University of Nueva Caceres

College of Business and Accountancy

J. Hernandez Avenue, Naga City
Advanced Financial Accounting and Reporting II

Partnership

Theories

1. For financial accounting purposes, assets of an individual partner contributed to a partnership are recorded by the
partnership at
a. Historical Cost
b. Book value
c. Fair market value

2. d. Lower
A partnership of costcalls
agreement or market
for allocation of profits and losses by salary allocations, a bonus allocation, interest
on capital, with any remainder to be allocated by present ratios. If a partnership has a loss to allocate, generally
which of the following procedures would be applied?
a. Any loss would be allocated equally to all partners.
b. Any salary allocation criteria would not be used.
c. The bonus criteria would not be used.
d. The loss would be allocated using profit and loss ratios only.
3. Which of the following statements is true concerning the treatment of salaries in partnership accounting?
a. Partner salaries may be used to allocate profits and losses; they are not considered expenses of the
partnership.
b. Partner salaries are equal to the annual partner draw.
c. The salary of the partner is treated in the same manner as salaries of corporate employees.
d. Partner salaries are directly closed to the capital account
4. Matt and Jeff partnership agreement provides for Matt to receive a 20% bonus on profits before the bonus.
Remaining profits and losses are divided between Matt and Jeff in the ratio 2:3, respectively. Which partner has a
greater advantage when the partnership has a profit or when it has a loss
Profit Loss
a. Matt Jeff
b. Matt Matt
c. Jeff Matt
d. Jeff Jeff
5. In the Rom-Rol partnership, Rom and Rol had a capital ratio of 3:1 and a profit and loss ratio of 2:1, respectively.
The bonus method was used to record Rod’s admittance as a new partner. What ratio would be us ed to allocate,
to Rom and Rol, the excess of Rod’s contribution over the amount credited to Rod’s Capital account?
a. Rom and Rol’s new relative capital ratio
b. Rom and Rol’s new relative profit or loss ratio
c. Rom and Rol’s old capital ratio
d. Rom and Rol’s old profit and loss ratio
6. When a partner retires from a partnership and the retiring partner is paid more than the capital balance in her
account, which of the following explains the difference?
I. The retiring partner is receiving a bonus from the other partners.
II. The retiring partner’s goodwill is being recognized.
a. I only b. II only c. either I or II d. Neither I or II
7. When Mill retired from the partnership of Mill, Yill and Lill, the final settlement of Mill’s interest exceeded Mill’s capital
balance. Under the bonus method, the excess
a. Was recorded as goodwill
b. Was recorded as an expense
c. Reduced the capital balances of Yill and Lill
d. Had no effect on the capital balances of Yill and Lill
8. The following is the priority sequence in which liquidation proceeds will be distributed for a partnership:
a. Partnership drawings, partnership liabilities, partnership loans, partnership capital balances.
b. Partnership liabilities, partnership loans, partnership capital balances
c. Partnership liabilities, partnership loans, partnership drawings, partnership capital balances
d. Partnership liabilities, partnership capital balances, partnership loans
9. A simple partnership liquidation requires
a. Periodic payments to creditors and partners determined by a safe payment schedule.
b. Periodic payments to partners as cash becomes available
c. Creditors be paid in an orderly manner
d. Partnership assets be converted into cash with full payment made to outside creditors before remaining
cash is distributed to partners in a lump sum payment
 University of Nueva Caceres
College of Business and Accountancy
J. Hernandez Avenue, Naga City
Advanced Financial Accounting and Reporting II

10. An advance cash distribution plan is prepared

a. Each time cash is distributed to partners in an installment liquidation
b. Each time a partnership asset is sold in an installment liquidation
c. To determine the order amount of cash each partner will receive as it becomes available for distribution
d. None of these
11. A partner’s maximum loss absorption is calculated by
a. Dividing the partner’s capital balance by his or her profit-and-loss-sharing percentage
b. Multiplying the partner’s capital balance by his or her profit-and-loss-sharing percentage
c. Multiplying distributable assets by the partner’s profit-sharing percentage
d. Dividing the partner’s capital balance by his or her percentage interest in capital
12. In the cash distribution plan, which partner gets the first cash distribution?
a. The partner with the largest loan balance
b. The partner with the largest loss absorption potential
c. The partner with the largest capital balance
d. The partner with the largest profit or loss ratio
13. In a partnership liquidation, the final cash distribution to the partners should be made in accordance with the
a. Partners’ profit or loss ratio
b. Balance of the partners’ loan and capital accounts
c. Ratio of the capital contributions to the partners
d. Ratio of capital contribution less withdrawals by the partners
e.
Problems
PARTNERSHIP FORMATION
1. CC admits DD as a partner in business. Accounts in the ledger for CC on November 30, 2011, 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 expense 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

2. The business assets of LL and MM are shown 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 - 728,352
Total P 1,020,916 P 1,317,002

LL and MM agreed upon 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 are worthless in LL’s and MM’s respective books.
c. Other assets of P2,000 and P3,600 in LL’s and MM’s respective books are to be written off.
A. The capital account of the partners after adjustments will be:
 University of Nueva Caceres
College of Business and Accountancy
J. Hernandez Avenue, Naga City
Advanced Financial Accounting and Reporting II

B. The same information in number 2, how much total assets does the partnership have after formation?

3. On March 1, 2012, PP decided 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 10,500

Furniture and fixtures

Office equipment (net)(net) 30,000
11,500 9,000
2,750
Prepaid expenses 6,375 3,000
Total P 105,375 P 51,500

Accounts payable P 45,000 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 PP was not yet recorded amounting to P800.
4. The fair market value of inventory amounted to:
For PP P29,500
For QQ 21,000

A. Compute the net (debit) credit adjustments for PP and QQ

B. The same information in number 3, compute the total liabilities after formation.
C. The same information in number 3, compute the total assets after formation:

4. On March 1, 2012, 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. Partnership
agreement provides that II and JJ share profits and losses 30% and 70% respectively.

A. On March 1, 2012, the balance in JJ’s capital account should be:

B. The same information in number 4, except that the mortgage loan is not assumed by the partnership. On March 1,
2012, the balance of JJ’s capital account should be:

5. The Grey and Redd partnership was formed on January 2, 2012. Under the partnership agreement, each partner
has an equal initial capital balance. Partnership net income or loss is allocated 60% to Grey and 40% to Redd. To
form the partnership, Grey srcinally contributed assets consisting P30,000 with a fair value of P60,000 on January
2, 2012, and Redd contributed P20,000 cash. Drawings by the partners during 2012 totaled P3,000 by Grey and
P9,000 by Redd. The partnership net income in 2012 was P25,000. Under the bonus method, what is the amount
of bonus?
 University of Nueva Caceres
College of Business and Accountancy
J. Hernandez Avenue, Naga City
Advanced Financial Accounting and Reporting II

6. On January 1, 2008, Atta and Boy agreed to form a partnership contributing their respective assets and liabilities
subject to adjustments. At that date the following were provided:

Atta Boy
Cash P 26,000 P 62,000
Accounts Receivable 200,000 600,000
Inventories 120,000 200,000
Land 600,000 -
Building - 500,000
Furniture and fixtures 50,000 35,000
Intangible assets 2,000 3,000
Accounts payable 180,000 150,000
Other liabilities 200,000 350,000
Capital 620,000 800,000

The following adjustments were agreed upon:

a. Accounts receivable of P20,000 and P40,000 are uncollectible in A’s aand B’s respective books.
b. Inventories of P6,000 and P7,000 are worthless in A’s and B’s respective books.
c. Intangible assets are to be written off in both books
What will be the capital balances of the partners after adjustments?

7. Mary admits Jane as a partner in the business. Balance sheet accounts of Mary just before the admission of Jane
show: Cash, P26,000, Accounts Receivable P120,000, Merchandise Inventory P180,000 and Accounts payable,
P62,000. It was agreed that for purposes of establishing Mary’s interest, the f ollowing adjustments be made: 1.) an
allowance for doubtful accounts of 3% of accounts receivable is to be established. 2.) Merchandise inventory is to
be adjusted upward by P25,000 and, 3.) prepaid expenses of P3,600 and accrued liabilities of P4,000 are to be
recognized. If Jane is to invest sufficient cash to obtain 2/5 interest in the partnership, how much would Jane
contribute to the new partnership?

PARNTERSHIP OPERATION
8. X, Y and Z, a partnership formed on January 1, 2011 had the following initial investments:
X – P100,000
Y – 150,000
Z – 225,000
The partnership agreement states that profit and losses are 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 P36,000 for Z.
- Average partner’s capital balances during the year shall be allowed 10%.
Additional information:
- On June 30, 2011, X invested an additional P60,000.
- Z withdrew from the partnership on September 30, 2011, P70,000.
- Share in the remaining partnership profit was P5,000 for each partner.
The total partnership capital on December 31, 2011 was:

9. The partnership of DD and BB was formed and commenced operations on March 1, 2011, 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
1, 2011, BB invested and additional P10,000 in the partnership, DD made a capital withdrawal of P4,000 on May 2,
2011 but reinvested the P4,000 on October 1, 2011. During 2011, DD withdrew P800 per month and BB, the
managing partner, withdrew P1,000 per month. These drawings were charged to salary expense. A preclosing trial
balance taken at December 31, 2011 is as follows:
Debit Credit
Cash P 9,000 P
Accounts Receivable-net 15,000
Equipment-net 50,000
Other assets 19,000
Liabilities 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 expense 5,000
Total P 137,000 P 137,000
 University of Nueva Caceres
College of Business and Accountancy
J. Hernandez Avenue, Naga City
Advanced Financial Accounting and Reporting II

Personal assets and liabilities of the partners at September 1, 2012 are:

Personal Assets Personal Liabilities
AA P80,000 P90,000
BB 100,000 61,000
CC 192,000 80,000
If CC contributes P70,000 to the partnership to provide cash to pay the creditors, what amount of AA’s P90,000 partnership
equity would appear to be recoverable?

26. A cash distribution plan (payment priority program) for Matthew, Norell and Reams partnership appears below:
Priority Creditors Matthew Norell Reams
First P300,000 100%
Next P80,000 70% 30%
Next P70,000 3/7 4/7
Remainder 22% 34% 44%

If P550,000 of cash is to be distributed, how much will be received by the priority creditors, Matthew, Norell and
Reams?

27. 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 P100,000
Other assets 300,000
Total assets P400,000

Liabilities P150,000
Axel, Capital 40,000
Barr, Capital 180,000
Gray, Capital 30,000
Total liabilities and capital P400,000

The partners agreed to dissolve the partnership after selling the other assets for P200,000. Upon dissolution of the
partnership, Axel should have received:

28. On January 1, 2012, partners Julian, Lagman and Magno decided to liquidate their partnership. Prior to the
liquidation, the partners had cash of P12,000, non-cash assets of P146,000, liabilities to outsiders of P36,000 and
a note payable to partner Magno of P14,000. The capital balances of the partners were: Julian- P36,000; Lagman-
P54,000; Magno- P18,000. The partners share profits and losses in the ratio of 3:3:4, respectively.

During January, 2012, the partnership received cash of P30,000 from the sale of assets with a book value of
P38,000 and paid P3,600 of liquidation expenses. During February, the partnership realized P44,000 from the sale
of assets with a book value of P35,000 and paid liquidation expenses of P6,400. During March, the remaining assets
were sold for P36,000. The partners agreed to distribute cash at the end of each month.

Required:
a. Prepare a cash priority program
b. Prepare the necessary journal entries to record the liquidation process.