AFAR REVIEW: Quiz 1 6/3/18

Partnership Formation

On June 1, 2010, AB, CD and EF decided to pool their assets and form BDF Partnership.
After formation the partners will participate in the profits and loss ratio of 40%, 25% and
35% for AB, CD and EF, respectively. The balance sheets on June 1 before the adjustments
were as follows:

AB CD EF
Cash P 42,000 P 28,000 P 34,000
Accounts receivable 250,000 325,000 280,000
Allowance for doubtful accounts (18,000) (24,000) -
Notes receivable - - 120,000
Merchandise inventory 75,000 90,000 60,000
Prepaid rent - 36,000 20,000
Building 400,000
Accumulated depreciation (60,000)
Equipment 210,000
Accumulated depreciation (25,000
)
Total assets P 689,000 P 640,000 P 514,000

Accounts payable P 36,000 P 41,000 P 34,000

Note payable 240,000
Capital 653,000 359,000 480,000
Total liabilities and capital P 689,000 P 640,000 P 514,000

The firm is to take over business assets and assume business liabilities. Capitals are to be
based on net assets transferred after the following adjustments:
 4% of the accounts receivable of AB may prove to be uncollectible, while the accounts
receivable of CD is estimated to be 90% realizable and accounts receivable of EF
amounting to P7,000 is deemed worthless.
 Interest at 15% on notes receivable amounting to P90,000 dated April 1, 2010 should
be accrued and interest at 12% on the balance of the notes dated February 2010. (use
360 days)
 The inventory of AB should be valued at P90,000, while P18,000 of the inventory of
CD is considered worthless.
 2/3 of the prepaid rent of CD is unexpired, while 1/4 of the prepaid rent of EF has
expired.
 The building is under depreciated by P20,000.
 The equipment is to be valued at P160,000.
 Interest at 10% on notes payable dated May 1, 2010 should be accrued, (use 360
days)
 AB has office supplies on hand which have been charged to expense amounting to
P9,000. These are still to be used by the partnership.
 Accrued expense of P2,450 is to be recognized in the books of EF.

Required: Assume the use of new set of books, prepare:

1. Adjusting entries on the books of AB, CD and EF.
2. Closing entries on the books of AB, CD and EF.
3. Journal entries to record the investments of AB, CD and EF, under the:
a. Net investment method
b. The partners’ capital balances are to be made equal with their profit and loss
 ratio.
i. Either by withdrawing or investing additional cash
After formation, the new capital of the partnership is based on the adjusted
capital balance of AB, so that CD and EF may either withdraw or invest
additional cash to make the partners’ capital balance in proportionate to their
profits and losses ratio.
ii. Bonus method

Partnership Operation and Statement of Partners’ Capital

I
AB, QR and XY are manufacturers’ representative in the wholesale business. Their capital
accounts in the AQX Partnership for 2010 were as follows:
AB QR XY
January 1, Balances P135,000 P180,000 P75,000
March 1, withdrawal 36,000
April 1, investment 30,000
May 1, investment 72,000
June 1, investment 27,000
August 1, withdrawal 9,000
October 1, withdrawal 54,000
December 1, investment 18,000

Required: For each of the following independent income-sharing agreements, prepare

an income distribution schedule.
a. Monthly salaries are P30,000 to AB, P50,000 to QR and P45,000 to XY. AB receives a
bonus of 5% of net income after deducting his bonus. Interest is 12% of ending capital
balances. Any remainder is divided by AB, QR and XY in a 25:40:35 ratio. The Income
Summary account has a credit balance of P2,835,000 before closing.
b. Interest is 10% of weighted average capital balances. Annual salaries are P480,000 to
AB, P630,000 to QR and P510,000 to XY. QR receives a bonus of 25% of net income
after deducting the bonus and his salary. Any remainder is divided in a 2:3:4 ratio by
AB, QR and XY, respectively. Net income was P1,050,000 before any allocations.
c. XY receives a bonus of 20% of net income after deducting the bonus and the salaries.
Annual salaries are P600,000 to AB, P540,000 to QR and P750,000 to XY. Interest is
15% of the ending capital in excess of P140,000. Any remainder is to be divided by AB,
QR and XY in the ratio of their beginning capital balances. Net income was P1,740,000
before any allocations.
d. Monthly salaries are P32,000 to AB, P40,000 to QR and P42,000 to XY. QR receives a
bonus of 10% of net income after deducting his bonus. Interest is 25% on the excess
of the ending capital balances over the beginning capital balances. Any remainder is to
be divided by AB, QR and XY in a 3:2:1 ratio. The Income Summary account has a debit
balance of P750,000 before closing.
e. Annual salaries of P450,000 to AB, P540,000 to QR and P810,000 to XY are allowed to
the extent of the earnings only. Any remainder is to be divided equally among the
partners. Net income before allocation is P960,000.

II
QR, ST and UV opened an accounting practice on January 1, 2010. The business is to be
reported as a partnership with QR and ST serving as senior partners because of their years
of experience. To establish the business, QR, ST and UV contributed cash and other
properties valued at P750,000, P640,000 and P480,000, respectively. A partnership
agreement is drawn up that carries the following stipulations:
a. Regular drawings are allowed annually against shares of net income up to an
amount equal to 25% of the beginning capital balance for the year.
 b. Profits and losses are allocated according to the following plan:
• A salary allowance is credited to each partner in an amount equal to P490 per
billable hour worked by that individual during the year. The billable hours for the
partners during the year were as follows: QR, 1,315; ST, 1,250; UV, 1,145.
• Interest is credited to the partners’ capital accounts at the rate of 10% of the
average monthly balance for the year.
• An annual bonus is to be credited to QR. The bonus is to be 20% of net income
after the bonus, the salary allowance and the interest.
• Any remaining partnership profit or loss is to be divided in the ratio of 60:20:20,
QR, ST and UV, respectively.

Because of monetary problems encountered in getting the business started, QR made an

additional investment of cash on March 1 amounting to P52,500 and ST on July 1
amounting to P135,000 while UV withdrew P45,000 on August 1. The partnership net
income for the year was P2,200,000 before any allocations. Each partner withdraws the
maximum allowable amount for the year.
Required: Prepare a statement of partners’ capital account for the year ending December
31, 2010 with supporting schedule of profit distribution.

Admission of a New Partner

I
Nonoy and Binay are partners with capitals of P240,000 and P120,000 respectively. They
share profits in the ratio of 3:1. The partners agree to admit Frank as a member of the firm.
Required: Record the admission of Frank for each c the following situations:
1. Frank purchases 1/3 interest of Nonoy and Binay for P96,000 which is divided
between them in proportion to the equities given up.
2. Frank purchases a 1/3 interest in the firm. Frank pays the partners P180,000 which
is to be divided between them in proportion to the equities given up. Before Frank’s
admission, however, Inventory undervaluation is recorded on the firm books.
3. Frank invest the amount needed to give him a 1/3 interest in the capital of the
partnership. No goodwill or bonus is recorded.
4. Frank invest P180,000 for a ½ interest in the firm. No goodwill is recorded.
5. Frank invest P150,000 for a ¼ interest in the firm. The total firm capital is to be
P510,000.
6. Frank invest P165,000 for ¼ interest in the firm. Goodwill is to be recorded.
7. Frank invest P100,000 for a ¼ interest in the firm. The assets of the partnership are
fairly valued except for Land account, which is overvalued before Frank’s admission.

II
On August 1, 2010, Marie and Paz formed a partnership. Marie contributed inventory of
P500,000 with a fair value of P300,000 while Paz contributed cash of P250,000 and a land
valued that cost her P900,000 with a carrying amount of P1,000,000 and a fair value of
P1,250,000. The partnership did not assume the mortgage attached to the property worth
P250,000.

The partners agree to allocate profits and losses as follows:

1. Each partner shall receive 5% interest on the amount of his beginning capital.
2. Marie will receive a salary of P8,000 per month.
3. The remainder will be divided equally on the first year of operation and 60% and
40% on subsequent years.
4. Marie and Paz are allowed to withdraw P5,000 per month. Any withdrawal is treated
as a direct reduction of capital.
In 2010, the partnership has a credit balance of income summary of P100,000. On July 1,
2011, Ivonne was admitted in the partnership by investing P800.000 for a 25% interest,
goodwill is to be recorded.

After admission of Ivonne, the partners agreed to divide profits as follows:

1. Each partner shall receive 5% interest on the amount of his beginning capital.
2. All partners will receive a salary of P2,000 per month.
3. The balance to be divided 45% to Marie, 30% to Paz and 25% to Ivonne.
4. Each partner is allowed to withdraw P2,000 per month. Any withdrawal is treated as
a direct reduction of capital.
In 2011, the partnership earned a profit of P300,000 evenly throughout the year. How much is the
capital balance of Marie at the end of December 31, 2011.
A. P707,623.44
B. P694,554.69
C. P670,652.97
D. P705,586.25

Retirement/Withdrawal of a Partner

I
A, B, and C are partners sharing profits in the ratio of 2:1:2, respectively. On December 31,
2010, C decided to withdraw from the partnership. Their capital balances on this date were
as follows:
A,Capital P 80,000
B,Capital 92,000
C,Capital 164,000

Required: Record the withdrawal of C under t ach of the following independent assumption.
1. C sold his interest to A and B for P140,000; the interest being divided using the
profit ratio by the remaining partners.
2. C sold his interest to the partnership for P170,000 cash.
3. C sold his interest to the partnership for P176,000 cash and only goodwill method
attributable to C was recorded by the partnership.
4. Assume the same facts in number (3) except that total goodwill attributable to all
the partners was recorded by the partnership.
5. C sold his interest to the partnership for P155,000 cash and partnership building is
undervalued by P30,000. Capital of the partnership after C’s retirement was
P211,000.
6. C accepts cash of P140,000 and an equipment with a current fair value of P18,000.
The equipment costs P60,000, is 60% depreciated, and has no residual value. Record
any gain or loss on disposal of the equipment directly to the partners' capital
accounts.
II
On December 30, 2010, the balance sheet of Danger Co. has the following balances: Total
assets P450,000: Willie loan P25,000; Willie capital P103,750; Manny capital P96,250 and
Loren capital P225,000. The partners share profits and losses in the ratio of 25% to Willie,
25% to Manny, and 50% to Loren. It was agreed among the partners that Willie retires from
the partnership and the partnership assets be adjusted to their fair values of P510,000 as of
December 31, 2010. The partnership also suffered net loss of P150,000. The partnership
would pay Willie P108,500 cash for his total interest in the partnership.
What is the total capital of Manny after retirement of Willie assuming the use of bonus method?
A. P73,000 C. P76,750
B. P73,750 D. P76,000
Lumpsum Liquidation

I
Boy, Coy and Doy are partners with profit and loss rat 3 of 2:3:5. The partners decided to
liquidate the partnership. The partnership’s statement of financial position on December
31, 2009 before liquidation is as follows:
Assets Liabilities and Capital

Cash P 70,000 Liabilities P200,000

Non-cash assets 595,000 Boy, Loan 45,000
Boy, 35,000
Capital
Coy, 105,000
Capital
Doy, Capital 280,000
Total P665.000 Total P665,000
Required: Prepare a statement of liquidation under the following assumptions:
1. The non-cash assets are sold for P245,000. Assume that all partners are solvent.
2. The non-cash assets are sold for P171,500. Liquidation expenses of P17,500 are
paid. Boy, being solvent contributes sufficient cash to cover the debit balance in his
capital account. The other partners are insolvent.
3. The non-cash assets are sold for P126,000. Boy is insolvent and is unable to repay
partnership for his debit balance. The other partners are solvent.

II
Kevin, Paul and Rey have capital balances of P60,000, P100,000 and P36,000, respectively
and they share profits in the respective ratio of 4:2:1. Paul received P52,000 as a result of
the liquidation of the partnership. Loss on assets realization is:
A. P118,000 C. P144,000
B. P132,000 D. P168,000

III
On December 31, 2009, the accounting records of Tito, Vic and Joey Partnership included the
following ledger account balances:
Receivable from Tito 132,000
Loan to Joey 40,500
Salary payable to Vic 135,000
Tito, Capital 553,500
Vic, Capital 452,500
Joey, Capital 486,000
Total assets includes cash amounting to P234,500. The partnership was liquidated on December
31, 2009, and Tito received P351,500 cash pursuant to the liquidation. Tito, Vic and Joey share net
income and losses in a 5:3:2 ratio, respectively. In the settlement to partners, how much cash is paid
to Vic?
A. 587,500 C. 542,000
B. 545,500 D. 0

IV
The partnership of MM, NN and OO was dissolved on October 31, 2009 and the account balances
after all noncash assets are converted to cash on Nov. 1, 2009, along with residual P/L sharing ratios,
are:
Cash P50,000 Accounts payable P120,000
NN, Capital (30%) 60,000 MM, Capital (30%) 90,000
OO, Capital (40%) 100,000
Personal assets and liabilities of the partners at November 1, 2009 are:
Personal Assets Personal Liabilities
MM P80,000 P90,000
 NN 100,000 61,000
OO 190,000 80,000
If OO contributed P70,000 to the partnership to provide cash to pay the creditors, what amount of
M’s P90,000 partnership equity would appear to be recoverable:
A. P90,000
B. P81,000
C. P79,000
D. P0

Installment Liquidation

I
On January 1, 2009, the partners of AB, CD and EF who share profits and losses in the ratio of
5:3:2, respectively, decide to liquidate their partnership. The partnership trial balance at this
date is as follows:
Cash 18,000
Accounts Receivable 66,000
Inventory 52,000
Machinery and Equipment – net 189,000
AB, Loan 30,000
Accounts Payable 53,000
CD, Loan 20,000
AB, Capital 118,000
CD, Capital 90,000
EF, Capital 74,000
Total 355,000

The partners plan a program of piecemeal conversion of assets in order to minimize

liquidation losses. All available cash, less an amount retained to provide for future expenses, is
to be distributed to the partners at the end of each month. No interest accrues on partners’
loans during liquidation. A summary of the liquidation transactions is as follows:

January 2009
1. P51,000 was collected on accounts receivable, the balance is uncollectible.
2. P38,000 was received for the entire inventory.
3. P2,000 liquidation expenses were paid.
4. P50,000 was paid to outside creditors, after offset of a P3,000 credit memorandum
received on January 11, 2009.
5. P10,000 cash was retained in the business at the end of the month for potential
unrecorded liabilities and anticipated expenses
February 2009
6. P4,000 liquidation expenses were paid.
7. P6,000 cash was retained in the business at the end of the month for potential
unrecorded liabilities and anticipated expenses
March 2009
8. P146,000 was received on sale of all items of machinery and equipment.
9. P5,000 liquidation expenses were paid.
10. The P30,000 loan from AB is approved by the partners for offset against his capital
account.
11. No cash was retained in the business.
Required: Prepare a statement of liquidation with supporting schedule of safe payments to
partners.

II
Statement of financial position for the partnership of R, T, and W who share profits 2:1:1,
respectively, shows the following balances just before liquidation:
Cash P72,000 Liabilities P120,000
Other Assets 357,000 R, Capital 132,000
T, Capital 93,000
W, Capital 84,000
Total 429,000 Total 429,000
In the first month of liquidation, P192.000 was received on the sale of certain assets.
Liquidation expenses of P6,000 were paid, and additional liquidation expenses of P4,800
are anticipated before liquidation is completed. Creditors were paid P33,600. Available
cash was distributed to the partners. How much cash W should receive?
A. P44,100
B. P40,050
C. P49,050
D. P28,950

Corporate Liquidation

I
The following data were taken from the statement of realization and liquidation of XYZ Corporation
for the quarter ended September 30, 2018:
Assets to be realized P 430,000
Assets acquired 460,000
Assets realized 520,000
Assets not realized 250,000
Liabilities to be liquidated 640,000
Liabilities assumed 280,000
Liabilities liquidated 460,000
Liabilities not liquidated 550,000
Supplementary credits 610,000
Supplementary charges 568,000

The capital stock of XYZ corporation is composed of 30,000 stocks P10 par value.
1. How much is the retained earnings of XYZ corporation before adjustment of any gain/loss on
realization?
2. How much is the Shareholder’s Equity of XYZ after adjustment of any gain/loss on
realization?
3. How much is the gain or loss in the settlement of liabilities?
4. How much is the gain or loss in the realization of assets?
5. How much is the ending cash balance of XYZ?

II
Twisted Corporation is undergoing liquidation. The trustee of Twisted Corp. presented the
following information: Assets amounting to P125,000 are available to unsecured liabilities without
priority. Assets amounting to P110,000 represents assets originally not pledged to any liabilities.
Unpaid liabilities are as follows: administrative expenses, P21,000; taxes, P18,000 and wages,
P32,000. Accounts payable and notes payable totalled P180,000. No assets were pledged on the
said liabilities. Payment to fully secured creditors and partially secured creditors amounts to
P139,000 and P144,000 respectively. The expected recovery percentage is 40 percent.
1. Amount of assets pledged to fully secured creditors
2. Total liabilities
3. The amount to be paid to all creditors