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PROBLEM 11-A

GROUP 1
Jose Reyes is a well known lawyer in Manila. He wants to start a
business and convinces Pedro Santos, a Certified Public
Accountant, to contribute the capital to form a partnership.
On January 1,2013,Santos invests a building worth P52,000 and
equipment valued at P16,000 as well as P12,000 in cash.
Although Reyes makes no tangible contribution to the
partnership, he will operate the business and be an equal partner
in the beginning capital balances.
The partnership contract provided the following agreement:
• Santos will be credited annually with interest equal to 20
percent of the beginning capital balance for the year.
• Santos will also have added to his capital account 15
percent of partnership income each year (without regard
for the preceding interest figure) or P4,000, whichever is
greater. All remaining income is credited to Reyes.
• Neither partner is allowed to withdraw funds from the
partnership during 2008. Therefore, they can each draw
out P5000 annually or 20 percent of the beginning capital
balance for the year, whichever is greater
A net loss of P10,000 is reported by the partnership during the
first year of its operation.
On January 1,2014, Paulo Cruz becomes a third partner in this
business by contributing P15,000 cash to the partnership. Cruz
receives a 20 percent share of the business’s capital. The profit
and loss agreement is altered as follows:
• Santos is still entitled to (1) interest on his beginning capital
balance as well as (2) the share of partnership income just
specified.
• Any remaining profit or loss will be split on a 6:4 basis
between Reyes and Cruz, respectively.
Partnership income for 2014 is reported as P44,000. Each partner
withdraws the full amount that is allowed.

On January 1, 2015, Cruz falls ill and sells his interest in the
partnership (with the consent of the other two partners) to Juan
Diaz. Diaz pays P46,000 directly to Cruz. Net income for 2015 is
P61,000 with the partners again taking their full drawing
allowance.

On January 1, 2016, Diaz elects to withdraw from the business for


personal reasons. The partnership contract contains a provision
stating that any partner may leave the partnership at any time
and its entitled to receive cash in an amount equal to the
recorded capita balance at that time plus 10 percent.
Required:
A. Prepare journal entries to record the
preceding transactions on the assumption
that the bonus (or no revaluation) method is
used. Drawings need not be recorded,
although the balances should be included in
the closing entries.
Jose Reyes is a well known lawyer in Manila. He wants to
start a business and convinces Pedro Santos, a Certified
Public Accountant, to contribute the capital to form a
partnership.
On January 1,2013, Santos invests a building worth P52,000
and equipment valued at P16,000 as well as P12,000 in cash.

01/01/13 Building 52 000


Equipment 16 000
Cash 12 000
Santos, Capital 80 000
Reyes, Capital 40 000

To record investment of Santos


Although Reyes makes no tangible contribution
to the partnership, he will operate the business
and be an equal partner in the beginning capital
balances.

01/01/13 Santos, Capital 40 000


Reyes, Capital 40 000

To record bonus to Reyes


The partnership contract provided the following agreement:
• Santos will be credited annually with interest equal to 20 percent of
the beginning capital balance for the year.
• Santos will also have added to his capital account 15 percent of
partnership income each year (without regard for the preceding
interest figure) or P4,000, whichever is greater. All remaining
income is credited to Reyes.
• Neither partner is allowed to withdraw funds from the partnership
during 2013. Thereafter, they can each draw out P5000 annually or
20 percent of the beginning capital balance for the year, whichever
is greater
A net loss of P10,000 is reported by the partnership
during the first year of its operation.
Santos Reyes Total
Interest
S: P40,000 x 20% P 8,000 P- P 8,000
Additional Profit 4,000 - 4,000
Balance, To Reyes ( 22, 000) (22,000)
Total P 12,000 P( 22,000) P(10,000)
A net loss of P10,000 is reported by the partnership
during the first year of its operation.

12/31/13 Reyes, Capital 22 000


Santos, Capital 12 000
Income, Summary 10 000

To record distribution of loss for 2013


On January 1,2014, Paulo Cruz becomes a third partner in this business by
contributing P15,000 cash to the partnership. Cruz receives a 20 percent
share of the business’s capital. The profit and loss agreement is altered as
follows:
• Santos is still entitled to (1) interest on his beginning capital balance as
well as (2) the share of partnership income just specified.
• Any remaining profit or loss will be split on a 6:4 basis between Reyes
and Cruz, respectively.
Investment in Partnership P 15,000
New partner’s proportionate book value
(80,000-10,000+15,000) x 20% 17,000
Difference (Bonus to new partner) P 2, 000

01/01/14 Cash 15 000


Santo, Capital (P2,000x15%) 300
Reyes, Capital (P2,000x85%) 1 700
Cruz, Capital 17 000

To record investment of Cruz


20% 0f Partners P 5 000 Which is
capital greater?
Santos 10,340 5, 000 10,340
(40,000+12,000-300)x20%
Reyes 3,260 5,000 5,000
(40,000-22,000-1700)x20%
Cruz (17,000)x 20% 3,400 5,000 5,000

12/31/14 Santos, Capital 10 340


Reyes, Capital 5 000
Cruz, Capital 5 000
Santos, Drawings 10 340
Reyes, Drawings 5 000
Cruz, Drawings 5 000

To close drawing accounts


Partnership income for 2014 is reported as
P44,000. Each partner withdraws the full amount
that is allowed.
Santos Reyes Cruz Total
Interest to Santos
P 51,700 x 20% P10,340 P- P 10,350
15% of Income to Santos 6,600 - 6,600
P 44,000 x 15%
Balance, 60:40 16,236 10,824 27,060
Total P 16,940 P 16, 236 P 10 824 P 44,000
Partnership income for 2014 is reported as
P44,000. Each partner withdraws the full amount
that is allowed.
12/31/14 Income Summary 44 000
Santos, Capital 16 940
Reyes, Capital 16 236
Cruz, Capital 10 824

To record the profit in 2014


On January 1, 2015, Cruz falls ill and sells his interest in the partnership (with
the consent of the other two partners) to Juan Diaz. Diaz pays P46,000
directly to Cruz.
Santos Reyes Cruz
Initial investment, 2013 40,000 40,000
2013 profit (loss) 12,000 (22,000)
Cruz Investment (300) (1 700) 17 000
2014 drawings (10,340) (5,000) (5,000)
2014 profit 16,940 16,236 10,824
Total P 58,300 P 27, 536 P 22,824

01/01/15 Cruz, Capital 22 824


Diaz, Capital 22 824

To record the profit in 2014


20% 0f Partners P 5 000 Which is
capital greater?
Santos 11,660 5, 000 11,660
(58,300)x20%
Reyes 5,507 5,000 5,507
(27,536)x20%
Diaz(22,824)x 20% 4,565 5,000 5,000

12/31/14 Santos, Capital 11 660


Reyes, Capital 5 507
Diaz, Capital 5 000
Santos, Drawings 11 660
Reyes, Drawings 5 507
Diaz, Drawings 5 000

To close drawing accounts


Net income for 2015 is P61,000 with the partners again
taking their full drawing allowance.

Santos Reyes Diaz Total


Interest to Santos
P 58,300 x 20% P11,660 P- P- P 11,660
15% of Income to Santos 9,150 - 9,150
P 61,000 x 15%
Balance, 60:40 24,114 16,076 40,190
Total P 20,810 P 24,114 P 16,076 P 61,000
Net income for 2015 is P61,000 with the partners again
taking their full drawing allowance.

12/31/15 Income Summary 61 000


Santos, Capital 20 810
Reyes, Capital 24 114
Cruz, Capital 16 076

To record the profit in 2015


On January 1, 2016, Diaz elects to withdraw from the business for personal
reasons. The partnership contract contains a provision stating that any
partner may leave the partnership at any time and its entitled to receive
cash in an amount equal to the recorded capita balance at that time plus 10
percent.

01/01/16 Diaz, Capital 33 900


Santos, Capital 509
Reyes, Capital 2 881
Cash 37 290

To record the withdrawal of Diaz