Chapter 3

Partnership – Part 3

PROBLEM 3-1: THEORY

1. A
2. A
3. B
4. D
5. D
6. C
7. D

PROBLEM 3-2: THEORY & COMPUTATIONAL

1. D

2. Solutions:

Case #1:
Requirement (a):
The capital balances of the existing partners are adjusted as follows:

Carrying Fair Increase

  amts. values (Decrease)
Cash 26,000 26,000 -
Accounts
receivable 120,000 116,400 (3,600)
Inventory 180,000 205,000 25,000
Prepaid asset 3,600 3,600
Accounts payable (62,000) (62,000) -
Accrued liabilities (4,000) (4,000)
Net assets 264,000 285,000 21,000

Unadjuste
  d Sh. in adjustment Adjusted
A, Capital (21K x 60%) =
(60%) 170,000 12,600 182,600
B, Capital
(40%) 94,000 (21K x 40%) = 8,400 102,400
264,000 285,000

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Date B, Capital (182,600 x 1/2) 51,200
C, Capital (182,600 x 1/2) 51,200
to record the admission of C to the partnership

Requirement (b):
Before Admission of After
  admission C admission
A, Capital 182,600 182,600
B, Capital 102,400 (51,200) 51,200
C, Capital - 51,200 51,200
285,000 - 285,000

Requirement (c):
Before Admission of After
Partner  admission C admission
A 60% 60%
B 40% -20% 20%
C 20% 20%
100% 100%

Case #2: Scenario A

Requirement (a):
The fair value of the 20% interest acquired by C is computed as follows:
Adjusted net assets before admission of C 285,000
Divide by: Interest of old partners (100% - 20%) 80%
Grossed-up fair value 356,250
Multiply by: Interest of C 20%
Fair value of C's interest 71,250

Date Cash 71,250

C, Capital 71,250
to record the admission of C to the
partnership

Requirement (b):
Before Admission of After
  admission C admission
A, Capital 182,600 182,600

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B, Capital 102,400 102,400
C, Capital 71,250 71,250
285,000 71,250 356,250

Requirement (c):
Before After
Partner  admission Admission of C admission
(100% - 20%) x
A 60% 60% 48%
(100% - 20%) x
B 40% 40% 32%
C 20% 20%
100% 100%

Case #2: Scenario B

Requirement (a):
Date Cash 71,250
A, Capital (100K – 71,250) x 60% 17,250
B, Capital (100K – 71,250) x 40% 11,500
C, Capital 100,000
to record the admission of C to the
partnership

Requirement (b):
Before Admission of After
  admission C admission
A, Capital 182,600 (17,250) 165,350
B, Capital 102,400 (11,500) 90,900
C, Capital 100,000 100,000
285,000 71,250 356,250

Case #3:
Solution:
Adjusted net assets 285,000
Divide by: Existing partners' interest 3/5
Total net assets after investment by C 475,000

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Multiply by: C's interest 2/5
Amt. of contribution by C 190,000

3. Solutions:
Requirement (a):
April A, Capital 320,000
1,
B, Capital (360K – 320K) x 30%/50% 24,000
20x1
C, Capital (360K – 320K) x 20%/50% 16,000
Cash 360,000
to record the retirement of A from the
partnership

Requirement (b):
Before Retirement of After
  retirement A retirement
A, Capital 320,000 (320,000) -
B, Capital 192,000 (24,000) 168,000
C, Capital 128,000 (16,000) 112,000
640,000 (360,000) 280,000

Requirement (c):
Before After
Partner  retirement Retirement of A retirement
A 50% -50% -
30% / (30% +
B 30% 20%) 60%
20% / (30% +
C 20% 20%) 40%
100% 100%

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PROBLEM 3-3: MULTIPLE CHOICE - COMPUTATIONAL
1. B
Solution:
Total capital after admission 150,000
Multiply by: Interest of Lind 1/3
Capital credit to Lind 50,000
Contribution of Lind (40,000)
Bonus to Lind 10,000
Multiply by: Old P/L ratio of Blau 60%
Deduction to Blau's capital 6,000

Interest of Blau before admission of Lind 60,000

Deduction to Blau's capital (6,000)
Adjusted capital of Blau after admission 54,000

2. D (60K + 20K + 15K) = 95K total capital after admission x 20% =

19,000

3. A Recognition of goodwill from non-business combination

transactions is prohibited under PFRSs.

4. A
Solution:
Payment to Eddy 180,000
Capital balance of Eddy 160,000
Excess payment to Eddy 20,000

Fox Grimm

Capital balances before retirement 96,000 64,000

Share in excess payment to Eddy (12,000) (8,000)

Capital balances after retirement 84,000 56,000

5. B
Solution:
Eddy, capital 160,000
Fox, capital 96,000
Grimm, capital 64,000
Investment of Hamm 140,000
Total partnership capital after admission 460,000
Multiply by: Interest of Hamm 25%

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Capital credit to Hamm 115,000
Investment of Hamm 140,000
Bonus to old partners (25,000)

Eddy, capital (before admission) 160,000

Share in bonus to old partners (25K x 50%) 12,500
Eddy, capital (after admission) 172,500

6. C
Solution:
Madur
Coll o Prieto
  (20%) (30%) (50%) Total
Unadjusted capital
balance 42,000 39,000 90,000 171,000
Share in revaluation gain
[(216K – 180) x
(20%; 20% & 50%)] 7,200 7,200 21,600 36,000
Adjusted capital 111,60 207,00
balance 49,200 46,200 0 0

The entry to record the settlement of Coll’s interest is as follows:

July Coll, loan 9,000
1,
Coll, Capital 49,20
20x1
Maduro, Capital (sh. in excess payment) (3K x 0
2/8) 750
Prieto, Capital (sh. in excess payment) (3K x 2,250 61,20
6/8) 0
Cash
Adjusted capital of Maduro before retirement 46,200
Share in excess payment to Coll (750)
Adjusted capital of Maduro after retirement 45,450

7. D (40K + 40K + 12K) = 92K fair value of net assets – [(5,000 x 2)

x 1 = 10,000 aggregate par value of shares issued] = 82,000
credit to share premium

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PROBLEM 3-4: EXERCISES – COMPUTATIONAL
1. Solutions:

Case #1:
Requirement (a):
The capital balances of the existing partners are adjusted as follows:
Carrying Fair Increase
 
amts. values (Decrease)
Cash 30,000 30,000 -
Accounts
140,000
receivable 120,000 (20,000)
Inventory 200,000 160,000 (40,000)
Equipment 500,000 450,000 (50,000)
Accounts payable (80,000) (80,000) -
Accrued liabilities (20,000) (20,000)
Net assets 790,000 660,000 (130,000)

Unadjuste
 
d Adjustment Adjusted
-130K x 60% =
Apple, Capital (60%) 515,000
-78K 437,000
-130K x 40% =
Banana, Capital (40%) 275,000
-52K 223,000
790,000 660,000

Dat B, Capital (223,00 x 1/2) 111,50

e
C, Capital (223,00 x 1/2) 0 111,50
to record the admission of C to the partnership 0

Requirement (b):
Before Admission of After
 
admission C admission
A, Capital 437,000 437,000
B, Capital 223,000 (111,500) 111,500
C, Capital - 111,500 111,500
660,000 - 660,000

Requirement (c):
Before Admission of After
Partner  admission C admission
A 60% 60%
B 40% -20% 20%

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 C 20% 20%
100% 100%

Case #2:
Requirement (a):
The fair value of the 20% interest acquired by C is computed as follows:
Adjusted net assets before admission of C 660,000
Divide by: Interest of old partners (100% - 20%) 80%
Grossed-up fair value 825,000
Multiply by: Interest of C 20%
Fair value of C's interest 165,000

Date Cash 165,000

C, Capital 165,000
to record the admission of C to the
partnership

Requirement (b):
Before Admission of After
 
admission C admission
A, Capital 437,000 437,000
B, Capital 223,000 223,000
C, Capital - 165,000 165,000
660,000 165,000 825,000

Requirement (c):
Before After
Partner  admission Admission of C admission
(100% - 20%) x
A 60% 60% 48%
(100% - 20%) x
B 40% 40% 32%
C 20% 20%
100% 100%

Case #3:
Requirement (a):

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Date Cash 100,000
A, Capital (165K – 100K) x 60% 39,000
B, Capital (165K – 100K) x 40% 26,000
C, Capital 165,000
to record the admission of C to the
partnership

Requirement (b):
Before Admission of After
 
admission C admission
A, Capital 437,000 (39,000) 398,000
B, Capital 223,000 (26,000) 197,000
C, Capital - 165,000 165,000
660,000 100,000 760,000

Case #4:
Requirement (a):
Date Cash 165,000
C, Capital 125,000
A, Capital (165K – 125K) x 60% 24,000
B, Capital (165K – 125K) x 40% 16,000

to record the admission of C to the

partnership

Requirement (b):
Before
  Admission of C After admission
admission
A,
437,000 461,000
Capital 24,000
B,
223,000 239,000
Capital 16,000
C,
125,000 125,000
Capital -
660,000 165,000 825,000

Case #5:

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Adjusted net assets 660,000
Divide by: Existing partners' interest 3/5
Total net assets after investment by Carrots 1,100,000
Multiply by: Carrots’ interest 2/5
Amt. of contribution by Carrots 440,000

2. Solutions:

Case #1:
The adjusted capital balances of the partners on the date of A’s retirement
are computed as follows:

  A (50%) B (30%) C (20%)

Jan. 1 320,000 192,000 128,000
Sh. In profit 400,000 240,000 160,000
Drawings (40,000) (60,000) (30,000)
Sept. 1 680,000 372,000 258,000

Requirement (a):
Sept. A, Capital 680,000
1,
B, Capital (700K – 680K) x 30%/50% 12,000
20x1
C, Capital (700K – 680K) x 20%/50% 8,000
Cash 700,000
to record the retirement of A from the
partnership

Requirement (b):
Before Retirement of After
 
retirement A retirement
A, Capital 680,000 (680,000) -
B, Capital 372,000 (12,000) 360,000
C, Capital 258,000 (8,000) 250,000
1,310,000 (700,000) 610,000

Requirement (c):
Partner  Before Retirement of A After

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 retirement retirement
A 50% -50% -
30% / (30% +
B 30% 20%) 60%
20% / (30% +
C 20% 20%) 40%
100% 100%

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Case #2:
Solutions:
Requirement (a):
Sept. A, Capital 680,000
1,
Cash 650,000
20x1
B, Capital (680K – 650K) x 18,000
30%/50% 12,000
C, Capital (680K – 650K) x
20%/50%

to record the retirement of A from the

partnership

Requirement (b):
Before Retirement of After
 
retirement A retirement
A, Capital 680,000 (680,000) -
B, Capital 372,000 18,000 390,000
C, Capital 258,000 12,000 270,000
1,310,000 (650,000) 660,000

3. Solution:
  A B C Total
100,00 160,00 310,00
Cash 0 0 50,000 0
120,00 170,00
Equipment 50,000 0 0
150,00 160,00 170,00 480,00
Capital balances - Jan. 1 0 0 0 0
Sh. In profit
(120K x 150K/480K (a));
(120K x 160K/480K); 120,00
(120K x 170K/480K) 37,500 40,000 42,500 0
187,50 200,00 212,50 600,00
Capital balances - Dec. 31 0 0 0 0

Since the problem does not state the partnership agreement on the sharing of
profits and losses, it is assumed that the sharing is based on the partners’
respective contributions.

4. Solutions:
Requirement (a):
The adjustments to the capital balances of A and B are computed as follows:
  A B

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600K x 20% [187.5K ÷ (187.5K + 200K)] (58,065)

600K x 20% [200K ÷ (187.5K + 200K)] (61,935)

Jan. A, Capital 58,06

1,
B, Capital 5
20x
2 D, Capital (600,000 x 20%) 61,93 120,00
to record the admission of D to the partnership 5 0

Requirement (b):
  A B C D Total
187,50 200,00 212,50 600,00
Before admission 0 0 0 - 0
(58,065 (61,935 120,00
Admission of D ) ) - 0 -
129,43 138,06 212,50 120,00 600,00
After admission 5 5 0 0 0

5. Solutions:

Requirement (a):
Dec. 31, B, Capital 200,00
20x1
Cash 0 164,00
A, Capital (200K – 164K) x 40%/60% 0
C, Capital (200K – 164K) x 20%/60% 24,000
12,000

Requirement (b):
  A B C Total
187,50 212,50
Before withdrawal 0 200,000 0 600,000
(200,000 (164,000
Withdrawal of B 24,000 ) 12,000 )
211,50 224,50
After withdrawal 0 - 0 436,000

Requirement (c):
Partner  Before Retirement of A After

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 retirement retirement
40% / (40% +
A 40% 20%) 66.67%
B 40% -40% -
20% / (40% +
C 20% 20%) 33.33%
100% 100%

6. Solutions:
Requirements (a) and (b):
  A B Totals
Cash
11,000 22,354 33,354
214,53 532,89
Accounts receivable 6 0 747,426
Inventory
114,535 253,402 367,937
603,00
Land
0 603,000
428,26
Building
7 428,267
50,34 34,78
Equipment
5 9 85,134
Other assets - - -
Total assets 993,416 1,271,702 2,265,118
(178,940 (243,650
Accounts payable
) ) (422,590)
Notes payable
(200,000) (345,000) (545,000)
Net assets 614,476 683,052 1,297,528

Requirement (c):
Adjusted net assets 1,297,528
Divide by: (100% - 20%) 80%
Grossed up fair value 1,621,910
Multiply by: C's interest 20%
Amount of need
contribution 324,382

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Requirement (d):
B C
  A (40%) (40%) (20%) Total
Fair value of net asset
contribution 614,476 683,052 324,382 1,621,910

Required capital
balance
(1,621,910 x 40%);
(1,621,910 x 40%);
(1,621,910 x 20%) 648,764 648,764 324,382 1,621,910
Cash settlement
(payment)/ receipt (34,288) 34,288 -

Requirement (e):
A B C
  (40%) (40%) (20%)
Adjusted capital balances, Jan. 1 648,764 648,764 324,382
Share in profit (325K x 40%);
(325K x 40%); (325K x 20%) 130,000 130,000 65,000
Drawings (50,000) (65,000) (28,000)
Capital balances, Dec. 31 728,764 713,764 361,382

7. Solution:
  A B C Total
600,00 600,00 1,600,00
Before retirement 0 0 400,000 0
Revaluation of equipt.
(24K ÷ 3) 8,000 8,000 8,000 24,000
608,00 608,00 1,624,00
Adjusted 0 0 408,000 0
(408,000 (408,000
Retirement of C ) )
608,00 608,00 1,216,00
After retirement 0 0 - 0

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