Problem 1-8
Problem 1-8
Problem 1-8
Al, Sharif, and Booba formed a partnership. Al will contribute cash of ₱50,000 and his store
equipment that originally cost ₱60,000 with a second-hand value of ₱25,000. Sharif will
contribute ₱80,000 in cash. Booba, whose family sells computers, will contribute ₱25,000 cash
and a brand new computer that cost his family’s computer dealership ₱50,000 but with a
regular selling price of ₱60,000. They agreed to share profits and losses equally. Upon
formation, what are the capital balances of the partners?
Al Sharif Booba
a. 75,000 80,000 85,000
b. 80,000 80,000 80,000
c. 88,333 88,333 88,334
d. 110,000 80,000 75,000
Problem 1-9:
On January 1, 2014, Atta and Boy agreed to form a partnership contributing their respective
assets and equities subject to adjustments. On that date, the following were provided:
Atta Boy
Cash ₱
₱ 28,000 62,000
Accounts receivable
200,000 600,000
Inventories
120,000 200,000
Land
600,000
Buildin
g 500,000
Furniture & fixtures
50,000 35,000
Intangible assets 2,000 3,000
Accounts Payable
180,000 250,000
Other liabilities
200,000 350,000
Capital
620,000 800,000
Problem 1-15:
On April 30, 2014, Alex, Benjie, and Cesar formed a partnership by combining their separate
business proprietorships. Alex contributed cash of ₱500,000. Benjie contributed property with a
₱360,000 carrying amount, a ₱400,000 original cost, and ₱800,000 fair market value. The
partnership accepted responsibility for the ₱350,000 mortgage attached to the property. Cesar
contributed equipment with a ₱300,000 carrying amount, a ₱750,000 original cost, and
₱550,000 fair value. The partnership agreement specifies that profits and losses are to be
shared equally but it is silent regarding capital contributions. What are the capital balances of
the partners at April 30, 2014?
Problem 1-36:
Luz, Vi, and Minda are partners when the partnership earned a profit of ₱30,000. Their
agreement provides the following regarding the allocation of profits and losses:
a. 8% interest on partners’ ending capital in excess of ₱75,000.
b. Salaries of ₱20,000 for Luz and ₱30,000 for Vi.
c. Any balance is to be distributed 2:1:1 for Luz, Vi, and Minda, respectively.
Assume ending capital balances of ₱60,000, ₱80,000, and ₱100,000 for partners Luz, Vi, and
Minda, respectively. What is the amount of profit allocated for Minda, if each provision of the
profit and loos agreement is satisfied to whatever extent possible using the priority order shown
above?
a. (3,600)
b. 3,600
c. (2,000)
d. 2,000
Problem 1-41:
A partnership has the following accounting amounts:
Sales
₱ 700,000
Cost of goods sold
400,000
Operating expenses
100,000
Salary allocations to partner
130,000
Interest paid to banks 20,000
Partners' drawings 80,000
Problem 1-49:
Blau and Rubi are partners who share profits and losses in the ratio of 6:4, respectively. On May
1, 2014, their respective capital accounts were as follows:
Blau 60,000
Rubi 50,000
On that date, Lind was admitted as a partner with one-third interest in capital, and profits for an
investment of ₱40,000. The new partnership began with total capital of ₱150,000. Immediately
after Lind’s admission, Blau’s capital should be
a. 50,000
b. 54,000
c. 56,667
d. 60,000
Problem 1-52:
Mitz, Marc, and Mart are partners sharing profits in the ratio of 5:3:2, respectively. As of
December 31, 2013. Their capital balances were ₱95,000 for Mitz, ₱80,000 for Marc, and
₱60,000 for mart. On January 1, 2014, the partners admitted Vince as a new partner and
according to their agreement, Vince will contribute ₱80,000 in cash to the partnership and also
pay ₱10,000 for 15% of Marc’s share. Vince will be given a 20% share in profits, while the
original partners’ share will be proportionately the same as before. After the admission of
Vince, the total capital will be ₱330,000 and Vince’s capital will be ₱70,000.
a. The total amount of goodwill to the old partners, upon the admission of Vince would be:
a. 7,000
b. 15,000
c. 22,000
d. 37,000
b. The balance of Marc’s capital, after the admission of Vince would be:
a. 72,600
b. 74,600
c. 79,100
d. 81,100
Problem 1-53:
Ranken purchases 50% of Lark’s capital interest in the K and L partnership for ₱22,000. If the
capital balances of Kim and Lark are ₱40,000 and ₱30,000, respectively. Ranken’s capital
balance following the purchase is
a. 22,000
b. 35,000
c. 20,000
d. 15,000
Problem 1-58:
The capital balances in DEA Partnership are: D, capital ₱60,000; E, capital ₱50,000; and A,
capital ₱40,000 and income ratios are: 5:3:2, respectively. The DEAR Partnership is formed by
admitting R to the firm with cash investment of ₱60,000 for a 25% interest in capital. What is
the amount of bonus to be credited to A capital in admitting R?
a. 10,000
b. 7,500
c. 3,750
d. 1,500
Problem 1-71:
The following condensed balance sheet is presented for the partnership of Axel, Barr, and Cain,
who share profits and losses in the ratio of 4:3:3, respectively:
Cash ₱ 100,000
Other assets 300,000
Total ₱ 400,000
Liabilities ₱ 150,000
Axel, Capital 40,000
Barr, Capital 180,000
Cain, Capital 30,000
Total ₱ 400,000
The partners agreed to dissolve the partnership after selling the other asset for ₱200,000. Upon
dissolution of the partnership, Axel should have received
a. 0
b. 40,000
c. 60,000
d. 70,000
Problem 1-85:
Partners Almond, Barney, and Colors have capital balances of ₱20,000, ₱50,000, and ₱90,000,
respectively. They split profits in the ratio of 2:4:4, respectively. Under a safe cash distribution
plan, one of the partners will get the following total amount in liquidation before any other
partners get anything:
a. 0
b. 15,000
c. 40,000
d. 180,000
Problem 1-8: Suggested answer: (a) 75,000, 80,000, 85,000
Al Sharif Booba
Cash
50,000 80,000 85,000
contribution
Store equipment 25,000
Computer 60,000
Capital balances 75,000 80,000 85,000
Noncash assets contributed by the partners into the partnership should be recorded at its fair
market value. In this case, the fair market value is the cash selling price of the computer and the
second hand value of the store equipment.
Atta Boy
Capital balances before adjustments 620,000 800,000
a. Uncollectible accounts receivable (20,000) (40,000)
b. Worthless inventories (6,000) (7,000)
c. Intangible assets written off (2,000) (3000)
Adjusted capital balances 592,000 750,000
When assets other than cash are invested into the partnership, it is necessary for the partners to
agree upon the value of such assets. The assets are recorded in accordance with the agreement
and the partners’ capital accounts are credited for the amounts of the respective investments.
The effects of the adjustments to the capital accounts should be in accordance with the
accounting equation (Asset = Liabilities + Capital).
Again, any noncash asset contributed into the partnership should be valued at the fair value of
the noncash asset contributed, any liabilities assumed by the partnership, reduces the partners’
capital balance. As a general guideline, what is to be recorded as a credit to partners’ capital is
the fair value of the net assets contributed.
Problem 1-36: Suggested answer: (d) 2,000
Again, where income is not sufficient or an operating loss exists, two alternatives may be
employed: 1.) all provisions of the profit and loss agreement may be satisfied and any deficiency
will be absorbed using the profit and loss ratio; and 2.) each of the provision may be satisfied to
whatever extent possible. The second alternative, as applied above, requires that provisions of
the profit and loss agreement be ranked by order of priority.
Salaries, like interest on capital investments, are viewed as a means of allocating income rather
than as an expense. The drawing account is a temporary account and is periodically closed to
the partner’s capital account, and has nothing to do with the computation of net income.
When a partnership is in urgent need of additional funds or the partners may desire the services
of a certain individual, a new partner may be admitted with the provision that (a) part of the
capital of the old partners shall be allowed as a bonus to the new partner, or (b) goodwill shall
be established and credited to the new partner.
When the total contributed capital is equal to the agreed capital, there is bonus. In this case, the
amount by which the interest allowed to the new partner exceeds his investment may be
considered as bonus contributed by the old partners. The bonus is deducted from the capitals of
the old partners based in their original profit and loss ratio.
Problem 1-52:
a. Suggested answer: (b) 15,000
Again, when the total agreed capital is more than the contributed capital, there is
goodwill and this amount of ₱15,000 will be distributed to the old partners using their
original profit and loss ratio. However, in the above computations, it should be pointed
out that aside from goodwill, the new partner provides bonus to old partners in the
amount of ₱22,000 (decrease in the new partner’s capital).
When an incoming partner purchases a portion or all of the interest of one or more of
the original partners, the partnership assets remains unchanged and the related amount
paid for the purchase should not be recorded in the books of the partnership for this is
regarded as a personal transaction between the selling partner/s and the buyer.
Bonus to old partners is recorded by making transfer from the contributed capital of the
new partner to the old partners’ capital accounts, which gives the new partners a capital
credit less than his actual investment. While, Goodwill to old partners should be
recognized by a debit to Goodwill account, and the resulting credit should be to old
partners’ capital accounts allocated based on their profit and loss ratio.
When a new partner deals directly with an existing partner or partners rather than with the
partnership entity, the acquisition price is paid to the selling partner/s and not to the
partnership itself. The partnership records the redistribution of capital interests by transferring
all or a portion of the seller’s capital to the new partner’s capital account but does not record
the transfer of any asset or consideration.
Since all assets are distributed at one point in time rather than installments, this represents
simple liquidation. As assets are converted into cash, any differences between the book values
and the amounts realized represent gains or losses to be divided among partners in the profit
and loss ratio. Such gains and losses are carried to the capital accounts. The capital balances
then becomes the basis for settlement.
Since the question being asked is “one of the partners will get … before any other partners get
anything”, therefore, it is the partner under priority no. 1 (Colors). Colors shall received, under
priority no. 1, ₱40,000 (100,000 x 40%).