000
Furniture and fixture 1,400,000
Accounts payable (600,000)
Adjusted capital balances 2,200,000 1,800,000

Date Cash 2,000,000

Inventories 1,200,000
Furniture and fixture 1,400,000
Accounts payable 600,000
Partner 1, Capital 2,200,000
Partner 2, Capital 1,800,000
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Variation #1:

Solutions:

Requirement (a) and (b):

Total net asset contributions 4,000,000
Divide by: 2
Equal credits to capital accounts 2,000,000

Partner 1 Partner 2
Equal credits to capital accounts 2,000,000 2,000,000
Fair value of net asset contribution 2,200,000 1,800,000
Bonus (200,000) 200,000

Answers: Partner 2 receives a bonus of ₱200,000.

Requirement (c): The bonus is treated as an adjustment to the

equity accounts of the partners. Partner 1’s capital shall be
decreased while Partner 2’s capital shall be increased by the
₱200,000 bonus.

Requirement (d):
Date Cash 2,000,000
Inventories 1,200,000
Furniture and fixture 1,400,000
Accounts payable 600,000
Partner 1, Capital 2,000,000
Partner 2, Capital 2,000,000
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Variation #2:
Solutions:

Total net asset contributions 4,000,000

Divide by: 2
Equal credits to capital accounts 2,000,000

Partner 1 Partner 2
Equal credits to capital accounts 2,000,000 2,000,000
Fair value of net asset contribution 2,200,000 1,800,000
(Receipt) Payment (200,000) 200,000

Answer: Partner 1 receives cash of ₱200,000 from Partner 2.

Requirement (b):
The cash settlement is not recorded in the partnership books.

Requirement (c):

Date Cash 2,000,000

Inventories 1,200,000
Furniture and fixture 1,400,000
Accounts payable 600,000
Partner 1, Capital 2,000,000
Partner 2, Capital 2,000,000
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Variation #3:

Solution:

Partner 1 Partner 2
Equal credits to capital accounts 2,000,000 2,000,000
Fair value of net asset contribution 2,200,000 1,800,000
(Withdrawal) Additional investment (200,000) 200,000

Answer: Partner 1 withdraws ₱200,000, while Partner 2 makes an

additional investment of ₱200,000.

PROBLEM 6: CLASSROOM ACTIVITY

The students grade themselves and then submit the results to the
teacher for recording.