Quiz 2

1. Chris is a partner in a local partnership. The prot and loss sharing agreement includes
an interest allocation of 7 percent on the invested capital. The capital account of Chris
reveals that he had a beginning capital account balance of P50,000. He withdrew
P10,000 on May 1 and invested P25,000 on October 31. Rounded to the nearest peso,
what is Chris’ weighted average capital balance?

2. Richard is a partner in a local partnership. The prot and loss sharing agreement
includes an interest allocation of 8 percent on the invested capital. Richard had a
beginning capital balance of P60,000. He invested P30,000 on March 1, withdrew
P20,000 on August 1, and invested P40,000 on December 1. Rounded to the nearest
dollar, what dollar amount is allocated to Richard as interest on capital balance if the
weighted average capital balance is used as the basis of the computation?

3. Shawn is a managing partner in a local business. Part of his prot allocation is a bonus
based on the store’s operating income. The bonus is 8 percent of operating income in
excess of P200,000 after deducting the bonus. If operating income for the year is
P250,000, what is Shawn’s bonus (rounded to the nearest dollar)?

4. Norman, Sarah, and Taylor are partners. The partnership income for the period is
P130,000. The partnership agreement assigns salaries to the partners of P10,000,
P15,000, and P18,000, respectively. In addition, the partners have prot and loss
residual ratios of 30%, 45%, and 25%. What is the amount of prot and loss allocated to
Sarah as a result of applying the residual ratios?

5. Nick, Joe, and Mike are partners. The company has P150,000 net income for the period.
How is this income divided to the partners if the following prot and loss allocation
process is followed?
Nick Joe Mike
Weighted average capital P200,000 P350,000 P180,000
Salary 25,000 15,000 35,000
Bonus .1 (NI - P100,000)
Residual prot/loss ratios .25 .45 .30
Return on invested capital 9%

6. Harriet, Bob, and Tim are partners. Income for the current year is P500,000. The prot
and loss agreement states that salaries are P35,000, P50,000, and P40,000, respectively.
In addition, the residual prot and loss ratios are 40%, 30%, and 30%, respectively. How
much of the prot is allocated to Harriet?

7. Suzanne, Thomas, and Vicky are partners. They have average capital account balances
of P200,000, P250,000, and P400,000, respectively. In addition, they have residual prot
and loss ratios of 15%, 25%, and 60%, respectively. If income for the year is P300,000
and the partners earn 8 percent return on invested capital, how much will be allocated to
Thomas?

8. Johnson and Pritchard are partners. They are changing the prot and loss ratios from the
current 60/40 to 70/30. At the date of the change, vacant land owned by the partnership
has a book value of P50,000 and a market value of P60,000. The partners choose to
prepare an itemized list of assets with market values di>erent from book values. If the
land is sold in the future for P80,000, how much of the gain will be assigned to Pritchard?

9. Karen and Andrea are currently changing their partnership prot and loss ratios from
75/25 to 60/40. They have created a list of assets that have market and book value
di>erences. One of the assets is a building with a P300,000 market value and P200,000

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 book value. Two years after changing the prot and loss ratios, the building is sold for
P380,000. How much of the prot is allocated to Andrea?

10. Peter and Ronald are partners. They have shared prots and losses 65/35 for a number
of years. Peter has indicated that he is going to reduce his involvement in the
partnership so the prot and loss ratio is being modied to 45/55. At the date of the
change in the prot and loss ratio, the partnership own vacant land with a market value
of P300,000 and a book value of P100,000. Peter and Ronald compile a list of assets with
market and book value di>erences. Two years after the change in the prot and loss
ratios, the land is sold for P450,000. How much of the gain is allocated to Peter?

11. Jennifer and Robert are partners who are changing their prot and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value di>erent from book value. One asset revalued is land with a book value of P50,000
and a market value of P120,000. Two years after the prot and loss ratio is changed, the
land is sold for P200,000. What is the amount of change to Jennifer’s capital account at
the date the land is revalued?

12. The same information in No. 11, what is the amount of change to Jennifer’s capital
account at the date the land is sold?

13. James and Bruce are partners. They have shared prots and losses 70/30 for several
years. The partnership prot allocation agreement is currently being modied to 60/40.
At the date of the change, the partners choose to revalue assets with market value
di>erent from book value. One asset revalued is a building with a book value of
P370,000 and a market value of P520,000. One year after the prot and loss ratio is
changed the building is sold for P650,000. What is the amount of change to James’
capital account at the date the building is revalued?

14. The same information in No. 13, what is the amount of change to James’ capital account
at the date the building is sold?

15. Theresa and Craig are partners. Their current prot and loss ratios (70/30) are being
changed to (60/40). The partners decide to adjust their capital accounts at the date of
the change in the prot and loss ratios to reAect the di>erence between market value
and book value of assets and liabilities. At the date of the change, land has a market
value of P250,000 and a book value of P120,000. How much will Theresa’s capital
account be adjusted at the date of the change in the prot and loss ratios (indicate
increase or decrease)?

16. Eric and Phillip have been partners for several years. During that time they have shared
prots and losses (60/40). They are currently revising the prot and loss ratios to
(70/30). Eric and Phillip decide to adjust the capital accounts at the date of the change
to reAect the di>erence between market value and book value of assets and liabilities.
At the date of the change, the partnership owns a building with a book value of P350,000
and a market value of P600,000. How much will Eric’s capital account be adjusted at the
date of the change in the prot and loss ratios (indicate increase or decrease)?

17. Garlic, Pepper, and Salt are partners in a plumbing service. The business reported net
income of P108,000 for 20x4. The partnership agreement provides that prots and losses
are to be divided equally after Pepper receives a P60,000 salary, Salt receives a P24,000
salary, and each partner receives 10% interest on his beginning capital balance.
Beginning capital balances were P40,000 for Garlic, P48,000 for Pepper, and P32,000 for
Salt. Pepper’s share of partnership income for 20x4 is:

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 18. Maxwell is trying to decide whether to accept a salary of P60,000 or a salary of P25,000
plus a bonus of 20% of net income after salaries and bonus as a means of allocating
prot among the partners. Salaries traceable to the other partners are estimated to be
P75,000. What amount of income would be necessary so that Maxwell would consider
the choices to be equal?

19. James, Keller and Rivers have the following capital balances; P48,000, P70,000 and
P90,000 respectively. Because of a cash shortage James invests an additional P12,000 on
June 1st. Each partner withdraws P1,000 per month. James, Keller and Rivers receive a
salary of P13,000, P15,000 and P20,000, respectively, for work done during the year.
Each partner receives interest of 8% on their weighted average capital balance without
regard to normal drawings. Any remaining prots are split 20%, 30% and 50%
respectively. The net income for the year is P30,000. What are the ending capital
balances for each partner?

20. The partnership agreement of JJ, KK, and LL provides for the annual allocation of the
business’s prot or loss in the following sequence:

 JJ, the managing partner, receives a bonus equal to 20 percent of the business’s
prot.
 Each partner receives 15 percent interest on average capital investment.
 Any residual prot or loss is divided equally.

The average capital investments for 20x4 were as follows: JJ, P100,000; KK, P200,000,
and LL, P300,000. How much of the P90,000 partnership prot for 20x4 should be
assigned to each partner?

21. PP, SS, and TT have operated a bookstore for a number of years as a partnership. At the
beginning of 20x4, capital balances were as follows: PP, P60,000; SS, P40,000 and TT,
P20,000. Due to a cash shortage, PP invests an additional P8,000 in the business on April
1, 20x4. Each partner is allowed to withdraw P1,000 cash each month. The partners
have used the same method of allocating prots and losses since the business’
inception:

 Each partner is given the following compensation allowance for work done in the
business: PP, P18,000; SS, P25,000; and TT, P8,000.
 Each partner is credited with interest equal to 10 percent of the average monthly
capital balance for the year without regard for normal drawings.
 Any remaining prot or loss is allocated 4:2:4 to PP, SS, and TT, respectively. The
net income for 20x4 is P23,600. Each partner withdraws the allotted amount each
month.

What are the ending capital balances for 20x4?

22. On January 1,20x4, the dental partnership of LL, CC, and RR was formed when the
partners contributed P20,000, P60,000, and P50,000, respectively. Over the next three
years, the business reported net income and (loss) as follows: 20x4, P (30,000); 20x5,
P20,000 and 20x6, P40,000. During this period, each partner withdrew cash of P10,000
per year. RR invested an additional 12,000 in cash on February 9, 20x5. At the time that
the partnership was created, the three partners agreed to allocate all prots and losses
according to a specied plan written as follows:

 Each partner is entitled to interest computed at the rate of 12 percent per year
based on the individual capital balances at the beginning of that year.

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  Because of prior work experience, LL is entitled to an annual salary allowance of
P12,000, and CC is credited with P8,000 per year.
 Any remaining prot will be split as follows: LL, 20 percent; CC, 40 percent; and
RR, 40 percent. If a loss remains, the balance will be allocated: LL, 30 percent;
CC, 50 percent; and RR, 20 percent.

Determine the ending capital balance for each partner as of the end of each of these
three years.

23. In 20x5, the partners of Julio & Fong Partnership shared net income and losses equally,
but in 20x6 the income-sharing ratio was changed to 60% for Julio and 40% for Fong. On
December 31, 20x5, inventories were understated by P12,000. On December 31, 20x6,
employees' salaries payable in the amount of P5,400 and short-term prepayments of
P2,700 had not been recognized in the accounting records. Net corrections to partners'
capital accounts for Julio and Fong indicate increase or (decrease):

Solutions:
1. P47,500 = [(P0,000 x 4) + (P40,000 x 6) + (P65,000 x 2)]/12
2. P6,400 = [(P60,000 x 2) + (P90,000 x 5) + (P70,000 x 4) + P110,000] (.08)
3. P3,703 - B = .08(P250,000 - P200,000 - B)
4. P39,150 = (P130,000 - P10,000 - P15,000 - P18,000) .45
5. Nick, P44,075; Joe, P48,435; Mike, P57,490
Nick Joe Mike Total
Interest on capital
P200,000 x .09 P18,000
P350,000 x .09 P31,500
P180,000 x .09 P16,200 P65,700
Salary 25,000 15,000 35,000 75,000
Bonus .1(P150,000 - P100,000) 5,000 5,000
Residual
P4,300 x .25 1,075
P4,300 x .45 1,935
P4,500 x .30 ______ _______ 1,290 4,300
Totals P44,075 P48,435 P57,490 P150,000

6. P185,000 = P35,000 + (P500,000 - P35,000 - P50,000 - P40,000) .4

7. P78,000 = (P250,000 x .08) + [P300,000 - (P200,000 + P250,000 + P400,000)(.08)] .25
8. P10,000 = (P60,000 - P50,000)(.40) + (P80,000 - P60,000)(.30)
9. P57,000 = (P300,000 - P200,000)(.25) + (P380,000 - P300,000)(.40)
10. P197,500 = (P300,000 - P100,000)(.65) + (P450,000 - P300,000)(.45)
11. P42,000 = (P120,000 - P50,000)(.60)
12. P36,000 = (P200,000 - P120,000)(.45)
13. P105,000 = (P520,000 - P370,000)(.70)
14. P78,000 = (P650,000 - P520,000)(.60)
15. P13,000 increase = (P250,000 - P120,000)(.70 - .60)
16. P25,000 decrease = (P600,000 - P350,000)(.70 - .60)

17. P68,800
Garlic Pepper Salt Total
Salary 60,000 24,000 84,000
Interests – 10% on beginning 4,000 4,800 3,200 12,000
Equally 4,000 4,000 4,000 12,000
Total 8,000 68,800 108,000

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 18. P310,000
Using bonus formula to solve for income:
Bonus = .20 (NI – Bonus – Salary)
35,000 = .20 NI – [.20 x P35,000] – [.20 x P100,000*]
62,000 = .2Income
P310,00 = income
0

*salaries 25,000 + 75,000

19. James, P58,360; Keller, P68,040; Rivers, P87,600

James Keller Rivers Total
Interest – 8% 4,400 5,600 7,200 17,200
Salary 13,000 15,000 20,000 48,000
2:3:5 (7,040) (10,560) (17,600) (35,200)
Total 10,360 10,040 9,600 30,000

Interest:
James: P48,000 x 5 = P240,000
P60,000 x 7 = 420,000 P660,000/12 = P55,000 x 8% = P4,400

Capital, beginning 48,000 70,000 90,000 208,000

Additional investments 12,000 12,000
Net income (loss) 10,360 10,040 9,600 30,000
Withdrawals – P1,000 per month (12,000) (12,000) (12,000) (36,000)
Capital, ending 58,360 68,040 87,600 214,000

20. JJ, P27,000; KK, P24,000; LL, P39,000

JJ KK LL
Total
Bonus (20%) ............................. P18,000 P -0- P -0- P18,000
Interest (15% of average capital) 15,000 30,000 45,000 90,000
Remaining loss ($18,000) ........ (6,000) (6,000) (6,000) (18,000)
Income assignment .................. P27,000 P24,000 P39,000 P90,000

21. PP, P64,600; SS, P49,000; TT, P2,000

PP SS TT Totals
Interest (10%) 6,600 (below)
2,000 12,600
Salary 18,000 25,000 8,000 51,000
Remaining income (loss) (16,000) ( 8,000) (16,000) (40,000)
Totals 8,600 21,000 (6,000) 23,600

CALCULATION OF PURKERSON'S INTEREST ALLOCATION

Balance, January 1—April 1 (P60,000 × 3) P180,000
Balance, April 1—December 31 (P68,000 × 9) 612,000
Total ................................................................................. P792,000
Months.............................................................................. ÷ 12
Average monthly capital balance ..................................... P 66,000
Interest rate ..................................................................... × 10%
Interest allocation (above) ............................................... P 6,600

STATEMENT OF PARTNERS' CAPITAL

PP SS TT Totals

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 Beginning balances .................... 60,000 40,000 20,000 120,000
Additional contribution ............... 8,000 -0- -0- 8,000
Income (above) ....................... 8,600 21,000 (6,000) 23,600
Drawings (P1,000 per month) .... (12,000) (12,000) (12,000) (36,000)
Ending capital balances.............. 64,600 49,000 2,000 115,600

22. Ending capital balances:

20x4 .................................. 4,720 32,400 32,880 70,000
20x5 .................................. 4,766 30,088 37,146 72,000
20x6 ……………………………. 9,610 36,243 36,147
82,000

INCOME ALLOCATION—20x4
LL CC RR Total
Interest (12% of beginning capital) 2,400 7,200 6,000 15,600
Salary 12,000 8,000 -0- 20,000
Remaining income/loss (19,680) (32,800) (13,120) (65,600)
Totals (5,280) (17,600) (7,120) (30,000)

STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 20x4

LL CC RR Total
Beginning balances ................. 20,000 60,000 50,000 130,000
Income allocation .................... (5,280) (17,600) (7,120) (30,000)
Drawings ................................. (10,000) (10,000) (10,000) (30,000)
Ending balances ................ 4,720 32,400 32,880 70,000

INCOME ALLOCATION—20x5
LL CC RR Total
Interest(12% of beginning capital above) *566 3,888 3,946 8,400
Salary ..................................... 12,000 8,000 -0-
20,000
Remaining income/loss: (2,520) (4,200) (1,680) (8,400)
Totals................... 10,046 7,688 2,266 20,000
*Rounded

STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 20x6

LL CC RR Total
Beginning balances (above) 4,720 32,400 32,880 70,000
Additional investment ............. -0- -0- 12,000 12,000
Income allocation .................... 10,046 7,688 2,266 20,000
Drawings ................................. (10,000) (10,000) (10,000) (30,000)
Ending balances ................ 4,766 30,088 37,146 72,000

INCOME ALLOCATION—20x6
LL CC RR Total
Interest (12% of beginning capital
above)* .............................. 572 3,611 4,457 8,640
Salary ..................................... 12,000 8,000 -0- 20,000
Remaining income.................... 2,272 4,544 4,544 11,360
Totals............................. 14,844 16,155 9,001 40,000
*Rounded

STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 20x6

LL CC RR Total

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 Beginning balances (above) 4,766 30,088 37,146 72,000
Income allocation 14,844 16,155 9,001 40,000
Drawings (10,000) (10,000) (10,000) (30,000)
Ending balances 9,610 36,243 36,147 82,000

23. Julio, P2,820 decrease; Fong, P120 increase

Short-term prepayments 2,700
Julio, Capital 2,820
Fong, Capital 120
Salaries Payable 5,400
The correction to partners' capital accounts is
computed as follows:
Julio Fong
Inventories understated by P12,000,
Dec. 31, 20x5 P 6,000 P 6,000
Inventories understated by P12,000,
Jan. 1, 20x6 (7,200) (4,800)
Accrued salaries of P5,400 not recorded,
Dec. 31, 20x6 (3,240) (2,160)
Short-term prepayments of P2,700
not recorded, Dec. 31, 20x6 1,620 1,080
Net corrections to partners' capital
accounts P(2,820) P 120

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 CHAPTER 7
PARTNERSHIP FORMATION, OPERATION,
AND CHANGE IN OWNERSHIP
SUMMARY OF ITEMS BY TOPIC

Conceptual Computational
True- Multiple Multiple Short
False Choice Choice Problems Answer
Contrasting partnerships, 1-15 107-112 333-336
proprietorships, and
corporations
Equity theories applied to 16-21 113-115 337-338
partnerships
Articles of partnership 22-25 116-117
Initial capital 26-28 118-119 275-277 339-340
contributions
Carrying value assigned 29-30 120 169 275-276
noncash assets
Tax basis assigned 31-33 121 276
noncash assets
Market value assigned 34-36 122 277
noncash assets
Liabilities assumed by 37-40 123 170 278 341
partnership
Partnership formation, 41-47, 124-126 171-173 279-280 342-343
bonus method 49
Partnership formation, 41-44, 127-129 174-176 281-282 344-345
goodwill method 48-50
Drawing accounts 51-53 130-132 346
Sharing profits and losses 54-55 133 347
Interest on capital 56-59 134, 136 177-178, 185, 283-284, 348-349
balances portion of profit 187 288-289
and loss allocation
Salary portion of profit 60-62 135, 137 185-186 288-289 350
and loss allocation
Bonus portion of profit 63-65 138-139 179-181, 185 285-286, 351
and loss allocation 288-289
Residual ratio portion of 66-71 140-142 182-187 287-289 352-353
profit and loss allocation
 Unrealized holding gains 72-74 143-144 188-205 290-295, 354-355
and losses 297
Changes in ownership 75-77 145 356
Admission of new partner 78-80 146-148 206-207 296-297 357-358
- no change in net assets
Admission of new partner 81-83 149-150 208-209 298-299, 359-361
- change in net assets - 302, 305,
revaluation of existing 308
assets
Admission of new partner 84-86 151-153 210-219 300-302 362-363
- bonus to existing
partners
Admission of new partner 87-89 154-155 220-230 303-305 364-365
- bonus to new partner
Admission of new partner 90-92 153, 156- 231-240 306-308 366-368
- goodwill to existing 157
partners
Admission of new partner 90, 93- 158-159 241-249 309-311 368-369
- goodwill to new partner 94
Withdrawal of partner - 95-100 160-162 250-253 312-317
revaluation of existing
assets
Withdrawal of partner - 95-97, 163-165 254-261 318-320 370-371
bonus method 101-103
Withdrawal of partner - 95-97, 166-168 262-274 321-332
goodwill method 104-106

True-False Statements

1. A partnership is an association of two or more investors to carry on as co-owners a

business for profit.

2. Only individuals are allowed to be partners in a partnership.

3. Proprietorships and partnerships are similar in that they are both easily formed.

4. Proprietorships and partnerships are different in that proprietors have unlimited legal
liability while each partner’s legal liability is limited to his/her percentage ownership in
the partnership.

5. A partner’s personal assets may be taken by creditors to pay partnership debts if the
partnership is unable to meet its obligations.
6. Partnerships are not required to prepare financial statements in accordance with
Generally Accepted Accounting Principles unless they have publicly traded debt or are
required to follow GAAP by a creditor.

7. For a partnership to get an unqualified audit opinion, the financial records must conform
to Generally Accepted Accounting Principles.

8. Most small partnerships maintain their financial information in accordance with

Generally Accepted Accounting Principles.

9. Tax authorities basically view partnerships and proprietorships as extensions of their

owners.

10. Partnerships are not required to pay any taxes.

11. The taxable income of all partners does not necessarily sum to the net income of the
partnership.

12. The only accounting difference that must exist between partnerships and corporations is
the reporting of the ownership equity.

13. The manner in which a partnership and a corporation are formed is very similar.

14. It is generally easier to transfer ownership interest in a corporate form of business than in
a partnership.

15. A partnership legally ceases to exist each time a new partner joins the partnership or an
existing partner leaves the partnership

16. The proprietary theory of equity is based on the notion that a business entity is distinct
from the owners.

17. The entity theory of equity is based on the notion that a business entity is distinct from
the owners.

18. An individual partner’s personal responsibility for partnership debts is an example of the
entity theory of equity.

19. The dissolution of a partnership because of the admission of a new partner or withdrawal
of an existing partner is an example of the proprietary theory of equity.

20. The fact that partnerships can enter into contracts is an example of the proprietary theory
of equity.

21. Contributed assets becoming property of the partnership is an example of the entity
theory of equity.
22. The Uniform Partnership Act is the basis for partnership laws in many states.

23. A written agreement is required to form a partnership.

24. When a partnership is formed without a written agreement, the state laws where the
partnership is formed will establish the legal relationship between partners.

25. All provisions of state partnership law must be applied when a partnership is formed.

26. Partners make contributions of equal size when forming a partnership

27. There are different ways the partnership can value noncash assets contributed to the
partnership.

28. Appraisals are not necessarily required when assigning value to noncash assets
contributed to the partnership.

29. Assigning a noncash asset the contributor’s carrying value could result in a misallocation
of gain or loss if the asset is sold.

30. An asset’s carrying value should not be considered when establishing the initial capital
accounts of partners.

31. The tax basis of contributed noncash assets must be used to determine partnership
income allocation for tax reporting purposes.

32. Partnerships are required to file an informational return (Form 1065) with the IRS
indicating the amount of partnership income allocated to each partner.

33. The income assigned to each partner for financial accounting purposes will equal the
partner’s partnership income included on the partner’s individual income tax return.

34. The market value of noncash assets contributed to the partnership may be used for
computing the partners’ taxable income.

35. A contributing partner’s capital account may be assigned the market value of noncash
assets contributed but a market value assignment is not required.

36. The market value of noncash assets contributed to a partnership is the only relevant value
when determining the partners’ beginning capital balances.

37. The assumption of a liability by the partnership with regard to a noncash asset
contributed to the partnership by a partner will affect the value assigned to the partner’s
capital account.
38. The tax basis of a noncash asset contributed to a partnership with an accompanying
liability will not change as a result of the contribution.

39. When a noncash asset is contributed to a partnership with an accompanying liability, the
book value of the asset must become the cost basis of the asset on the partnership’s
financial records.

40. The assumption of a liability related to a noncash asset contributed to a partnership

reduces the value contributed.

41. Initial partner capital balances must equal the sum of the net assets contributed to the
partnership by the partner.

42. Initial partner capital balances are determined by agreement among the partners.

43. Only tangible assets contributed to the partnership can be considered when creating
initial capital balances.

44. There are two ways to consider unidentifiable intangible assets contributed to a
partnership: the bonus method and the goodwill method.

45. The bonus method of recognizing unidentifiable intangible assets contributed at a

partnership’s formation does not result in a net increase in total owners’ equity.

46. The bonus method of recognizing unidentifiable intangible assets contributed at a

partnership’s formation has to make the capital account balances for all partners equal.

47. The bonus method of recognizing unidentifiable intangible assets contributed at a

partnership’s formation will result in all of the partner’s capital accounts increasing.

48. Application of the goodwill method when forming a partnership requires partners to
agree on the amount of goodwill to be assigned to a partner(s).

49. At the date the partnership is formed, the total partner capital will be the same regardless
of whether the bonus method or the goodwill method is used to recognize unidentifiable
intangible assets.

50. Goodwill can be assigned to more than one partner at the date the partnership is formed.

51. The ability of partners to withdraw resources from the partnership is controlled
exclusively by the laws of the state where the partnership resides.
52. The articles of partnership often control the size of withdrawals partners are allowed to
make.

53. If a partnership makes a payment on behalf of a partner, a withdrawal has occurred.

54. Partnerships are required to indicate the manner in which profits and losses are to be
allocated among the partners.

55. With the exception of the residual profit and loss ratio, partners can agree to apply profit
and loss allocation components in any order.

56. The interest component of partnership profit and loss allocation rewards the partner for
labor and expertise brought into the partnership.

57. The purpose of the interest on capital balances component of partnership profit and loss
allocation is to reward partners for contributing economic resources to the partnership.

58. The interest on capital balances component of partnership profit and loss allocation is
always based on each partner’s beginning or period capital balance.

59. The interest on capital balances component of partnership profit and loss allocation is
generally stated as a percentage of the capital balance.

60. The salary portion of the profit and loss allocation is set in the articles of partnership and
will not change over time.

61. The salary portion of the partnership profit and loss allocation is not included in the
partnership’s income statement.

62. The salary portion of the partnership profit and loss allocation is used to compensate
partners for the time and effort expected in the business.

63. Partnerships are required to have bonus clauses in the articles of partnership.

64. Bonus to partners can be based on any criteria on which the partners agree.

65. Partnership bonus arrangements must consider net income as part of the bonus
calculation.

66. A residual interest is always a component of partnership profit and loss allocation.

67. Partnership profit and loss residual percentages must be equal.

68. Partnership profit and loss residual percentages must be the same for profits as they are
for losses.
69. Partnership profit and loss residual percentages are used to allocate any remaining profit
or loss to partners after all other allocation components have been considered.

70. Partnership residual profit and loss percentages may be changed by agreement of the
partners.
71. Partnership residual profit and loss percentages do not have to be the last component
applied in the profit and loss allocation process.

72. When partnership profit and loss ratios are changed, the difference between market and
book values should be determined and allocated to partners based on the currently
existing profit and loss ratios.

73. Partnerships must revalue assets up and/or down when the profit and loss ratios are
adjusted.

74. When an error is discovered in the financial records of a partnership, it should be

corrected immediately. Allocation of any change to capital accounts as a result of an
error correction should be based on the profit and loss ratios that existed when the error
occurred.

75. The dissolution of a partnership occurs only when the partnership is terminating
operations and going out of business.

76. One reason a change in the number of partners in a partnership through the addition or
withdrawal of a partner is important because the partners have unlimited liability.

77. A new partner in a partnership accepts unlimited liability for actions that occurred before
that partner joined the partnership.

78. The admission of a new partner into a partnership can occur without any new assets
being invested into the partnership.

79. If a new partner is going to acquire an ownership interest in a partnership directly from
another partner, the other partners do not need to approve the admission.

80. If a new partner acquires 40 percent of an existing partner’s equity in the partnership, the
new partner is also entitled to 40 percent of the existing partner’s profit and loss
allocation.

81. When a new partner is joining a partnership by making a payment to the partnership for
an amount more than book value, the partners are required to choose one of three
methods of recording the new partner’s payment in excess of book value.

82. The revaluation of assets and liabilities at the date a new partner joins the partnership, by
investing assets directly into the partnership, does not eliminate the possibility that the
partnership might need to record bonuses or goodwill as part of the admission of the new
partner.

83. The amount that assets are revalued when a new partner joins a partnership is always
shared by existing partners equally.
84. If a new partner’s capital account is created for an amount less than the value of net
assets contributed, an error has been made in the partnership’s accounting records.

85. The recognition of a bonus to existing partners at the date a new partner is admitted to a
partnership often occurs in lieu of the recognition of goodwill for the existing partners.

86. The bonus recognized by existing partners when a new partner is admitted to a
partnership is commonly shared among the existing partners based on the existing
partners’ relative profit and loss residual ratios.

87. It is possible for a new partner’s capital account to be established at an amount greater
than the market value of the identifiable assets invested.

88. New partners are never recipients of bonuses when they join the partnership.

89. A bonus paid to a new partner results in a reduction to the capital accounts of the existing
partners in proportion to their profit and loss sharing ratios.

90. The goodwill method of admitting a new partner to a partnership results in greater total
assets than the bonus method of admitting a new partner.

91. When the goodwill method is applied to recognize the admission of a new partner and
the existing partners are responsible for the goodwill, the new partner’s capital account
will always be established equal to the amount of the contribution to the partnership.

92. The existing partners will always recognize goodwill when a new partner is admitted to
the company and the goodwill method is applied.

93. When the goodwill method is applied to recognize the admission of a new partner and
the new partner is responsible for the goodwill, the new partner’s capital account will be
established at the amount of the contribution.

94. When new partner goodwill is recognized at the date the partner joins the partnership, the
existing partners’ capital accounts do not change as a result of the new partner’s
admission

95. A partner may withdraw from a partnership at any time without notice given to the
existing partners.

96. A withdrawing partner may have his/her partnership interest acquired by an outside
investor agreed to by the remaining partners, the remaining partners, or the partnership.

97. If existing partners acquire a withdrawing partner’s equity, the existing partners must
purchase the withdrawing partner’s equity in proportion to their residual profit and loss
ratios.
98. The revaluation of assets when a partner withdraws from the partnership may be a
complete revaluation or a partial revaluation, reflecting the change in value with regard
to the withdrawing partner’s ownership interest.

99. A partnership’s assets must be revalued when a partner withdraws.

100. When a partnership’s assets are revalued at the date a partner withdraws from the
partnership, the withdrawing partner’s equity must be acquired by the partnership. It
cannot be acquired by an outside investor or the existing partners personally.

101. Withdrawing partners from a partnership may receive a bonus or pay a bonus to
remaining partners.

102. If the assets of a partnership are revalued at the date of a partner’s withdrawal, there can
be no bonus recorded.

103. A bonus can be recorded for a retiring partner only if the partnership acquires the equity
of the partner.

104. At the date a partner withdraws from a partnership, the partners must choose to either
recognize the goodwill with respect to the withdrawing partner or they can choose to
recognize all of the partnership’s goodwill.

105. Any goodwill recognized at the date a partner withdraws from a partnership is usually
allocated to partners based on their residual profit and loss ratios.

106. Partnerships may have both a revaluation of assets and liabilities as well as goodwill
recognition at the date a partner withdraws from a partnership.

True-False Statement Solutions

1. T
2. F, Individuals, partnerships, and corporations are allowed to be partners in a partnership.
3. T
4. F, All of the general partners are liable for all the partnership’s debts.
5. T
6. T
7. F, Partnerships may receive an unqualified audit opinion when using a comprehensive
basis of accounting other that accrual such as cash, modified accrual, or the tax basis.
8. F, Most small partnerships maintain their financial information using the tax basis.
9. T
10. F, While the partnership does not pay income taxes, it is responsible for other taxes such
as payroll taxes and franchise taxes.
11. T
12. T
13. F, Partnerships and corporations are formed by two are more parties. A written
agreement is not necessary and state approval is not required for a partnership but a
corporation must file articles of incorporation with the state to attain a corporate charter.
14. T
15. T
16. F, The proprietary theory is based on the notion that the business entity is an aggregation
of the owners
17. T
18. F, This is an example of the proprietary theory of equity.
19. T
20. F, This is an example of the entity theory of equity.
21. T
22. T
23. F, While a written agreement is generally recommended when forming a partnership, it is
not required.
24. T
25. F, Most provisions only apply if there is no agreement among the partners with regard to
that specific issue.
26. F, Initial capital contributions are determined by agreement among the partners and do
not have to be equal in size.
27. T
28. T
29. T
30. F, Any basis (i.e., carrying value, tax basis, or market value) can be used to value
noncash assets contributed to a partnership
31. T
32. T
33. F, There are numerous differences that can cause the income assigned to partners for
accounting purposes to differ from income assigned to partners for tax purposes such as
noncash assets contributed to the partnership valued at an amount different than the
contributing partner’s tax basis
34. F, The tax basis of noncash assets contributed to the partnership must be used to
determine taxable income.
35. T
36. F, Partners should agree on the method to be used to value noncash asset contributions
when preparing the articles of partnership. A variety of bases can be used and the market
value is one of the alternatives.
37. T
38. F, The amount of the liability assumed by the partnership, excluding the contributing
partners share of that liability, will reduce the tax basis of the asset contributed.
39. F, The assumption of a liability has no impact on the valuation approach by the
partnership.
40. T
41. F, The capital balances established can be any amounts agreed by the partners.
42. T
43. F, Partners may contribute tangible and intangible assets to the partnership. It is possible
to consider both when determining initial partnership capital account balances.
44. T
45. T
46. F, The bonus method reallocates the total partnership capital among the partners’ capital
based on the agreed value of unidentifiable intangible assets contributed. Capital
accounts do not have to be the same when the process is completed.
47. F, The bonus method reallocates the total partnership capital among the partners based on
the agreed value of unidentifiable intangible assets contributed. It will always result in
one or more partner’s capital accounts decreasing while the remaining partner(s) capital
accounts increase.
48. T
49. F, The goodwill method requires an additional asset (Goodwill) to be recognized on the
balance sheet. As a result, the partners’ capital accounts will be greater in aggregate.
The bonus method results in a reallocation of capital among the partners and does not
result in a change in total partnership capital.
50. T
51. F, While states may have laws indicating that the partners cannot withdraw resources and
make the partnership insolvent, withdrawals are typically controlled by the articles of
partnership.
52. T,
53. T
54. F, If the partnership agreement is silent with regard to profit and loss allocation, profits
and losses are shared equally.
55. T
56. F, The interest component of partnership profit and loss allocation rewards partners for
capital contributions.
57. T
58. F, The interest on capital balances component of partnership profit and loss allocation
may be based on the beginning, ending, simple average capital balance, or weighted
average capital balance.
59. T
60. F, The salary component of the partnership profit and loss allocation would be expected
to be renegotiated periodically as the duties of the partners change.
61. T
62. T
63. F, Partnerships can offer bonuses to anyone. The choice is up to the partners. On the
other hand, there is no requirement to ever offer a bonus.
64. T
65. F, While many bonuses are based on a measure of income, it is not required. Bonus can
be based on other criteria such as market share, revenue, or average cost per unit.
66. T
67. F, Residual interests may be equal but they are not required to be equal.
68. F, While profit residual ratios and loss residual ratios are generally the same, they can
differ.
69. T
70. T
71. F, Residual profit and loss percentages are the last component of the profit and loss
allocation process applied because they are designed to allocate any remaining amount to
the partners.
72. T
73. F, There are several ways that the difference between market and book value of assets
can be addressed when the profit and loss ratios are changed. Revaluing the assets is one
of the possibilities along with maintaining a record of assets with market and book value
differences as well as directly adjusting capital accounts while leaving asset values
unchanged.
74. T
75. F, A dissolution occurs every time there is a change in relationship among the partners.
This can occur when a new partner enters the partnership or an existing partner leaves the
partnership. A dissolution occurs when the partnership is going out of business but the
termination of business is not a requirement for a dissolution.
76. T
77. F, A new partner's liability for actions that occurred before joining the partnership is
limited to the amount invested in the partnership.
78. T
79. F, Regardless how a new partner enters a partnership, the other partners have to approve
the admission because they must accept unlimited liability due to actions of the new
partner taken on behalf of the partnership.
80. F, There is no necessary relationship between the percentage of equity acquired and the
amount of profit or loss received. These are separate contractual issues.
81. F, There are three methods that may be used when a new partner is paying an amount
more than book value for the investment: revaluation of existing assets, bonus method,
and goodwill method. The partners do not have to choose one method. It would not be
inconsistent to revalue the assets and apply either the bonus or the goodwill method to
record the investment.
82. T
83. F, Existing partners share the difference between market value and book value equally if
that is the manner in which profits and losses are shared. If profits and losses are shared
in some other manner, then the difference between market and book values are shared in
that manner.
84. F, While it is possible that an error has been made, it is more likely that the existing
partners recognized an increase in their capital accounts via a bonus. The difference
between the amount credited to the new partner’s capital account and the amount
invested is shared by the existing partners.
85. T
86. T
87. T
88. F, New partners may receive a bonus if they bring value to the partnership in excess of
the tangible assets invested. This additional amount may be from such things as
expertise, experience, or business contacts. The bonus allocated to the new partner is
payment for these types of unidentifiable assets contributed to the partnership.
89. T
90. T
91. T
92. F, Goodwill may be recognized with regard to the existing partners but it may also be
recognized with regard to the new partner.
93. F, When goodwill is recognized with regard to the new partner, the new partner’s capital
account will be greater than the amount invested by the recognized goodwill.
94. T
95. F, The articles of partnership may include an agreement on the length of advanced notice
a partner must give before withdrawing from a partnership. Failure to provide the agreed
notice may result in the withdrawing partner being liable for damages suffered by the
partnership.
96. T
97. F, If existing partners acquire a withdrawing partner’s equity, they can divide the
purchase of that equity among themselves in any manner they choose.
98. T
99. F, Partnership assets may be revalued but they may also remain at their carrying value.
100. F, The revaluation of the partnership’s assets is unrelated to the purchase of the
withdrawing partners ownership interest in the partnership.
101. T
102. F, The revaluation of partnership assets at the time of a partner’s withdrawal has no
impact on the recognition of a bonus or goodwill.
103. T
104. F, While the partners can recognize either the withdrawing partner’s goodwill or the
entire partnership’s goodwill, there is no requirement to recognize any goodwill when a
partner withdraws from a partnership.
105. T
106. T

Conceptual Multiple Choice Questions

107. Which of the following is not a reason for forming a partnership?

a. Combine economic resources
b. Share managerial talent
c. Avoid complicated tax laws
d. Undertake a specific business objective

108. Which of the following business entity forms is (are) required to maintain their financial
information in accordance with Generally Accepted Accounting Principles?
a. Corporations
b. Corporation and Partnership
c. Partnership and Proprietorships
d. Corporation, Partnerships, and Proprietorships

109. Which of the following statements is not true with regard to tax issues of partnerships?
a. Partnerships are viewed as an extension of the owners
b. Partnerships are required to pay some forms of taxes
 c. The IRS must be informed as to the manner partnership income is allocated to the
partners
d. All of the above are true

110. Which of the following is not a similarity that exists between proprietorships and
partnerships?
a. Neither requires approval by a state to form
b. Both can use an accounting method that does not conform to GAAP
c. Owners put the company’s income on the owner’s individual tax return
d. All of the above are similarities of proprietorships and partnerships

111. Which of the following is not an area where there are differences when comparing
partnerships and corporations?
a. The ease of formation
b. The level of owner legal liability
c. The ease of ownership transferability
d. All of the above are areas where partnerships and corporations differ

112. Which of the following is not a difference when comparing partnerships and
corporations?
a. Corporations must conform to GAAP whereas partnerships are not required to
conform to GAAP
b. Partnerships and corporations neither are required to attain state approval to form
c. Partners have unlimited liability while corporation shareholders generally do not
have unlimited liability
d. Corporations are required to pay income tax while partnerships are not required to
pay income taxes

113. What theory of equity is applicable for partnerships?

a. Proprietary theory
b. Entity theory
c. A mix of proprietary and entity theory
d. Partnership theory

114. Which of the following is not an example of the proprietary theory of equity?
a. Partners do not have claims to specific assets
b. Individual partners are liable for all debts of the partnership
c. A partner’s income tax includes the partner’s share of partnership net income, and
the partnership does not pay income taxes
d. Salaries of partners are viewed as distributions of income, not components of net
income

115. Which of the following is not an example of the entity theory of equity?
a. Continuity of the partnership when admission or withdrawal of partners occurs
b. A partnership can enter into contracts
 c. Assets contributed to the partnership retain the existing tax basis to the partner
contributing
d Partnership creditors have priority claim to partnership assets and the creditors of
partners have priority claim to the partner’s assets in the event of liquidation

116. Which of the following statements is not true with regard to articles of partnership?
a. Written articles of partnership are not required to form a partnership
b. The Uniform Partnership Act provides a list of items that must be included in
articles of partnership
c. A written partnership agreement enables the partners to detail the agreed working
relationship among the partners
d. State law applies only if there is not agreement among the partners with regard to
that specific issue

117. When a partnership agreement is silent with regard to any aspect of a partnership
operation, who/what decides on that aspect of the partnership’s operations?
a. State law
b. Uniform Partnership Act
c. Majority vote of stockholders
d. Decision by senior partner

118. Which of the following valuation amounts is not allowed when assigning values to
noncash assets in a partnership formation?
a. Contributor’s carrying value
b. Contributor’s tax basis
c. Market (appraised) value
d. All of the above valuation amounts are allowed

119. Which of the following statements is correct with regard to the creation of initial capital
account balances on a partnership’s financial records?
a. The capital accounts can be created for any dollar amount agreed by all partners
b. The market value of noncash assets must be considered when creating the initial
capital balances
c. Each partner’s capital account must have a non-zero value assigned to it
d. All of the above statements are correct

120. Which of the following statements is not true with regard to assigning the carrying value
of noncash assets contributed to those assets at the date of a partnership’s formation?
a. Use of the noncash asset’s historical cost can result in the misstatement of the
partners’ capital accounts
b. Assigning the historical cost to noncash assets contributed to a partnership may
require the partnership agreement to address profit/loss distribution that will
occur when the contributed asset is sold
c. Assigning the historical cost to noncash assets contributed to a partnership will
not cause partner taxable income to differ from the partner’s share of partnership
income
 d. All of the above statements are correct

121. Which of the following statements is true with regard to assigning a noncash asset
contributed to a partnership the tax basis of the contributing partner?
a. The tax basis of noncash assets contributed must be used if the partnership is a
taxable entity
b. The tax basis must be considered when determine each partner’s allocation of
taxable partnership income
c. The contributing partner’s tax basis may not be used for financial accounting
records
d. None of the above statements are true

122. Which of the following statements is not true with regard to assigning the market value
of noncash assets contributed to those assets at the date of a partnership’s formation?
a. Gains or losses would likely not be recorded if the asset were sold at the date for
partnership is formed
b. The contributing partner’s share of the partnership’s income would be adjusted by
the difference between the market value and tax basis at the date the asset is
contributed to the partnership
c. The market value is the most commonly assigned value to contributed noncash
assets
d. All of the above statements are correct

123. Which of the following statements is correct with regard to the contribution of assets and
associated liabilities to a partnership?
a. Liabilities associated with assets contributed to a partnership remain the liability
of the contributing partner
b. Liabilities associated with assets contributed to a partnership become the liability
of the partnership
c. Liabilities associated with assets contributed to a partnership become the liability
of both the contributing partner and the partnership
d. Assets may not be contributed to a partnership if there is a liability associated
with the asset

124. The bonus method of recognizing unidentifiable intangible asset contributions to a

partnership does which of the following?
a. It recognizes that partners may contribute more than the observable assets to the
partnership
b. It increases total partnership capital
c. Can only increase partner capital accounts
d. b and c are correct

125. This method of recognizing unidentifiable intangible assets does not result in a change to
total contributed capital.
a. Goodwill method
b. Bonus method
 c. Reciprocal method
d. None of these methods will result in a change to total contributed capital

126. When can the bonus method be applied?

a. When a partnership is formed
b. When a new partner is added to the partnership
c. When an existing partner retires from the partnership
d. The bonus method can be applied in all three of the above circumstances

127. Shawn, Harris, and Derek are forming a partnership. The partners agree that Harris
should be assigned goodwill because of his knowledge of the business. Which partners’
capital accounts will have the dollar assigned dollar amounts altered due to the
recognition of the goodwill?
a. Shawn
b. Harris
c. Derek
d. All dollar amount assigned to all three partners’ capital accounts will be altered.

128. This method of recognizing unidentifiable intangible assets results in a change to total
contributed capital.
a. Goodwill method
b. Bonus method
c. Reciprocal method
d. None of these methods will result in a change to total contributed capital

129. The goodwill method always results in which of the following?

a. A change in the dollar value assigned to two or more partners’ capital accounts
b. A decrease in a partner’s capital account
c. An increase in a partner’s capital account
d. An increase in a partner’s capital account and a decrease in at least one partners’
capital account

130. For what purpose(s) might a drawing account be used for a partnership?
a. To keep a list of business contacts made by a partner
b. To recognize a loan made to a partner
c. To recognize inventory removed from the partnership by the partner
d. None of the above ore possible uses of a drawing account

131. Which of the following is not a withdrawal that may be found in a partnership’s drawing
account?
a. Removal of cash by a partner
b. Payment of a partner’s speeding ticket by the partnership
c. Removal of inventory by a partner
d. All of the above may be found in a drawing account
132. Which of the following statements is correct with regard to drawing accounts that may be
used by a partnership?
a. Drawing accounts are closed to the partners’ capital accounts at the end of the
accounting period
b. Drawing accounts establish the amount that may be taken from the partnership by
a partner in a given time period
c. Drawing accounts are similar to Retained Earnings in a corporation
d. Drawing accounts appear on the balance sheet as a contra-equity account

133. Which of the following should not be done by the accountant with regard to partnership
profit and loss allocation?
a. Prepare an analysis of alternative methods to allocate profits and losses
b. Recommend a particular method for allocating profits and losses
c. Inform partners of different ways that profits and losses could be allocated
d. All of the above are reasonable duties of the accountant

134. What is the underlying purpose of the interest on capital balances component of
allocating partnership profits and losses?
a. Compensate partners who contribute economic resources to the partnership
b. Reward labor and expertise contributions
c. Reward for special responsibilities undertaken
d. None of the above

135. What is the underlying purpose of the salary component of allocating partnership profits
and losses?
a. Compensate partners who contribute economic resources to the partnership
b. Reward labor and expertise contributions
c. Reward for special responsibilities undertaken
d. None of the above

136. Which of the following interest component calculation bases is least susceptible to
manipulation when allocating profits and losses to partners?
a. Beginning capital account balance
b. Average of beginning and ending capital account balances
c. Weighted average capital account balance
d. Ending capital account balance

137. Which component of the partnership profit and loss allocation compensates partners for
the routine time and effort expended in the business?
a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest

138. Which component of the partnership profit and loss allocation is most commonly offered
to the partner who manages the business?
 a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest

139. Which of the following may be a basis for determining the amount of a partner’s bonus?
a. Operating income
b. Market share
c. Average cost per unit
d. All of the three may be bases for determining the amount of a partner’s bonus

140. Which component of the partnership profit and loss allocation must be performed last?
a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest

141. Which of the following statements is true with regard to partnership residual profit and
loss ratios?
a. A partner’s residual profit ratio must be the same as the loss ratio
b. Residual profit and loss ratios can be changed by agreement
c. The residual profit and loss ratio must always be applied
d. All of the above are true statements

142. Applying the partnership residual profit and loss ratio can have which of the following
effects on a partner’s allocation of profit and/or loss?
a. Increase
b. Decrease
c. Increase or decrease
d. The residual profit and loss ratio is not used for the allocation or profit and/or loss

143. Which of the following should be done when the partnership profit and loss ratios are
changed?
a. The book and market value of assets and liabilities should be evaluated
b. The capital accounts should be modified to reflect the new profit and loss ratios
c. The creditors should be informed that the profit and loss ratios have been changed
d. The partners must draft new articles of partnership.

144. Which of the following is not a common way to address the difference between market
and book values of assets and liabilities when the partnership profit and loss ratios are
changed?
a. Assets and liabilities are revalued to market value
b. Assets with a difference between market and book value are sold and the profit is
distributed to partners based on existing profit and loss ratios
c. A list of differences between market value and book value are made
 d. Capital accounts of the partners are altered to reflect the difference between
market and book values at the date the profit and loss ratios change

145. Which of the following occurs every time a new partner is admitted to a partnership or an
existing partner leaves the partnership?
a. Dissolution
b. Termination
c. Dissolution and termination
d. None of the above occurs

146. Which of the following forms of new partner admission will not result in a change in the
partnership’s net assets?
a. Purchase of an ownership interest directly from the partnership
b. Purchase of an ownership interest directly from an existing partner
c. Either of the above
d. Neither of the above

147. Which of the following must occur for a new partner to enter the partnership by
acquiring an ownership interest directly from an existing partner?
a. Existing partners must know the amount the new partner is paying for the
ownership interest
b. The new partner must acquire all of the current partner’s ownership interest
c. Existing partners must approve the admission of the new partner into the
partnership
d. The new partner must live in the same state as the other partners

148. Which of the following must be true when a new partner acquires an ownership interest
directly from an existing partner?
a. Capital must be assigned to the new partner
b. The new partner’s profit and loss allocation must be proportionate to the capital
account balance
c. The new partner must be allocated some amount of profit and loss
d. The existing partners must provide a list of all the partnership’s outstanding
liabilities to the new partner

149. When a new partner joins a partnership by investing assets into the partnership, what
method may be used to record the admission of the new partner?
a. Revaluation of existing assets
b. Recognition of goodwill
c. Application of the bonus method
d. Any of the three or a combination may be applied

150. Which of the following is a reason to not revalue partnership assets at the date a new
partner is admitted to the partnership?
a. There has been a change in ownership
b. A new legal entity exists
 c. The partnership has not ceased operations
d. All three are reasons to not revalue partnership assets at the date of a new
partner’s admission

151. A bonus is recognized by existing partners at the date a new partner joins a partnership
when which of the following relationships occur?
a. The new partner’s contribution exceeds his/her percentage of total partnership
capital after the investment is made
b. The new partner’s contribution is less than his/her percentage of total partnership
capital after the investment is made
c. The new partner’s contribution is equal to his/her percentage of total partnership
capital after the investment is made
d. It is not possible to determine the answer to this question

152. Which of the following is not a criterion for recognizing a bonus to existing partners
when a new partner joins the partnership?
a. Only cash assets were contributed to the partnership by the new partner
b. The existing partners desire to not recognize goodwill on the balance sheet
c. The articles of partnership indicate that the bonus method will be used to admit
new partners
d. The new partner invests more into the partnership that his/her share of total
partnership capital after the investment is made

153. Which method of recording the admission of a new partner into a partnership potentially
results in the existing partners’ capital accounts changing in value?
a. Bonus method
b. Goodwill method
c. Either bonus method or goodwill method
d. Existing partners’ capital accounts never change when a new partner is admitted
into a partnership.

154. A bonus recognized by a new partner at the date of admission into the partnership is
generally shared by the existing partners in what way?
a. Equally
b. In proportion to capital account balances
c. In proportion to profit and loss residual ratios
d. In proportion to salaries

155. Which of the following is not a criterion for recognizing a bonus to a new partner when
the new partner joins the partnership?
a. Only cash assets were contributed to the partnership by the new partner
b. The existing partners desire to not recognize goodwill on the balance sheet
c. The articles of partnership indicate that the bonus method will be used to admit
new partners
d. The new partner invests less into the partnership that his/her share of total
partnership capital after the investment is made
156. When the goodwill method of recognizing the admission of a new partner is applied and
the existing partners contribute the goodwill, which of the following will result?
a. An increase in the capital accounts of existing partners
b. A decrease in the amount invested by the new partner
c. A decrease in the partnership’s total assets
d. A new partner’s capital account less than the amount invested

157. Which of the following will occur when the existing partners contribute goodwill and a
new partner is admitted to the partnership?
a. The existing partner’s capital accounts will be decreased
b. The existing partner will receive cash from the partnership
c. The partnership’s total assets will be increased
d. The new partner will be required to reduce his/her profit and loss sharing ratio

158. Which of the following statements is false with regard to the goodwill recognized for a
new partner entering a partnership?
a. The new partner’s capital account balance will exceed the amount invested
b. The existing partners’ capital accounts will remain unchanged
c. The amount invested by the new partner will be less than his/her proportion of the
partnership’s book value before goodwill is recognized
d. The three partners will have equal capital account balances when the transaction
is completed

159. Which of the following statements presents a reason that goodwill may be recorded with
regard to a new partner at the date of that partner’s admission to the partnership?
a. The existing partnership is worth more than the appraised value of the tangible
net assets
b. The new partner has a strong desire to become a member of the partnership
c. The total value of the new partner’s contribution to the partnership is greater than
the value of the identifiable net assets contributed
d. The new partner’s residual interest in profits and losses is greater than 30 percent

160. What portion of the partnership’s assets must be revalued when a partner withdraws from
the partnership?
a. The withdrawing partner’s share must be revalued
b. All of the partnership’s assets must be revalued
c. Any or all of the partnership’s assets may be revalued but none have to be
revalued
d. Partnership assets may not be revalued when a partner withdraws

161. Who may acquire the ownership interest of a partner who is withdrawing from a
partnership?
a. Existing partners
b. New investor
c. The partnership
 d. All of the above

162. If existing partners acquire the equity of a withdrawing partner, in what manner do they
divide the equity?
a. In any manner they choose
b. Equally
c. Proportionate to their residual profit and loss ratios
d. Existing partners are not permitted to acquire the equity of a withdrawing partner

163. Which of the following must exist to create the potential for a retiring partner to have a
bonus recognized at the date of withdrawal?
a. The retiring partner must be paid more than the book value of his equity
b. The existing partners must decide to not admit a new partner to the partnership
c. The retiring partner’s equity must be acquired by the partnership
d. All of the above are necessary for a bonus to be recognized

164. In what manner do the remaining partners share in the bonus paid to a withdrawing
partner?
a. In proportion to their residual profit and loss ratios
b. Equally
c. In proportion to their capital account balances
d. The partner with the greatest capital account is assigned the bonus

165. Which of the following statements is true with regard to a withdrawing partner?
a. A bonus must be paid to the retiring partner
b. A bonus may be paid to the retiring partner
c. A bonus must be paid to the retiring partner or to the remaining partners
d. Recognizing a bonus is not appropriate when a partner retires

166. What change occurs to continuing partners’ capital accounts when a withdrawing partner
is assigned goodwill at the date of withdrawal?
a. Continuing partners’ capital accounts decease by their profit and loss ratio
proportion of the goodwill assigned to the withdrawing partner
b. Continuing partners’ capital accounts increase
c. Continuing partners’ capital accounts do not change
d. Goodwill cannot be recognized with regard to withdrawing partners

167. What amount of goodwill can be recognized at the date a partner withdraws from a
partnership?
a. The withdrawing partner’s portion of goodwill
b. The continuing partners’ portion of goodwill
c. Goodwill may not be recognized at the date a partner withdraws
d. Either the withdrawing partner’s portion of goodwill or the goodwill attributable
to the entire partnership
168. Which of the following will occur when the goodwill method is used to recognize the
withdrawal of a partner?
a. The partnership must acquire the equity of the withdrawing partner
b. The withdrawing partner will be paid the book value of his/her equity after the
goodwill is recognized
c. The existing partners will divide the salary of the withdrawing partner
d. The total equity of the partnership will not change as a result of the partner’s
withdrawal

Conceptual Multiple Choice Question Difficulty and Solutions

107. easy c
108. moderate a
109. moderate d
110. easy d
111. easy d
112. moderate b
113. moderate c
114. difficult a
115. difficult c
116. moderate b
117. moderate a
118. easy d
119. moderate a
120. difficult c
121. moderate b
122. moderate d
123. easy b
124. easy a
125. easy b
126. moderate d
127. easy b
128. easy a
129. moderate c
130. easy c
131. moderate d
132. moderate a
133. easy b
134. easy a
135. easy b
136. easy c
137. easy c
138. easy b
139. moderate d
140. easy d
141. moderate b
142. easy c
143. moderate a
144. easy b
145. easy a
146. easy b
147. easy c
148. moderate c
149. easy d
150. moderate c
151. moderate b
152. easy a
153. easy c
154. easy c
155. easy a
156. moderate a
157. easy c
158. easy d
159. moderate c
160. easy c
161. easy d
162. moderate a
163. moderate d
164. easy a
165. easy b
166. easy c
167. easy d
168. easy b

Computational Multiple Choice Questions

169. Paul, Jeremy, and Juan are forming a partnership. Juan contributes a building having an
historical cost, accumulated depreciation, and market value of $290,000, $100,000, and
$400,000, respectively. The building is initially recorded on the partnership’s books at
Juan’s book value ($190,000). Two years later the building is sold for a $270,000 gain.
What portion of the profit or loss should be allocated to Juan?
a. $20,000
b. $230,000
c. $210,000
d. $90,000

170. Philip, Ray, and Sarah are forming a partnership. Philip contributes cash of $100,000;
Ray contributes inventory with a value of $100,000; and Sarah contributes a building
with a market value of $300,000. The partnership also assumed the $210,000 mortgage
on the building. What is the amount of capital assigned to each partner?
Philip Ray Sarah
a. $30,000 $30,000 $230,000
b. $56,000 $56,000 $174,000
 c. $100,000 $100,000 $90,000
d. $100,000 $100,000 $300,000

171. Max, Ike, and Tony are forming a partnership. The appraised value of assets contributed
is $60,000, $80,000, and $100,000, respectively. In addition, Max and Tony agree that
Ike’s experience is worth $30,000. The partners desire to apply the bonus method where
applicable. What is the total capital recorded at the date the partnership is formed?
a. $210,000
b. $240,000
c. $270,000
d. Some other dollar amount

172. Richardson, Peterson, and Wilkerson are forming a partnership. The partners contribute
cash and noncash assets valued at $30,000, $50,000, and $25,000, respectively. The
partners choose to apply the bonus method where applicable. If the partners agree to
establish equal capital account balances when the partnership is formed, how much of a
bonus is received by Richardson?
a. $15,000
b. $10,000
c. $5,000
d. Richardson does not receive a bonus

173. Richardson, Peterson, and Wilkerson are forming a partnership. The partners contribute
cash and noncash assets valued at $30,000, $50,000, and $25,000, respectively. The
partners choose to apply the bonus method where applicable. If the partners agree to
establish equal capital account balances when the partnership is formed, how much
capital is Peterson sacrificing to give a bonus to Richardson and Wilkerson?
a. $15,000
b. $10,000
c. $5,000
d. Richardson does not receive a bonus

174. Albert, Claude, and Jamie form a partnership by contributing $25,000, $70,000, and
$80,000, respectively. In addition, the partners agree that Albert should receive $20,000
of goodwill because of his special skills relevant to this business. What amount of
capital will exist for Albert when the partnership is formed?
a. $20,000
b. $25,000
c. $65,000
d. $45,000

175. Albert, Claude, and Jamie form a partnership by contributing $25,000, $70,000, and
$80,000, respectively. In addition, the partners agree that Albert should receive $20,000
of goodwill because of his special skills relevant to this business. What amount of
capital will exist for Claude when the partnership is formed?
a. $60,000
 b. $65,000
c. $70,000
d. Some other amount

176. Chris and David are forming a partnership with contributions of $75,000 and $125,000,
respectively. In addition, they agree that they will recognize $25,000 goodwill with
regard to David’s contacts in the area. What is the total amount of capital that will exist
for the partnership immediately after it is formed?
a. $75,000
b. $125,000
c. $150,000
d. $225,000

177. Chris is a partner in a local partnership. The profit and loss sharing agreement includes
an interest allocation of 7 percent on the invested capital. The capital account of Chris
reveals that he had a beginning capital account balance of $50,000. He withdrew
$10,000 on May 1 and invested $25,000 on October 31. Rounded to the nearest dollar,
what is Chris’ weighted average capital balance?
a. $57,500
b. $51,667
c. $47,500
d. $28,333

178. Richard is a partner in a local partnership. The profit and loss sharing agreement
includes an interest allocation of 8 percent on the invested capital. Richard had a
beginning capital balance of $60,000. He invested $30,000 on March 1, withdrew
$20,000 on August 1, and invested $40,000 on December 1. Rounded to the nearest
dollar, what dollar amount is allocated to Richard as interest on capital balance if the
weighted average capital balance is used as the basis of the computation?
a. $82,500
b. $6,400
c. $80,000
d. $6,600

179. Shawn is a managing partner in a local business. Part of his profit allocation is a bonus
based on the store’s operating income. The bonus is 8 percent of operating income in
excess of $200,000 after deducting the bonus. If operating income for the year is
$250,000, what is Shawn’s bonus (rounded to the nearest dollar)?
a. $3,703
b. $40,000
c. $20,000
d. $4,000

180. James has a bonus as part of his partner profit allocation. The bonus is based on the
partnerships net income. James receives a bonus equal to 5 percent that the net income
 exceeds $150,000. If the net income in the current year is $180,000, how much bonus
does James receive?
a. $30,000
b. $7,500
c. $1,500
d. $9,000

181. Cheryl is the manager of a local store. She is also a partner in the company and she
receives a bonus as part of the profit and loss allocation. Cheryl’s bonus is based on the
increase in revenues recorded during the period. The bonus arrangement is that Cheryl
receives 1 percent of net income for every full percentage point growth for revenues in
excess of a 5 percent revenue growth. During the most recent period, revenues grew
from $500,000 to $540,000 and net income grew from $98,000 to $120,000. How much
bonus does Cheryl receive for this period?
a. $2,000
b. $1,100
c. $6,000
d. $3,600

182. Norman, Sarah, and Taylor are partners. The partnership income for the period is
$130,000. The partnership agreement assigns salaries to the partners of $10,000,
$15,000, and $18,000, respectively. In addition, the partners have profit and loss
residual ratios of 30%, 45%, and 25%. What is the amount of profit and loss allocated to
Sarah as a result of applying the residual ratios?
a. $39,150
b. $54,150
c. $58,500
d. $51,750

183. Jim and Scott are partners who have residual profit and loss ratios of 55% and 45%,
respectively. The partnership has income of $60,000 for the current period. How much
of this income is allocated to Scott?
a. $30,000
b. $33,000
c. $14,850
d. $27,000

184. Mike and Michelle are partners in a local business. The business has a $25,000 loss this
year. How much of this loss is allocated to Mike?
a. $12,500
b. $0
c. $25,000
d. Losses cannot be allocated without residual profit and loss ratios
185. Nick, Joe, and Mike are partners. The company has $150,000 net income for the period.
How is this income divided to the partners if the following profit and loss allocation
process is followed?
Nick Joe Mike
Weighted average capital $200,000 $350,000 $180,000
Salary 25,000 15,000 35,000
Bonus .1 (NI - $100,000)
Residual profit/loss ratios .25 .45 .30
Return on invested capital 9%

Nick Joe Mike

a. $43,000 $46,500 $60,500
b. $45,325 $50,685 $53,990
c. $50,000 $50,000 $50,000
d. $44,075 $48,435 $57,490

186. Harriet, Bob, and Tim are partners. Income for the current year is $500,000. The profit
and loss agreement states that salaries are $35,000, $50,000, and $40,000, respectively.
In addition, the residual profit and loss ratios are 40%, 30%, and 30%, respectively.
How much of the profit is allocated to Harriet?
a. $150,000
b. $185,000
c. $162,500
d. $152,500

187. Suzanne, Thomas, and Vicky are partners. They have average capital account balances
of $200,000, $250,000, and $400,000, respectively. In addition, they have residual profit
and loss ratios of 15%, 25%, and 60%, respectively. If income for the year is $300,000
and the partners earn 8 percent return on invested capital, how much will be allocated to
Thomas?
a. $78,000
b. $100,000
c. $50,800
d. $171,200

188. Johnson and Pritchard are partners. They are changing the profit and loss ratios from the
current 60/40 to 70/30. At the date of the change, vacant land owned by the partnership
has a book value of $50,000 and a market value of $60,000. The partners choose to
prepare an itemized list of assets with market values different from book values. If the
land is sold in the future for $80,000, how much of the gain will be assigned to Johnson?
a. $21,000
b. $18,000
c. $27,000
d. $20,000
189. Johnson and Pritchard are partners. They are changing the profit and loss ratios from the
current 60/40 to 70/30. At the date of the change, vacant land owned by the partnership
has a book value of $50,000 and a market value of $60,000. The partners choose to
prepare an itemized list of assets with market values different from book values. If the
land is sold in the future for $80,000, how much of the gain will be assigned to
Pritchard?
a. $12,000
b. $10,000
c. $9,000
d. $13,000

190. Karen and Andrea are currently changing their partnership profit and loss ratios from
75/25 to 60/40. They have created a list of assets that have market and book value
differences. One of the assets is a building with a $300,000 market value and $200,000
book value. Two years after changing the profit and loss ratios, the building is sold for
$380,000. How much of the profit is allocated to Karen?
a. $135,000
b. $108,000
c. $123,000
d. $183,000

191. Karen and Andrea are currently changing their partnership profit and loss ratios from
75/25 to 60/40. They have created a list of assets that have market and book value
differences. One of the assets is a building with a $300,000 market value and $200,000
book value. Two years after changing the profit and loss ratios, the building is sold for
$380,000. How much of the profit is allocated to Andrea?
a. $57,000
b. $45,000
c. $72,000
d. $97,000

192. Peter and Ronald are partners. They have shared profits and losses 65/35 for a number of
years. Peter has indicated that he is going to reduce his involvement in the partnership so
the profit and loss ratio is being modified to 45/55. At the date of the change in the
profit and loss ratio, the partnership own vacant land with a market value of $300,000
and a book value of $100,000. Peter and Ronald compile a list of assets with market and
book value differences. Two years after the change in the profit and loss ratios, the land
is sold for $450,000. How much of the gain is allocated to Peter?
a. $197,500
b. $227,500
c. $157,500
d. $287,500

193. Peter and Ronald are partners. They have shared profits and losses 65/35 for a number of
years. Peter has indicated that he is going to reduce his involvement in the partnership so
the profit and loss ratio is being modified to 45/55. At the date of the change in the
 profit and loss ratio, the partnership own vacant land with a market value of $300,000
and a book value of $100,000. Peter and Ronald compile a list of assets with market and
book value differences. Two years after the change in the profit and loss ratios, the land
is sold for $450,000. How much of the gain is allocated to Ronald?
a. $122,500
b. $192,500
c. $152,500
d. $262,500

194. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
changed, the land is sold for $200,000. What is the amount of change to Jennifer’s
capital account at the date the land is revalued?
a. $72,000
b. $42,000
c. $30,000
d. $28,000

195. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
changed, the land is sold for $200,000. What is the amount of change to Robert’s capital
account at the date the land is revalued?
a. $72,000
b. $42,000
c. $30,000
d. $28,000

196. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
changed, the land is sold for $200,000. What is the amount of change to Jennifer’s
capital account at the date the land is sold?
a. $48,000
b. $67,500
c. $31,500
d. $36,000

197. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
 changed, the land is sold for $200,000. What is the amount of change to Robert’s capital
account at the date the land is sold?
a. $44,000
b. $82,500
c. $32,000
d. $60,000

198. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to James’
capital account at the date the building is revalued?
a. $105,000
b. $91,000
c. $45,000
d. $39,000

199. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to Bruce’s
capital account at the date the building is revalued?
a. $105,000
b. $91,000
c. $45,000
d. $39,000

200. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to James’
capital account at the date the building is sold?
a. $91,000
b. $78,000
c. $39,000
d. $52,000

201. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
 different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to Bruce’s
capital account at the date the building is sold?
a. $91,000
b. $78,000
c. $39,000
d. $52,000

202. Theresa and Craig are partners. Their current profit and loss ratios (70/30) are being
changed to (60/40). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, land has a market value of
$250,000 and a book value of $120,000. How much will Theresa’s capital account be
adjusted at the date of the change in the profit and loss ratios?
a. $52,000 increase
b. $13,000 increase
c. $52,000 decrease
d. $13,000 decrease

203. Theresa and Craig are partners. Their current profit and loss ratios (70/30) are being
changed to (60/40). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, land has a market value of
$250,000 and a book value of $120,000. How much will Craig’s capital account be
adjusted at the date of the change in the profit and loss ratios?
a. $52,000 increase
b. $13,000 increase
c. $52,000 decrease
d. $13,000 decrease

204. Eric and Phillip have been partners for several years. During that time they have shared
profits and losses (60/40). They are currently revising the profit and loss ratios to
(70/30). Eric and Phillip decide to adjust the capital accounts at the date of the change to
reflect the difference between market value and book value of assets and liabilities. At
the date of the change, the partnership owns a building with a book value of $350,000
and a market value of $600,000. How much will Eric’s capital account be adjusted at the
date of the change in the profit and loss ratios?
a. $25,000 increase
b. $50,000 increase
c. $25,000 decrease
d. $50,000 decrease

205. Eric and Phillip have been partners for several years. During that time they have shared
profits and losses (60/40). They are currently revising the profit and loss ratios to
(70/30). Eric and Phillip decide to adjust the capital accounts at the date of the change to
 reflect the difference between market value and book value of assets and liabilities. At
the date of the change, the partnership owns a building with a book value of $350,000
and a market value of $600,000. How much will Phillip’s capital account be adjusted at
the date of the change in the profit and loss ratios?
a. $25,000 increase
b. $50,000 increase
c. $25,000 decrease
d. $50,000 decrease

206. Jenna is about to purchase some of Cynthia’s partnership interest. Cynthia currently has
partnership equity of $84,500. If Jenna pays Cynthia $30,000 for 30 percent of her
capital, what amount will be recorded in the partnership accounting records?
Jenna Cynthia
a. $30,000 credit $25,350 debit
b. $25,350 credit $25,350 debit
c. $30,000 credit $30,000 debit
d. $25,350 debit $25,350 credit

207. Sam and Ray are partners with capital accounts of $150,000 and $225,000, respectively.
They are considering allowing Richard to purchase 30 percent of Ray’s equity. At the
date of the proposed transaction, Sam and Ray want to revalue the partnership’s assets
and allocate any differences based on their 40/60 profit sharing agreement. Assume that
the net market versus book value differences is $100,000. What amount would Richard
pay for the 30 percent interest?
a. $67,500
b. $76,500
c. $97,500
d. The amount cannot be determined from the information provided

208. Jesse, Joseph, and Leslie are partners with capital accounts of $70,000, $120,000, and
$90,000, respectively. The partnership share profits and losses 45%, 30%, and 25%,
respectively. They are considering allowing Hans to join the partnership by investing
directly into the partnership. The partners intend to revalue the assets before Hans’
admission. Neither bonus nor goodwill are required. If the asset’s market value exceeds
book value $150,000, how much will Hans invest to acquire a 20% equity interest in the
partnership?
a. $107,500
b. $86,000
c. $70,000
d. $100,000

209. Sandra and Joshua are partners. They have capital account balances of $250,000 and
$200,000, respectively, and they share profits and losses 70/30. The partners are
considering admitting Judy as a new partner with a 25 percent equity interest for an
investment in the partnership of $180,000. Before admission, Sandra and Joshua will
revalue the partnership’s assets. If the net increase in the partnership’s assets is
 $125,000, what will be the balance in Sandra’s capital account immediately before
Judy’s admission?
a. $575,000
b. $337,500
c. $528,500
d. $262,500

210. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of Susan’s capital
account at the date of admission?
a. $142,500
b. $150,000
c. $144,000
d. The dollar amount cannot be determined from this information

211. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of bonus recognized
in Ken’s capital account at the date of admission?
a. $4,500
b. $34,500
c. $6,000
d. $1,500

212. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of bonus recognized
in Robert’s capital account at the date of admission?
a. $6,000
b. $1,500
c. $144,000
d. $4,500

213. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of Ken’s capital
account at the date of admission?
a. $274,500
b. $304,500
c. $144,000
d. $271,500
214. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of Robert’s capital
account at the date of admission?
a. $271,500
b. $301,500
c. $144,000
d. $304,500

215. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of Pierre’s capital account at
the date of admission?
a. $933,000
b. $450,000
c. $388,750
d. $622,000

216. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of bonus recognized in
John’s capital account at the date of admission?
a. $98,000
b. $61,250
c. $24,500
d. $36,750

217. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of bonus recognized in
Sam’s capital account at the date of admission?
a. $98,000
b. $61,250
c. $24,500
d. $36,750

218. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of John’s capital account at
the date of admission?
 a. $516,750
b. $661,750
c. $649,500
d. $504,500

219. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of John’s capital account at
the date of admission?
a. $516,750
b. $661,750
c. $649,500
d. $504,500

220. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of Frank’s capital
account at the date of admission?
a. $137,500
b. $120,000
c. $143,333
d. The dollar amount cannot be determined from this information

221. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of bonus recognized
in Frank’s capital account at the date of admission?
a. $70,000
b. $23,333
c. $17,500
d. $52,500

222. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of the reduction to
Kris’ capital account at the date of admission?
a. $5,250
b. $12,250
c. $17,500
d. $100,333
223. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of the reduction to
Mark’s capital account at the date of admission?
a. $5,250
b. $12,250
c. $17,500
d. $100,333

224. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of Kris’ capital
account at the date of admission?
a. $157,750
b. $254,750
c. $164,750
d. $247,750

225. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of Mark’s capital
account at the date of admission?
a. $157,750
b. $254,750
c. $164,750
d. $247,750

226. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg into
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of Greg’s capital account at
the date of admission?
a. $60,000
b. $78,530
c. $429,250
d. $75,750

227. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of reduction to Tom’s
capital account at the date of admission?
a. $6,300
 b. $9,450
c. $54,300
d. $81,450

228. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of reduction to Barbara’s
capital account at the date of admission?
a. $6,300
b. $9,450
c. $54,300
d. $81,450

229. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of Tom’s capital account at
the date of admission?
a. $255,550
b. $258,700
c. $173,700
d. $170,550

230. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of Barbara’s capital account
at the date of admission?
a. $255,550
b. $258,700
c. $173,700
d. $170,550

231. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, which partner(s) are contributing the goodwill?
a. Both new and existing partners are contributing goodwill
b. New partner is contributing goodwill
c. Existing partners are contributing goodwill
d. There is not enough information to answer this question

232. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
 They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jacob is admitted?
a. $130,000
b. $26,000
c. $87,500
d. $32,500

233. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Jacob immediately after he
is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000

234. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Michelle immediately after
Jacob is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000

235. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Steve immediately after
Jacob is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000

236. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
 interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
d. There is not enough information to answer this question

237. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jane is admitted?
a. $31,250
b. $125,000
c. $183,333
d. $41,667

238. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Jane immediately after she is
admitted?
a. $225,000
b. $281,250
c. $293,750
d. $183,333

239. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Susan immediately after Jane is
admitted?
a. $318,750
b. $356,250
c. $368,750
d. $306,250

240. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of David immediately after Jane is
admitted?
 a. $318,750
b. $356,250
c. $368,750
d. $306,250

241. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jason is admitted?
a. $11,250
b. $8,438
c. $186,250
d. $15,000

242. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Jason immediately after he
is admitted?
a. $190,000
b. $175,000
c. $15,000
d. $186,250

243. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Dan immediately after Jason
is admitted?
a. $285,000
b. $186,250
c. $250,000
d. $320,000

244. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Stephanie immediately after
Jason is admitted?
a. $285,000
b. $186,250
 c. $250,000
d. $320,000

245. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
d. There is not enough information to answer this question

246. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Julia is admitted?
a. $142,000
b. $150,000
c. $10,000
d. $8,000

247. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Julia immediately after she is
admitted?
a. $160,000
b. $150,000
c. $152,000
d. $158,000

248. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Juan immediately after Julia is
admitted?
a. $280,000
b. $142,000
c. $320,000
d. $240,000
249. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Felix immediately after Julia is
admitted?
a. $280,000
b. $142,000
c. $320,000
d. $240,000

250. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing Harry’s portion of the partnership’s assets. If the
value of the partnership’s assets are $200,000 greater than book value, what is the dollar
amount of capital account adjustment that will be recorded?
a. $50,000
b. $70,000
c. $80,000
d. $200,000

251. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing all of the partnership’s assets. If the value of the
partnership’s assets are $200,000 greater than book value, what is the dollar amount of
capital account adjustment that will be recorded?
a. $50,000
b. $70,000
c. $80,000
d. $200,000

252. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. The partners have capital account balances of $80,000, $110,000,
and $55,000, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing all of the partnership’s assets, an increase of
$200,000. If Susan and Walter acquire Harry’s equity, what will be the amount of
Susan’s capital on the partnership’s balance sheet immediately after Harry’s withdrawal,
rounded to the nearest dollar?
a. $110,000
b. $230,000
c. $282,308
d. Susan’s capital account balance cannot be determined from the information given

253. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. The partners have capital account balances of $80,000, $110,000,
and $55,000, respectively. Harry is withdrawing from the partnership. At the date of
 withdrawal, the partners are revaluing all of the partnership’s assets, an increase of
$200,000. If Susan and Walter acquire Harry’s equity, what will be the amount of total
capital on the partnership’s balance sheet immediately after Harry’s withdrawal?
a. $245,000
b. $445,000
c. $365,000
d. $295,000

254. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
Frank’s capital account be reduced if the bonus method is applied for the withdrawal?
a. $40,000
b. $24,000
c. $20,000
d. $16,000

255. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. What will be the
balance in Frank’s capital account if the bonus method is applied for the withdrawal?
a. $160,000
b. $104,000
c. $184,000
d. $136,000

256. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
George’s capital account be reduced if the bonus method is applied for the withdrawal?
a. $40,000
b. $24,000
c. $20,000
d. $16,000

257. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
 retirement are 45 percent, 30 percent, and 25 percent, respectively. What will be the
balance in George’s capital account if the bonus method is applied for the withdrawal?
a. $120,000
b. $104,000
c. $184,000
d. $136,000

258. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. How much
will Melissa’s capital account be reduced if the bonus method is applied for the
withdrawal?
a. $36,000
b. $60,000
c. $24,000
d. $30,000

259. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. What will
be the balance in Melissa’s capital account if the bonus method is applied for the
withdrawal?
a. $336,000
b. $300,000
c. $264,000
d. $246,000

260. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. How much
will Sarah’s capital account be reduced if the bonus method is applied for the
withdrawal?
a. $36,000
b. $60,000
c. $24,000
d. $30,000

261. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
 Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. What will
be the balance in Sarah’s capital account if the bonus method is applied for the
withdrawal?
a. $336,000
b. $300,000
c. $264,000
d. $246,000

262. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is $22,500. Assuming that Bob’s equity
is purchased by a new partner (Deborah) approved by Claire and Jack, what is the
amount of Deborah’s initial capital account?
a. $150,000
b. $170,000
c. $172,500
d. The amount cannot be determined because the amount Deborah paid for Bob’s
equity is not known

263. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is $22,500. Assuming that Bob’s equity
is purchased by Claire (60 percent) and Jack (40 percent), what is the amount of Claire’s
capital account at the date of Bob’s withdrawal?
a. $238,500
b. $307,500
c. $186,750
d. $180,000

264. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is $22,500. Assuming that Bob’s equity
 is purchased by Claire (60 percent) and Jack (40 percent), what is the amount of Jack’s
capital account at the date of Bob’s withdrawal?
a. $397,500
b. $294,000
c. $285,000
d. $159,000

265. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the
partnership’s goodwill $75,000. Assuming that Bob’s equity is purchased by a new
partner (Deborah) approved by Claire and Jack, what is the amount of Deborah’s initial
capital account?
a. $150,000
b. $170,000
c. $172,500
d. The amount cannot be determined because the amount Deborah paid for Bob’s
equity is not known

266. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the
partnership’s goodwill $75,000. Assuming that Bob’s equity is purchased by Claire (60
percent) and Jack (40 percent), what is the amount of Claire’s capital account at the date
of Bob’s withdrawal?
a. $175,500
b. $247,500
c. $257,250
d. $327,750

267. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the
partnership’s goodwill $75,000. Assuming that Bob’s equity is purchased by Claire (60
percent) and Jack (40 percent), what is the amount of Jack’s capital account at the date of
Bob’s withdrawal?
a. $175,500
 b. $247,500
c. $257,250
d. $327,750

268. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.
Assuming that Sally’s equity is purchased by a new partner (Mary) approved by Bonnie
and Gwen, what is the amount of Mary’s initial capital account?
a. $240,000
b. $390,000
c. $320,000
d. The amount cannot be determined because the amount Mary paid for Sally’s
equity is not known

269. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.
Assuming that Sally’s equity is purchased by Bonnie (60 percent) and Gwen (40
percent), what is the amount of Bonnie’s capital account at the date of Sally’s
withdrawal?
a. $446,000
b. $494,000
c. $424,000
d. $376,000

270. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.
Assuming that Sally’s equity is purchased by Bonnie (60 percent) and Gwen (40
percent), what is the amount of Gwen’s capital account at the date of Sally’s withdrawal?
a. $446,000
b. $494,000
c. $424,000
d. $376,000
271. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
equity is purchased by a new partner (Mary) approved by Bonnie and Gwen, what is the
amount of Mary’s initial capital account?
a. $87,500
b. $237,500
c. $350,000
d. The amount cannot be determined because the amount Mary paid for Sally’s
equity is not known

272. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is the amount of
Bonnie’s capital account at the date of Sally’s withdrawal?
a. $441,000
b. $490,000
c. $560,000
d. $420,000

273 Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is the amount of
Bonnie’s capital account at the date of Sally’s withdrawal?
a. $441,000
b. $490,000
c. $560,000
d. $420,000

274. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
 equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is total
partnership equity after the withdrawal?
a. $980,000
b. $780,000
c. $830,000
d. $630,000

Computational Multiple Choice Question Difficulty and Solutions

169. difficult b
($400,000 - $190,000) + [$270,000 - ($400,000 - $190,000)]/3 = $230,000
170. easy c
171. easy b
$60,000 + $80,000 + $100,000 = $240,000
172. easy c
$30,000 + $50,000 + $25,000 = $105,000/3 = $35,000 - $30,000 = $5,000
173. moderate a
$30,000 + $50,000 + $25,000 = $105,000/3 = $35,000
$50,000 - $30,000 = $15,000
174. easy d
175. easy c
176. easy d
177. moderate c
[($50,000 x 4) + ($40,000 x 6) + ($65,000 x 2)]/12 = $47,500
178. moderate b
[($60,000 x 2) + ($90,000 x 5) + ($70,000 x 4) + $110,000] (.08) = $6,400
179. difficult a
B = .08($250,000 - $200,000 - B)
180. moderate c
B = .05($180,000 - $150,000)
181. difficult d
B = {[($540,000 - $500,000)/$500,000] - .05} $120,000
182. moderate a
($130,000 - $10,000 - $15,000 - $18,000) .45
183. easy d
$60,000 x .45
184. easy a
Profits and losses are allocated equally if there is no allocation provided
185. difficult d
Nick Joe Mike Total
Interest on capital
$200,000 x .09 $18,000
$350,000 x .09 $31,500
$180,000 x .09 $16,200 $65,700
Salary 25,000 15,000 35,000 75,000
Bonus .1($150,000 - $100,000) 5,000 5,000
Residual
 $4,300 x .25 1,075
$4,300 x .45 1,935
$4,500 x .30 1,290 4,300
Totals $44,075 $48,435 $57,490 $150,000
186. moderate b
$35,000 + ($500,000 - $35,000 - $50,000 - $40,000) .4
187. moderate a
($250,000 x .08) + [$300,000 - ($200,000 + $250,000 + $400,000)(.08)] .25
188. moderate d
($60,000 - $50,000)(.60) + ($80,000 - $60,000)(.70)
189. moderate b
($60,000 - $50,000)(.40) + ($80,000 - $60,000)(.30)
190. moderate c
($300,000 - $200,000)(.75) + ($380,000 - $300,000)(.60)
191. moderate a
($300,000 - $200,000)(.25) + ($380,000 - $300,000)(.40)
192. moderate a
($300,000 - $100,000)(.65) + ($450,000 - $300,000)(.45)
193. moderate c
($300,000 - $100,000)(.35) + ($450,000 - $300,000)(.55)
194. easy b
($120,000 - $50,000)(.60)
195. easy d
($120,000 - $50,000)(.40)
196. easy d
($200,000 - $120,000)(.45)
197. easy a
($200,000 - $120,000)(.55)
198. moderate a
($520,000 - $370,000)(.70)
199. moderate c
($520,000 - $370,000)(.30)
200. moderate b
($650,000 - $520,000)(.60)
201. moderate d
($650,000 - $520,000)(.40)
202. difficult b
($250,000 - $120,000)(.70 - .60)
203. difficult d
($250,000 - $120,000)(.30 - .40)
204. difficult c
($600,000 - $350,000)(.70 - .60)
205. difficult a
($600,000 - $350,000)(.40 - .30)
206. easy b
$84,500 x .3
207. difficult d
The amount that Richard will pay Ray depends on many factors and cannot be
determined from the information provided here.
208. difficult a
[($70,000 + $120,000 + $90,000 + $150,000)/.80](.20)
209. easy b
$250,000 + ($125,000 x .70)
210. moderate c
($270,000 + $300,000 + $150,000)(.20)
211. moderate a
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.75)
212. moderate b
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.25)
213. difficult a
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.75) + $270,000
214. difficult b
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.25) + $300,000
215. moderate c
($625,000 + $480,000 + $450,000)(.25)
216. moderate d
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.60)
217. moderate c
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.40)
218. difficult b
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.60) + $625,000
219. difficult d
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.40) + $480,000
220. moderate a
($170,000 + $260,000 + $120,000)(.25)
221. moderate c
[$120,000 - ($170,000 + $260,000 + $120,000)(.25)]
222. moderate b
[$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.70)
223. moderate a
[$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.30)
224. difficult a
$170,000 - [$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.70)
225. difficult b
$260,000 - [$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.30)
226. moderate d
($265,000 + $180,000 + $60,000)(.15)
227. moderate a
[$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.40)
228. moderate b
[$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.60)
229. difficult b
 $265,000 - [$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.40)
230. difficult d
$180,000 - [$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.60)
231. moderate c
($150,000 + $200,000 + $120,000)(.20) = $94,000
232. difficult a
($150,000 + $200,000 + $120,000)(.20) = $94,000, goodwill to existing partners
$120,000 + $0 = .2($150,000 + $200,000 + $120,000 + goodwill)
$120,000 = $94,000 + .2 goodwill
$26,000 = .2 goodwill
Goodwill = $130,000
233. moderate d
($150,000 + $200,000 + $120,000)(.20) = $94,000, goodwill to existing partners; new
partner capital account recognized at amount invested
234. difficult a
($150,000 + $200,000 + $120,000)(.20) = $94,000, goodwill to existing partners
$120,000 + $0 = .2($150,000 + $200,000 + $120,000 + goodwill)
$120,000 = $94,000 + .2 goodwill
$26,000 = .2 goodwill
Goodwill = $130,000
$150,000 + $130,000 x .60
235. difficult b
($150,000 + $200,000 + $120,000)(.20) = $94,000, goodwill to existing partners
$120,000 + $0 = .2($150,000 + $200,000 + $120,000 + goodwill)
$120,000 = $94,000 + .2 goodwill
$26,000 = .2 goodwill
Goodwill = $130,000
$200,000 + $130,000 x .40
236. moderate b
($250,000 + $300,000 + $225,000)(.25) = $193,750
237. difficult b
($250,000 + $300,000 + $225,000)(.25) = $193,750, goodwill to existing partners
$225,000 + $0 = .25($250,000 + $300,000 + $225,000 + goodwill)
$225,000 = $193,750 + .25 goodwill
$31,250 = .25 goodwill
Goodwill = $125,000
238. moderate a
($250,000 + $300,000 + $225,000)(.25) = $193,750, goodwill to existing partners; new
partner capital account recognized at amount invested
239. difficult d
($250,000 + $300,000 + $225,000)(.25) = $193,750, goodwill to existing partners
$225,000 + $0 = .25($250,000 + $300,000 + $225,000 + goodwill)
$225,000 = $193,750 + .25 goodwill
$31,250 = .25 goodwill
Goodwill = $125,000
$250,000 + $125,000 x .45
240. difficult c
($250,000 + $300,000 + $225,000)(.25) = $193,750, goodwill to existing partners
$225,000 + $0 = .25($250,000 + $300,000 + $225,000 + goodwill)
$225,000 = $193,750 + .25 goodwill
$31,250 = .25 goodwill
Goodwill = $125,000
$300,000 + $125,000 x .55
241. difficult d
($250,000 + $320,000 + $175,000)(.25) = $186,250, goodwill to new partner
$175,000 + goodwill = .25($250,000 + $320,000 + $175,000 + goodwill)
$175,000 + goodwill = $186,250 + .25 goodwill
.75 goodwill = 11,250
Goodwill = $15,000
242. difficult a
($250,000 + $320,000 + $175,000)(.25) = $186,250, goodwill to new partner
$175,000 + goodwill = .25($250,000 + $320,000 + $175,000 + goodwill)
$175,000 + goodwill = $186,250 + .25 goodwill
.75 goodwill = 11,250
Goodwill = $15,000
$175,000 + $15,000
243. moderate c
($250,000 + $320,000 + $175,000)(.25) = $186,250, goodwill to new partner; existing
partners’ capital accounts do not change
244. moderate d
($250,000 + $320,000 + $175,000)(.25) = $186,250, goodwill to new partner; existing
partners’ capital accounts do not change
245. moderate a
($240,000 + $320,000 + $150,000)(.20) = $142,000
246. difficult c
($240,000 + $320,000 + $150,000)(.20) = $142,000, goodwill to new partner
$150,000 + goodwill = .20($240,000 + $320,000 + $150,000 + goodwill)
$150,000 + goodwill = $142,000 + .20 goodwill
.80 goodwill = $8,000
Goodwill = $10,000
247. difficult a
($240,000 + $320,000 + $150,000)(.20) = $142,000, goodwill to new partner
$150,000 + goodwill = .20($240,000 + $320,000 + $150,000 + goodwill)
$150,000 + goodwill = $142,000 + .20 goodwill
.80 goodwill = $8,000
Goodwill = $10,000
$160,000 + $10,000
248. moderate d
($240,000 + $320,000 + $150,000)(.20) = $142,000, goodwill to new partner, capital
accounts of existing partners do not change
249. moderate c
 ($240,000 + $320,000 + $150,000)(.20) = $142,000, goodwill to new partner, capital
accounts of existing partners do not change
250. easy b
$200,000 x .35
251. easy d
252. moderate d
253. moderate b
$80,000 + $110,000 + $55,000 + $200,000
254. moderate b
($250,000 - $210,000)(45/75)
255. moderate d
$160,000 - ($250,000 - $210,000)(45/75)
256. moderate d
($250,000 - $210,000)(30/75)
257. moderate b
$120,000 - ($250,000 - $210,000)(30/75)
258. moderate a
($240,000 - $180,000)(42/70)
259. moderate c
$300,000 - ($240,000 - $180,000)(42/70)
260. moderate c
($240,000 - $180,000)(28/70)
261. moderate d
$270,000 - ($240,000 - $180,000)(28/70)
262. easy c
$150,000 + $22,500
263. moderate a
$135,000 + ($150,000 + $22,500)(.60)
264. moderate b
$225,000 + ($150,000 + $22,500)(.40)
265. easy c
$150,000 + ($75,000 x .3)
266. difficult c
$135,000 + ($75,000 x .25) + [$150,000 + ($75,000 x .30)](.60)
267. difficult d
$225,000 + ($75,000 x .45) + [$150,000 + ($75,000 x .30)](.40)
268. easy a
$200,000 + $40,000
269. moderate b
$350,000 + ($200,000 + $40,000)(.60)
270. moderate c
$280,000 + ($200,000 + $40,000)(.40)
271. easy b
$200,000 + ($150,000 x .25)
272. difficult c
$350,000 + ($150,000 x .45) + [$200,000 + ($150,000 x .25)](.60)
273 difficult d
$280,000 + ($150,000 x .30) + [$200,000 + ($150,000 x .25)](.40)
274. moderate a
$350,000 + $280,000 + $200,000 + $150,000

Problems

275. (10 Points) moderate

Alan, Betty, and Carl are forming a partnership. Each will contribute cash and noncash
assets. Assume the initial capital account balances will be determined based on the value
of the assets contributed. Information regarding the initial contributions is provided
below:

Alan Betty Carl__

Cash $150,000 $275,000 $125,000
Plant Assets - historical cost 280,000 350,000 540,000
Plant Assets - carrying value 215,000 225,000 300,000
Plant Assets - tax basis 200,000 190,000 230,000
Plant Assets - market value 350,000 260,000 310,000

Required:
a. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the carrying value is used to determine the value assigned to
noncash assets contributed. Assume also that each partner’s capital account is
assigned a value equal to the cash and noncash assets contributed by that partner.
b. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the carrying value is used to determine the value assigned to
noncash assets contributed. Assume also that all of the partners’ capital accounts
are equal when the journal entry is completed.
c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?

Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($215,000 + $225,000 + $300,000) 740,000
Alan, Capital ($150,000 + $215,000) 365,000
Betty, Capital ($275,000 + $225,000) 500,000
Carl, Capital ($125,000 + $300,000) 425,000
Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($215,000 + $225,000 + $300,000) 740,000
Alan, Capital ($550,000 + $740,000)/3 430,000
Betty, Capital ($550,000 + $740,000)/3 430,000
Carl, Capital ($550,000 + $740,000)/3 430,000
 Part c. Alan has significantly more capital when it is divided equally when compared to
assigning the sum of the carrying values of assets contributed. On the other hand,
Betty has significantly less capital when it is divided equally. Carl has
approximately the same amount under either assignment method. One possibility
is that Betty is giving up some capital to Alan because Alan has substantially
more expertise in running the business. Thus, Betty is paying a bonus to Alan.

276. (10 Points) moderate

Alan, Betty, and Carl are forming a partnership. Each will contribute cash and noncash
assets. Assume the initial capital account balances will be determined based on the value
of the assets contributed. Information regarding the initial contributions is provided
below:

Alan Betty Carl__

Cash $150,000 $275,000 $125,000
Plant Assets - historical cost 280,000 350,000 540,000
Plant Assets - carrying value 220,000 225,000 300,000
Plant Assets - tax basis 200,000 190,000 230,000
Plant Assets - market value 350,000 260,000 310,000

Required:
a. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the tax basis is used to determine the value assigned to noncash
assets contributed. Assume also that each partner’s capital account is assigned a
value equal to the cash and noncash assets contributed by that partner.
b. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the tax basis is used to determine the value assigned to noncash
assets contributed. Assume also that all of the partners’ capital accounts are equal
when the journal entry is completed.
c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?

Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($200,000 + $190,000 + $230,000) 620,000
Alan, Capital ($150,000 + $200,000) 350,000
Betty, Capital ($275,000 + $190,000) 465,000
Carl, Capital ($125,000 + $230,000) 355,000

Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($200,000 + $190,000 + $230,000) 620,000
Alan, Capital ($550,000 + $620,000)/3 390,000
Betty, Capital ($550,000 + $620,000)/3 390,000
Carl, Capital ($550,000 + $620,000)/3 390,000
 Part c. Alan and Carl each have significantly more capital when it is divided equally
when compared to assigning the sum of the carrying values of assets contributed.
On the other hand, Betty has significantly less capital when it is divided equally.
One possibility is that Betty is giving up some capital to Alan and Carl because
they have substantially more expertise in running the business. Thus, Betty is
paying a bonus to Alan and Carl.

277. (10 Points) moderate

Alan, Betty, and Carl are forming a partnership. Each will contribute cash and noncash
assets. Assume the initial capital account balances will be determined based on the value
of the assets contributed. Information regarding the initial contributions is provided
below:

Alan Betty Carl__

Cash $150,000 $275,000 $125,000
Plant Assets - historical cost 280,000 350,000 540,000
Plant Assets - carrying value 220,000 225,000 300,000
Plant Assets - tax basis 200,000 190,000 230,000
Plant Assets - market value 350,000 260,000 310,000

Required:
a. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the market value is used to determine the value assigned to
noncash assets contributed. Assume also that each partner’s capital account is
assigned a value equal to the cash and noncash assets contributed by that partner.
b. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the market value is used to determine the value assigned to
noncash assets contributed. Assume also that all of the partners’ capital accounts
are equal when the journal entry is completed.
c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?

Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($350,000 + $260,000 + $310,000) 920,000
Alan, Capital ($150,000 + $350,000) 500,000
Betty, Capital ($275,000 + $260,000) 535,000
Carl, Capital ($125,000 + $310,000) 435,000

Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($350,000 + $260,000 + $310,000) 920,000
Alan, Capital ($550,000 + $920,000)/3 490,000
Betty, Capital ($550,000 + $920,000)/3 490,000
 Carl, Capital ($550,000 + $920,000)/3 490,000

Part c. Carl has significantly more capital when it is divided equally when compared to
assigning the sum of the carrying values of assets contributed. On the other hand,
Betty has significantly less capital when it is divided equally. Alan has
approximately the same amount under either assignment method. One possibility
is that Betty is giving up some capital to Carl because Carl has substantially more
expertise in running the business. Thus, Betty is paying a bonus to Carl.

278. (5 Points) easy

Alex, Bill, and Martha contribute the following assets to begin partnership operations:

Alex Bill Martha_

Cash $150,000 $225,000 $175,000
Inventory 57,000 89,000
Plant Assets 350,000 100,000
Accounts Payable 14,000 40,000
Notes Payable 160,000

Record the journal entry to establish the assets and owners’ equity of the partnership.

Answer:
Cash ($150,000 + $225,000 + $175,000) 550,000
Inventory ($57,000 + $89,000) 146,000
Plant Assets ($350,000 + $100,000) 450,000
Accounts Payable ($14,000 + $40,000) 54,000
Notes Payable 160,000
Alex, capital ($150,000 + $57,000 - $14,000) 193,000
Bill, capital ($225,000 + $350,000 - $160,000) 415,000
Martha, capital ($175,000 + $89,000 + 324,000
$100,000 - $40,000)

279. (10 Points) moderate

William, Casey, and Samantha are forming a partnership. Below is a table outlining the
contributions of each partner.

William Casey Samantha

Cash $ 15,000 $20,000 $ 10,000
Inventory 100,000 60,000 80,000
Plant Assets 250,000 160,000
Liabilities Assumed by Partnership 130,000 90,000

In addition, Casey brings significant experience needed to run the business. It is agreed
that partners will receive capital allocations equal to the market value of the net assets
contributed and that Casey will receive additional capital of $75,000 and the bonus
 method will be applied. Two-thirds of the bonus is to come from William and one-third
from Samantha. Record the journal entry for the creation of the partnership.

Answer:
Cash ($15,000 + $20,000 + $10,000) 45,000
Inventory ($100,000 + $60,000 + $80,000) 240,000
Plant Assets ($250,000 + $160,000) 410,000
Liabilities ($130,000 + $90,000) 220,000
Casey, Capital ($20,000 + $60,000 + $75,000) 155,000
Samantha, Capital [$10,000 + $80,000 + 135,000
$160,000 - $90,000 - ($75,000/3)]
William, Capital [$15,000 + $100,000 + 185,000
$250,000 - $130,000 - ($75,000 x 2/3)]

280. (10 Points) moderate

Bonnie, Connie, and Deborah are forming a partnership. The partners will contribute the
following identifiable assets:

Bonnie Connie Deborah

Cash $150,000 $200,000 $140,000
Inventory 160,000 190,000 180,000
Plant Assets 300,000 340,000
Liabilities Assumed by Partnership 180,000 130,000

In addition, Bonnie brings significant experience because she has run a similar type of
business. It is agreed that Bonnie will receive additional capital of $80,000 and the
bonus method will be applied. Sixty percent of the bonus is to come from Deborah and
forty percent from Connie. Record the journal entry for the creation of the partnership.

Answer:
Cash ($150,000 + $200,000 + $140,000) 490,000
Inventory ($160,000 + $190,000 + $180,000) 530,000
Plant Assets ($300,000 + $340,000) 640,000
Liabilities ($180,000 + $130,000) 310,000
Bonnie, Capital ($150,000 + $160,000 + 510,000
$300,000 - $180,000 + $80,000)
Connie, Capital [$200,000 + $190,000 - 358,000
($80,000 x .4)]
Deborah, Capital [$140,000 + $180,000 + 482,000
$340,000 - $130,000 - ($80,000 x .6)]

281. (10 Points) moderate

Able, Baker, and Charlie are forming a partnership. Charlie has significant experience in
the type of business the partners are starting. As a result, Able and Baker agree that
goodwill of $50,000 should be recognized with regard to Charlie. The partners
contribute the following tangible assets:
 Able Baker Charlie
Cash $20,000 $35,000 $55,000
Plant Assets 75,000 90,000 60,000
Liabilities 25,000 45,000 15,000

Record the journal entry to establish the partnership.

Answer:
Cash ($20,000 + $35,000 + $55,000) 110,000
Plant Assets ($75,000 + $90,000 + $60,000) 225,000
Goodwill 50,000
Liabilities ($25,000 + $45,000 + $15,000) 85,000
Able, Capital ($20,000 + $75,000 - $25,000) 70,000
Baker, Capital ($35,000 + $90,000 - $45,000) 80,000
Charlie, Capital ($55,000 + $60,000 - $15,000 + 150,000
$50,000)

282. (15 Points) moderate

Jessica, Mary, and Susan currently operate three separate businesses. They are planning
to combine and form a partnership to operate as one business. The prospective partners
agree that, in addition to the net market value of the tangible assets contributed to the
partnership, Jessica and Susan should have goodwill recognized in the amounts of
$80,000 and $40,000, respectively. The following table presents the market value of the
assets and liabilities contributed to the partnership.

Jessica Mary Susan

Cash $100,000 $250,000 $170,000
Inventory 280,000 400,000 450,000
Plant Assets 750,000 500,000 600,000
Accounts Payable 190,000 270,000 260,000
Mortgage Payable 340,000 200,000 320,000

Required:
a. Record the journal entry to establish the partnership.
b. What appears to be the partners’ intent when creating the new
partnership?

Answer:
Part a.
Cash ($100,000 + $250,000 + $170,000) 520,000
Inventory ($280,000 + $400,000 + $450,000) 1,130,000
Plant Assets ($750,000 + $500,000 + $600,000) 1,850,000
Goodwill 120,000
Accounts Payable ($190,000 + $270,000 + 720,000
$260,000)
 Mortgage Payable ($340,000 + $200,000 + 860,000
$320,000)
Jessica, Capital ($100,000 + $280,000 + 680,000
$750,000 - $190,000 - $340,000 + $80,000)
Mary, Capital ($250,000 + $400,000 + 680,000
$500,000 - $270,000 - $200,000)
Susan, Capital ($170,000 + $450,000 + 680,000
$600,000 - $260,000 - $320,000 + $40,000)

Part b.
The apparent intent of the partners is to make all three partner capital accounts of equal
dollar amount when the partnership is formed.

283. (20 Points) moderate

Tom, Jon, and Sandy are partners in a thriving business. You work for the firm that
provides accounting services to the partnership. The accounting period recently ended
and you have been assigned the task of helping with the profit allocation to the partners.
The following information has been extracted from the partnership’s accounting records:

Date Tom Jon Sandy____

1/1 Balance $850,000 Balance $680,000 Balance $450,000
4/30 Withdraw $75,000 Withdraw $30,000
9/1 Invest $120,000 Withdraw $100,000
12/1 Invest $90,000 Invest $40,000 Withdraw $60,000

The partnership agreement stipulates that the weighted-average capital balance is the
basis for the interest on capital component of profit and loss allocation and the rate of
return on invested capital is 12 percent. What is the amount of interest on capital
allocated to each partner as a part of the profit and loss allocation?

Answer:
TOM’S AVERAGE CAPITAL BALANCE
Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $850,000 4 months $ 3,400,000
April 30 Withdraw $75,000 775,000 4 months 3,100,000
September 1 Invest $120,000 895,000 3 months 2,685,000
December 1 Invest $90,000 985,000 1 month 985,000
$10,170,000
Average capital ($10,170,000 / 12) $847,500

JON’S AVERAGE CAPITAL BALANCE

Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $680,000 8 months $5,440,000
September 1 Withdraw $100,000 580,000 3 months 1,740,000
 December 1 Invest $40,000 620,000 1 month 620,000
$7,800,000
Average capital ($7,800,000 / 12) $650,000

SANDY’S AVERAGE CAPITAL BALANCE

Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $450,000 4 months $1,800,000
April 30 Withdraw $30,000 420,000 7 months 2,940,000
December 1 Withdraw $60,000 360,000 1 month 360,000
$5,100,000
Average capital ($5,100,000 / 12) $425,000

Interest on capital contributions:

Tom: $847,500 x .12 = $101,700
Jon: $650,000 x .12 = $78,000
Sandy: $425,000 x .12 = $51,000

284. (20 Points) moderate

John, Roger, and Troy are partners in a local business. You are a staff accountant at a
firm that provides accounting services to the partnership. You were just assigned the task
of helping prepare the profit allocation to the partners. The following information was
extracted from the partnership’s accounting records:

Date John Roger Troy_____

1/1 Balance $250,000 Balance $350,000 Balance $500,000
3/31 Withdraw $30,000 Invest $50,000
8/31 Invest $40,000 Withdraw $90,000
11/1 Invest $25,000 Invest $60,000 Withdraw $60,000

The partnership agreement stipulates that the weighted-average capital balance is the
basis for the interest on capital component of profit and loss allocation and the rate of
return on invested capital is 10 percent. What is the amount of interest on capital
allocated to each partner as a part of the profit and loss allocation?

Answer:
JOHN’S AVERAGE CAPITAL BALANCE
Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $250,000 3 months $ 750,000
March 31 Withdraw $30,000 220,000 5 months 1,100,000
August 31 Invest $40,000 260,000 2 months 520,000
November 1 Invest $25,000 285,000 2 months 570,000
$2,940,000
Average capital ($2,940,000 / 12) $245,000
 ROGER’S AVERAGE CAPITAL BALANCE
Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $350,000 8 months $2,800,000
August 31 Withdraw $90,000 260,000 2 months 520,000
November 1 Invest $60,000 320,000 2 months 640,000
$3,960,000
Average capital ($3,960,000 / 12) $330,000

TROY’S AVERAGE CAPITAL BALANCE

Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $500,000 3 months $1,500,000
March 31 Invest $50,000 550,000 7 months 3,850,000
November 1 Withdraw $60,000 490,000 2 months 980,000
$6,330,000
Average capital ($6,660,000 / 12) $527,500

Interest on capital contributions:

John: $245,000 x .10 = $24,500
Roger: $330,000 x .10 = $33,000
Troy: $527,500 x .10 = $52,750

285. (10 Points) easy

Philip is the managing partner of a local company. Part of his profit and loss allocation
is a bonus based on the store operating income. The bonus arrangement is 8 percent of
operating income in excess of $200,000 after deducting the bonus. How much is Philip’s
bonus this year if operating income before deducting the bonus is $350,000?

Answer:
Bonus = .08($350,000 - $200,000 - B)
1.08 Bonus = $12,000
Bonus = $11,111.11

286. (10 Points) easy

Sally is a partner, and business manager, in a local partnership. Part of the profit and loss
agreement in the articles of partnership is a bonus to be paid to the business manager.
The bonus is currently calculated at 12 percent of income in excess of $250,000 after
subtracting the bonus.

How much bonus will Sally receive if income is $400,000?

Answer:
Bonus = .12 ($400,000 - $250,000 - B)
Bonus = $16,071.43
287. (10 Points) easy
Frank, George, and Hank are partners. Partnership profits for the year are $90,000.

Required:
a. How much is allocated to each partner if the profit and loss residual ratios are
30%, 20%, and 50%, respectively?

b. How would the profit be allocated if there were no profit and loss residual ratios?

Answer:
Part a.
Frank $90,000 x .30 = $27,000
George $90,000 x .20 = $18,000
Hank $90,000 x .50 = $45,000

Part b.
Frank, George and Hank $90,000/3 = $30,000

288. (30 Points) difficult

Beverly, Brad, and Bob are partners in the 3Bs company. The partners have been in
business for a number of years. The following information exists with regard to the
allocation of profits and losses.

Beverly _ Brad Bob__

Weighted-average capital balance $400,000 $650,000 $550,000
Salary 40,000 65,000 80,000
Bonus .1(Net income - $200,000)
Residual 40% 35% 25%

The interest portion of the profit and loss allocation is 8 percent of the weighted-average
capital balance. Profit allocation is determined in the order presented above. Assume the
allocation is completed regardless of the level of profit. Partnership losses, on the other
hand, are allocated by the residual ratios only.

Required:
a. Determine the profit allocation if the partnership net income is $580,000.
b. Determine the profit allocation if the partnership net income is $250,000.
c. Determine the loss allocation if the partnership net loss is ($50,000).

Solution:
Part a.
Beverly Brad Bob Total__
Interest on capital
$400,000 x .08 $ 32,000
$650,000 x .08 $ 52,000
 $550,000 x .08 $ 44,000 $128,000
Salary 40,000 65,000 80,000 185,000
Bonus
.1($580,000 - $200,000) 38,000 38,000
Residual
$229,000 x .4 91,600
$229,000 x .35 80,150
$229,000 x .25 57,250 229,000
$163,600 $235,150 $181,250 $580,000

Part b.
Beverly Brad Bob Total__
Interest on capital
$400,000 x .08 $32,000
$650,000 x .08 $ 52,000
$550,000 x .08 $44,000 $128,000
Salary 40,000 65,000 80,000 185,000
Bonus
.1($250,000 - $200,000) 5,000 5,000
Residual
($68,000) x .4 (27,200)
($68,000) x .35 (23,800)
($68,000) x .25 (17,000) (68,000)
$44,800 $98,200 $107,000 $250,000

Part c.
Beverly Brad Bob Total__
Residual
($50,000) x .4 ($20,000)
($50,000) x .35 ($17,500)
($50,000) x .25 ($12,500) ($50,000)

289. (15 Points) difficult

Tiffany, Jason, and Shanel are partners in a marketing firm. They allocate profits and
losses based on four criteria: (1) 6 percent return on invested capital; (2) salary, based on
$40 per billable hour; (3) bonus to Jason for managing the business [.15 (net income -
$250,000 - bonus)]; and (4) residual allocation. For the year, the partners have the
following average invested capital and billable hours.

Tiffany Jason Shanel_

Average invested capital $200,000 $180,000 $160,000
Billable hours 1,500 1,700 2,200

Prepare a schedule allocating the partnership’s $450,000 profit. Round all

amounts to the nearest dollar.
 Solution:
Tiffany Jason Shanel Total_
Interest on capital
$200,000 x .06 $ 12,000
$180,000 x .06 $ 10,800
$160,000 x .06 $ 9,600 $ 32,400
Salary
1,500 x $40 60,000
1,700 x $40 68,000
2,200 x $40 88,000 216,000
Bonus
.15($450,000 - $250,000 - B) 26,087 26,087
Residual
$175,513/3 58,504 58,504 58,505 175,513
$130,504 $163,391 $156,105 $450,000

290. (10 Points) moderate

Stan and Allan have been partners for several years. Their current partnership profit and
loss ratios are being changed from 75/25 to 60/40. As part of the change, they have
created a list of assets that have market and book value differences. One of the assets is
vacant land with a $200,000 market value and a $110,000 book value. One year after
changing the profit and loss ratios, the building is sold for $280,000. Record (1) the sale
of the land and (2) the distribution of the gain on sale to the partners.

Solution:
Cash 280,000
Land 110,000
Gain on Sale of Land 170,000

Gain on Sale of Land 170,000

Stan, capital ($200,000 - $110,000)(.75) + 115,500
($280,000 - $200,000)(.60)
Allan, capital ($200,000 - $110,000)(.25) + 54,500
($280,000 - $200,000)(.40)

291. (10 Points) moderate

Susan and Mary have been partners for several years. Their current partnership profit
and loss ratios are being changed from 65/35 to 55/45. As part of the change, they have
created a list of assets that have market and book value differences. One of the assets is a
building with a $370,000 market value and a $150,000 book value. One year after
changing the profit and loss ratios, the building is sold for $500,000. Record (1) the sale
of the building and (2) the distribution of the gain on sale to the partners.

Solution:
Cash 500,000
 Building 150,000
Gain on Sale of Building 350,000

Gain on Sale of Land 350,000

Susan, capital ($370,000 - $150,000)(.65) + 214,500
($500,000 - $370,000)(.55)
Mary, capital ($370,000 - $150,000)(.35) + 135,500
($500,000 - $370,000)(.45)

292. (10 Points) easy

Janice and Richard are partners who are changing their profit and loss ratios from 40/60
to 55/45. At the date of the change, the partners chooses to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$250,000 and a market value of $420,000. Two years after the profit and loss ratio is
changed, the land is sold for $600,000. Record (1) the revaluation of the land, (2) the
sale of the land, and (3) the distribution of the gain on sale of land to the partners.

Solution:
Land ($420,000 - $250,000) 170,000
Janice, capital ($170,000 x .40) 68,000
Richard, capital ($170,000 x .60) 102,000

Cash 600,000
Land 420,000
Gain on Sale of Land ($600,000 - $420,000) 180,000

Gain on Sale of Land 180,000

Janice, capital ($180,000 x .55) 99,000
Richard, capital ($180,000 x .45) 81,000

293. (10 Points) moderate

John and Renee are partners who are changing their profit and loss ratios from 70/30 to
60/40. At the date of the change, the partners chooses to revalue assets with market
value different from book value. One asset revalued is a building with a net book value
of $100,000 and a market value of $340,000. One year after the profit and loss ratio is
changed, the building is sold for $270,000. Record (1) the revaluation of the building,
(2) the sale of the building, and (3) the distribution of the loss on sale of the building to
the partners.

Solution:
Building ($340,000 - $100,000) 240,000
John, capital ($240,000 x .70)
168,000
Renee, capital ($240,000 x .30) 72,000

Cash 270,000
 Loss on Sale of Building ($270,000 - $340,000) 70,000
Building 340,000

John, capital ($70,000 x .60) 42,000

Renee, capital ($70,000 x .40) 28,000
Loss on Sale of Building 70,000

294. (10 Points) moderate

Tom and Darris are partners. Their current profit and loss ratios (80/20) are being
changed to (70/30). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, land has a market value of
$350,000 and a book value of $140,000. Record the adjustment to the capital accounts at
the date of the change in the profit and loss ratios.

Solution:
Darris, capital [($340,000 - $150,000)(.20-.30)] 21,000
Tom, capital [($340,000 - $150,000)(.80 - .70)] 21,000

295. (10 Points) moderate

Tim and Donna are partners. Their current profit and loss ratios (60/40) are being
changed to (45/55). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, a building has a book
value of $400,000 and a market value of $650,000. Record the adjustment to the capital
accounts at the date of the change in the profit and loss ratios.

Solution:
Donna, capital [($650,000 - $400,000)(.40-.55)] 37,500
Tim, capital [($650,000 - $400,000)(.60 - .45)] 37,500

296. (5 Points) easy

Wesley, Slyvia, and Mel are partners. They have capital accounts of $60,000, $95,000,
and $105,000, respectively. Heather is talking to Mel about joining the partnership and
acquiring 1/3 of his equity. Wesley and Slyvia know Heather and they have approved
her admission into the partnership. Record Heather’s admission assuming she pays
$50,000 to acquire 1/3 of Mel’s equity.

Solution:
Mel, capital ($105,000/3) 35,000
Heather, capital 35,000

297. (10 Points) moderate

John, Linda, and Bill are partners with capital accounts of $78,000, $59,000, and
$183,000, respectively. In addition, they share profits and losses 30%, 25%, and 45%,
respectively. Bill is planning to partially retire and has asked John and Linda if they
 would approve Mitch as a new partner. John and Linda respond that Mitch is acceptable
but they want to revalue the partnership’s assets before Mitch is admitted. At the date of
the admission, the net assets are written up $250,000. Mitch pays Bill $200,000 for 60
percent of his equity. Record the revaluation of the assets and the admission of Mitch
into the partnership.

Solution:
Assets 250,000
John, capital ($250,000 x .30)
75,000
Linda, capital ($250,000 x .25) 62,500
Bill, capital ($250,000 x .45) 112,500

Bill, capital ($183,000 + $112,500)(.60) 177,300

Mitch, capital 177,300

298. (20 Points) moderate

Susan and Tom are partners with capital accounts of $280,000 and $182,500,
respectively. The partners share profits and losses 60/40. They are considering
admitting Scott into the partnership as a 25% equity ownership for an investment into the
partnership of $187,500. Before admission of Scott, the partnership’s assets will be
revalued up $100,000. Record the revaluation of the assets and the admission of Scott
into the partnership.

Solution:
Assets 100,000
Susan, capital ($100,000 x .60) 60,000
Tom, capital ($100,000 x .40)
40,000

Book value of capital before the investment $562,500

($280,000 + $182,500 + $100,000)
Scott’s investment 187,500
Total book value of capital after the investment $750,000
Scott’s percentage ownership 0.25
Book value of Scott’s ownership percentage capital $187,500

Cash 187,500
Scott, capital 187,500

299. (20 Points) moderate

Wayne and Dennis are partners with capital accounts of $250,000 and $300,000,
respectively. The partners share profits and losses 30/70. They are considering
admitting Dorothy into the partnership with a 20% equity ownership for an investment
into the partnership of $193,750. Before admission of Dorothy, the partnership’s assets
 will be revalued up $225,000. Record the revaluation of the assets and the admission of
Dorothy into the partnership.

Answer:
Assets 225,000
Wayne, capital ($225,000 x .30) 67,500
Dennis, capital ($225,000 x .70) 157,500

Book value of capital before the investment $775,000

($250,000 + $300,000 + $225,000)
Dorothy’s investment 193,750
Total book value of capital after the investment $968,750
Dorothy’s percentage ownership 0.20
Book value of Scott’s ownership percentage capital $193,750

Cash 193,750
Dorothy, capital 193,750

300. (10 Points) easy

Louise and Jane are considering admitting Mary into their partnership. Louise and Jane
share profits at losses 70/30 and their capital account balances are $260,000 and
$190,000, respectively. The partnership agreement indicates that the bonus method will
be applied when new partners are admitted to the company. Louise and Jane want to
know what the journal entry would look like if Mary is admitted with a 20 percent equity
interest in the partnership for an investment of $140,000. Prepare the journal entry at the
date of admission.

Answer:
Cash 140,000
Jane, capital ($140,000 - $118,000)(.30) 6,600
Louise, capital ($140,000 - $118,000)(.70) 15,400
Mary, capital ($260,000 + $190,000 + $140,000)(.20) 118,000

301. (10 Points) easy

Steve and Ray are partners with capital accounts of $300,000 and $460,000, respectively.
They share profits and losses 60/40. Their business is growing and they need to admit a
new partner. Sheila has indicated that she would like to be part of the business.
Negotiations occur and Sheila is admitted with a 25 percent equity interest for $325,000.
Record the admission of Sheila if the bonus method is applied.

Answer:
Cash 325,000
Sheila, capital ($300,000 + $460,000 + 271,250
$325,000)(.25)
Ray, capital ($325,000 - $271,250)(.40) 21,500
Steve, capital ($325,000 - $271,250)(.60) 32,250
302. (20 Points) moderate
Deborah and Randy are partners who share profits and losses 55/45. They have capital
account balances of $450,000 and $380,000, respectively. The partners have been
negotiating with Marsha about her joining the partnership. The parties agree that the
partnership will revalue assets to their market value ($150,000 above book value) and
that Marsha will invest $250,000 for a 15 percent equity interest. Record the revaluation
and the admission of Marsha into the partnership assuming the bonus method is applied.

Answer:
Assets 150,000
Deborah, capital ($150,000 x .55) 82,500
Randy, capital ($150,000 x .45) 67,500

Cash 250,000
Deborah, capital ($250,000 - $184,500)(.55) 36,025
Marsha, capital ($450,000 + $380,000 + 184,500
$150,000 + $250,000)(.15)
Randy, capital ($250,000 - $184,500)(.45) 29,475

303. (10 Points) easy

Jennifer and Juan are partners with capital accounts of $100,000 and $160,000,
respectively. They share profits and losses 45/55. The business is expanding and they
need to admit a new partner. Kathryn has indicated that she would like to join the
partnership. Negotiations occur and Kathryn is admitted with a 25 percent equity interest
for $75,000. Record the admission of Kathryn assuming the bonus method is applied.

Answer:
Cash 80,000
Jennifer, capital ($85,000 - $80,000)(.45) 2,250
Juan, capital ($85,000 - $80,000)(.55) 2,750
Kathryn, capital ($100,000 + $160,000 + 85,000
$80,000)(.25)

304. (10 Points) easy

Fred and Laurie are considering admitting John into their partnership. Fred and Laurie
share profits at losses 60/40 and their capital account balances are $160,000 and
$290,000, respectively. The partnership agreement indicates that the bonus method will
be applied when new partners are admitted to the company. Fred and Laurie have asked
you to prepare the journal entry to admit John with a 25 percent equity interest in the
partnership for an investment of $125,000.

Answer:
Cash 125,000
Fred, capital ($143,750 - $125,000)(.60) 11,250
Laurie, capital ($143,750 - $125,000)(.40) 7,500
 John, capital ($160,000 + $290,000 + 143,750
$125,000)(.25)

305. (20 Points) moderate

Jo Ann and Robert are partners who share profits and losses 30/70. They have capital
account balances of $150,000 and $280,000, respectively. The partners have been
negotiating with Bill about him joining the partnership. The parties agree that the
partnership will revalue assets to their market value ($80,000 above book value) and that
Bill will invest $100,000 for a 20 percent equity interest. Record the revaluation and the
admission of Bill into the partnership assuming the bonus method is applied.

Answer:
Assets 80,000
Jo Ann, capital ($80,000 x .30) 24,000
Robert, capital ($80,000 x .70) 56,000

Cash 100,000
Jo Ann, capital ($122,000 - $100,000)(.30) 6,600
Robert, capital ($122,000 - $100,000)(.70) 15,400
Bill, capital ($280,000 + $150,000 + 122,000
$80,000 + $100,000)(.20)

306. (20 Points) moderate

Robert and Steven are partners in a local company. They have capital accounts in the
amounts of $250,000 and $320,000, respectively, when they agree to admit a new
partner, Don, to the company. Don has agreed to contribute $225,000 for a 25 percent
interest in the owners’ equity of the partnership. Before Don’s admission to the
partnership, Robert and Steven share profits and losses 80 percent and 20 percent,
respectively. Record the admission of Don assuming the goodwill method is applied.

Answer:
Book value of capital before the investment $570,000
Don’s investment 225,000
Total book value of capital after the investment $795,000
Don’s percentage ownership 0.25
Book value of Don’s ownership percentage capital $198,750

Goodwill to existing partners

$225,000 = (.25)($795,000 + Goodwill)

$225,000 = $198,750 + .25 (Goodwill)
$26,250 = .25 (Goodwill)
Goodwill = $105,000

Cash 225,000
Goodwill 105,000
 Don, capital 225,000
Robert, capital ($105,000 x .80) 84,000
Steve, capital ($105,000 x .20) 21,000

307. (20 Points) moderate

Ann and Sarah are partners in a local company. They have capital accounts in the
amounts of $150,000 and $220,000, respectively, when they agree to admit a new
partner, John, to the company. John has agreed to contribute $175,000 for a 25 percent
interest in the owners’ equity of the partnership. Before John’s admission to the
partnership, Ann and Sarah share profits and losses 40 percent and 60 percent,
respectively. Record the admission of John assuming the goodwill method is applied.

Answer:
Book value of capital before the investment $370,000
John’s investment 175,000
Total book value of capital after the investment 545,000
John’s percentage ownership 0.25
Book value of John’s ownership percentage capital 136,250

Goodwill to existing partners

$175,000 = (.25)($495,000 + Goodwill)

$175,000 = $136,250 + .25 (Goodwill)
$38,750 = .25 (Goodwill)
Goodwill = $155,000

Cash 175,000
Goodwill 155,000
Ann, capital ($155,000 x .40) 62,000
John, capital 175,000
Sarah, capital ($155,000 x .60) 93,000

308. (30 Points) difficult

Bob and Norman are partners and they share profits and losses 70/30. They have capital
accounts balances of $350,000 and $480,000, respectively, when they agree to admit
Richard to the company. All parties have agreed that the partnership will first revalue
tangible assets to their market value ($150,000 above book value) and then Richard will
invest $300,000 for a 20 percent interest in the partnership’s owners’ equity. Record the
revaluation and the admission of Richard into the partnership assuming the goodwill
method is applied.

Answer:
Assets 150,000
Bob, capital ($150,000 x .70) 105,000
Norman, capital ($150,000 x .30) 45,000
 Book value of capital before the investment $ 980,000
($350,000 + $480,000 + $150,000)
Richard’s investment 300,000
Total book value of capital after the investment $1,280,000
Richard’s percentage ownership 0.20
Book value of Richard’s ownership percentage capital $ 256,000

Goodwill to existing partners

$300,000 = (.20)($1,280,000 + Goodwill)

$300,000 = $256,000 + .20 (Goodwill)
$44,000 = .20 (Goodwill)
Goodwill = $220,000

Cash 300,000
Goodwill 220,000
Bob, capital ($220,000 x .70) 154,000
Norman, capital ($220,000 x .30) 66,000
John, capital 300,000

309. (10 Points) moderate

Skip and Amy are partners in a struggling company. An investor, James, has offered to
join the partnership and provide the needed expertise. Skip and Amy have capital
account balances in the amount of $120,000 and $160,000, respectively, at the date
James is admitted to the partnership and their respective profit and loss ratios are 60
percent and 40 percent. James agrees to invest $60,000 for a 20 percent interest in the
partnership capital. Assuming the goodwill method is applied, record the admission of
James.

Answer:
Book value of capital before the investment $280,000
($120,000 + $160,000)
James’ investment 60,000
Total book value of capital after the investment $340,000
James’ percentage ownership 0.20
Book value of James’ ownership percentage capital $ 68,000

Goodwill to new partner

$60,000 + goodwill = (.20)($340,000 + Goodwill)

$60,000 + goodwill = $68,000 + .20 (Goodwill)
.80 goodwill = $8,000
Goodwill = $10,000

Cash 60,000
Goodwill 10,000
 James, capital 70,000

310. (10 Points) moderate

Rich and Barbara are partners who share profits and losses 70/30. They have been
looking for a new partner to help with the expanding business. Frank has expressed an
interest and discussions are underway. Frank is willing to join the partnership by
investing $270,000 for a 25 percent equity interest. At the date Frank joins the
partnership, Rich and Barbara have capital account balances of $370,000 and $500,000,
respectively. Assuming the goodwill method is applied, record Frank’s admission to the
partnership.

Answer:
Book value of capital before the investment $ 870,000
($370,000 + $500,000)
Frank’s investment 270,000
Total book value of capital after the investment 1,140,000
Frank’s percentage ownership 0.25
Book value of Frank’s ownership percentage capital $ 285,000

Goodwill to new partner

$270,000 + goodwill = (.25)($1,140,000 + Goodwill)

$270,000 + goodwill = $285,000 + .25 (Goodwill)
.75 goodwill = $15,000
Goodwill = $20,000

Cash 270,000
Goodwill 20,000
Frank, capital 290,000

311. (30 Points) difficult

Clark and Nick are partners and they share profits and losses 75/25. They have capital
accounts balances of $250,000 and $380,000, respectively, when they agree to admit Ron
to the company. All parties have agreed that the partnership will first revalue tangible
assets to their market value ($200,000 above book value) and then Ron will invest
$170,000 for a 20 percent interest in the partnership’s owners’ equity. Record the
revaluation and Ron’s admission into the partnership assuming the goodwill method is
applied.

Answer:
Assets 200,000
Clark, capital ($200,000 x .75) 150,000
Nick, capital ($200,000 x .25) 50,000

Book value of capital before the investment $ 830,000

($250,000 + $380,000 + $200,000)
 Ron’s investment $ 170,000
Total book value of capital after the investment $1,000,000
Ron’s percentage ownership 0.20
Book value of Ron’s ownership percentage capital $ 200,000

Goodwill to new partner

$170,000 + goodwill = (.20)($1,000,000 + Goodwill)

$170,000 + goodwill = $200,000 + .20 (Goodwill)
.80 goodwill = $30,000
Goodwill = $37,500

Cash 170,000
Goodwill 37,500
Ron, capital 207,500

312. (10 Points) easy

Sarah, Tanya, and Theresa are partners who share profits and losses 25 percent, 35
percent, and 40 percent, respectively. Theresa has decided to leave the partnership. The
fixed assets of the partnership are undervalued by $50,000. The capital accounts of
Sarah, Tanya, and Theresa before Theresa’s withdrawal are $82,000, $130,000, and
$156,000, respectively. The articles of partnership state that the withdrawing partner’s
share of any differences between market value and carrying value should be recognized
when a partner leaves the partnership. Record the journal entry for the revaluation of the
assets. Record also Theresa’s withdrawal assuming that Marsha purchases Theresa’s
equity.

Answer:
Assets ($50,000 x .40) 20,000
Theresa, capital ($50,000 x .40) 20,000

Theresa, capital ($156,000 + $20,000) 176,000

Marsha, capital 176,000

313. (10 Points) easy

Sarah, Tanya, and Theresa are partners who share profits and losses 25 percent, 35
percent, and 40 percent, respectively. Theresa has decided to leave the partnership. The
fixed assets of the partnership are undervalued by $50,000. The capital accounts of
Sarah, Tanya, and Theresa before Theresa’s withdrawal are $82,000, $130,000, and
$156,000, respectively. The articles of partnership state that the full market value of all
assets and liabilities should be recognized when a partner leaves the partnership. Record
the journal entry for the revaluation of the assets. Record also Theresa’s withdrawal
assuming that Marsha purchases Theresa’s equity.

Answer:
Assets 50,000
 Sarah, capital ($50,000 x .25) 12,500
Tanya, capital ($50,000 x .35) 17,500
Theresa, capital ($50,000 x .40) 20,000

Theresa, capital ($156,000 + $20,000) 176,000

Marsha, capital 176,000

314. (10 Points) moderate

Sam, Tim, and Tyrone are partners who share profits and losses 15 percent, 40 percent,
and 45 percent, respectively. Tyrone has decided to leave the partnership. The fixed
assets of the partnership are undervalued by $80,000. The partners’ capital account
balances before the withdrawal are $70,000, $190,000, and $250,000, respectively. The
articles of partnership state that the withdrawing partner’s share of any differences
between market value and carrying value should be recognized when a partner leaves the
partnership. Record the journal entry for the revaluation of the assets. Record the
withdrawal assuming that Sam purchases 30 percent and Tim purchase 70 percent of
Tyrone’s equity.

Answer:
Assets ($80,000 x .45) 36,000
Tyrone, capital 36,000

Tyrone, capital ($250,000 + $36,000) 286,000

Sam, capital ($286,000 x .30) 85,800
Tim, capital ($286,000 x .70) 200,200

315. (10 Points) moderate

Sam, Tim, and Tyrone are partners who share profits and losses 15 percent, 40 percent,
and 45 percent, respectively. Tyrone has decided to leave the partnership. The fixed
assets of the partnership are undervalued by $80,000. The partners’ capital account
balances before the withdrawal are $70,000, $190,000, and $250,000, respectively. The
articles of partnership state that the full market value of all assets and liabilities should be
recognized when a partner leaves the partnership. Record the journal entry for the
revaluation of the assets. Record the withdrawal assuming that Sam purchases 30 percent
and Tim purchase 70 percent of Tyrone’s equity.

Answer:
Assets 80,000
Sam, capital ($80,000 x .15) 12,000
Tim, capital ($80,000 x .40) 32,000
Tyrone, capital ($80,000 x .45) 36,000

Tyrone, capital ($250,000 + $36,000) 286,000

Sam, capital ($286,000 x .30) 85,800
Tim, capital ($286,000 x .70) 200,200
316. (10 Points) easy
Don, Mark, and James are partners who share profits and losses 25 percent, 20 percent,
and 55 percent, respectively. Mark has decided to leave the partnership. The articles of
partnership state that the withdrawing partner’s share of any differences between market
value and carrying value should be recognized when a partner leaves the partnership.
The fixed assets of the partnership are undervalued by $75,000. The partners’ capital
account balances before the withdrawal are $90,000, $110,000, and $240,000,
respectively. Record the journal entry for the revaluation of the assets. Record the
withdrawal assuming that the partnership acquires Mark’s equity.

Answer:
Assets ($75,000 x .20) 15,000
Mark, capital 15,000

Mark, capital ($110,000 + $15,000) 125,000

Cash 125,000

317. (10 Points) easy

Don, Mark, and James are partners who share profits and losses 25 percent, 20 percent,
and 55 percent, respectively. Mark has decided to leave the partnership. The articles of
partnership state that the full market value of all assets and liabilities should be
recognized when a partner leaves the partnership. The fixed assets of the partnership are
undervalued by $75,000. The partners’ capital account balances before the withdrawal
are $90,000, $110,000, and $240,000, respectively. Record the journal entry for the
revaluation of the assets. Record the withdrawal assuming that the partnership acquires
Mark’s equity.

Answer:
Assets 75,000
Don, capital ($75,000 x .25) 18,750
Mark, capital ($75,000 x .20) 15,000
James, capital ($75,000 x .55) 41,250

Mark, capital ($110,000 + $15,000) 125,000

Cash 125,000

318. (30 Points) difficult

Berry, Carl, and Phil have been partners for many years. Carl has indicated that he plans
to withdraw from the partnership. To prepare for his departure, the following
information is gathered:

Book Market
Value Value_
Current Assets 210,000 210,000
Fixed Assets 850,000 980,000
Total Assets 1,060,000
 Current Liabilities 110,000 110,000
Long-term Debt 220,000 180,000
Berry, Capital (45%) 380,000
Carl, Capital (25%) 180,000
Phil, Capital (30%) 170,000
Total Liabilities and Partnership Equity 1,060,000

The partnership agreement specifies that the withdrawing partner’s portion of the change
in value of any assets and liabilities should be recognized at the date of withdrawal. The
partners agree that $300,000 of partnership assets will be used to purchase Carl’s
ownership equity. The assets are to be financed by borrowing the money on long-term
notes payable. Record these events assuming that the bonus method is used to recognize
the withdrawal.

Answer:
Fixed Assets ($980,000 - $850,000)(.25) 32,500
Long-term Debt ($220,000 - $180,000)(.25) 10,000
Carl, capital 42,500

Cash 300,000
Long-term Debt 300,000

Carl, capital ($180,000 + $42,500) 222,500

Berry, capital ($300,000 - $222,500)(45/75) 46,500
Phil, capital ($300,000 - $222,500)(30/75) 31,000
Cash 300,000

319. (10 Points) moderate

Barbara, Mitch, and Susan are partners with capital accounts of $280,000, $350,000, and
$420,000, respectively. Barbara has informed Mitch and Susan that she is withdrawing
from the partnership. The partners have agreed that the partnership will purchase
Barbara’s ownership interest for $340,000. The profit and loss residual ratios before
Barbara’s retirement are 30 percent, 28 percent, and 42 percent, respectively. Assuming
the bonus method is applied, record Barbara’s withdrawal.

Answer
Barbara, capital 280,000
Mitch, capital ($340,000 - $280,000)(28/70) 24,000
Susan, capital ($340,000 - $280,000)(42/70) 36,000
Cash 340,000

320. (10 Points) easy

Fred, Greg, and Sam are partners with capital accounts of $175,000, $225,000, and
$150,000, respectively. Sam informs Fred and Greg that is withdrawing from the
partnership. The partners agree that the partnership will purchase Sam’s ownership
interest for $200,000. The profit and loss residual ratios before Sam’s retirement are 45
 percent, 35 percent, and 20 percent, respectively. Record Sam’s withdrawal assuming
the bonus method is applied.

Answer:
Sam, capital 150,000
Fred, capital ($200,000 - $150,000)(45/80) 28,125
Greg, capital ($200,000 - $150,000)(35/80) 21,875
Cash 200,000

321. (10 Points) moderate

Jack, Ken, and Laura are partners in a local company. Ken has announced his
withdrawal from the company. The articles of partnership indicate that the withdrawing
partner’s goodwill is to be recognized at the date of withdrawal. Jack, Ken, and Laura
share profits in a 30 percent, 25 percent, and 45 percent ratio, respectively, and their
respective capital accounts just prior to the withdrawal are $225,000, $260,000, and
$325,000, respectively. Estimated goodwill attributable to Ken’s ownership percentage
is $80,000. Prepare the journal entry (entries) necessary to reflect the withdrawal of Ken
assuming that Martin has been approved to become the new partner. Martin pays Ken
$380,000 for 100 percent of his partnership equity.

Answer:
Goodwill 80,000
Ken, capital 80,000

Ken, capital ($260,000 + $80,000) 340,000

Martin, capital 340,000

322. (10 Points) moderate

Doris, Elmer, and Fran are partners in a local company. Doris has announced her
withdrawal from the company. The articles of partnership indicate that the withdrawing
partner’s goodwill is to be recognized at the date of withdrawal. Doris, Elmer, and Fran
share profits in a 20 percent, 35 percent, and 45 percent ratio, respectively, and their
respective capital accounts just prior to the withdrawal are $120,000, $180,000, and
$275,000, respectively. Estimated goodwill attributable to Doris’ ownership percentage
is $50,000. Prepare the journal entry (entries) necessary to reflect the withdrawal of
Doris assuming that Greg has been approved to become the new partner. Greg pays
Doris $190,000 for 100 percent of her partnership equity.

Answer:
Goodwill 50,000
Doris, capital 50,000

Doris, capital ($120,000 + $50,000) 170,000

Greg, capital 170,000

323. (10 Points) moderate

 Shawn, Teresa, and Mark are partners who share profits and losses 25 percent, 35
percent, and 40 percent, respectively. Mark announced his withdrawal from the
company when the partners’ capital accounts were $190,000, $238,000, and $210,000,
respectively. The articles of partnership indicate that the withdrawing partner’s goodwill
is to be recognized at the date of withdrawal. Estimated goodwill attributable to Mark’s
ownership percentage is $75,000. Prepare the journal entry (entries) necessary to reflect
the withdrawal of Mark assuming that Shawn and Teresa acquire Mark’s equity. Shawn
pays Mark $190,000 for 60 percent of Mark’s equity and Teresa pays $130,000 for 40
percent of Mark’s equity.

Answer:
Goodwill 75,000
Mark, capital 75,000

Mark, capital ($210,000 + $75,000) 285,000

Shawn, capital ($285,000 x .60) 171,000
Theresa, capital ($280,000 x .40) 114,000

324. (10 Points) moderate

David, Eric, and Glenn are partners who share profits and losses 35 percent, 40 percent,
and 25 percent, respectively. Eric announced his withdrawal from the company when the
partners’ capital accounts were $220,000, $200,000, and $280,000, respectively. The
articles of partnership indicate that the withdrawing partner’s goodwill is to be
recognized at the date of withdrawal. Estimated goodwill attributable to Eric’s
ownership percentage is $90,000. Prepare the journal entry (entries) necessary to reflect
Eric’s withdrawal assuming that David and Glenn acquire Eric’s equity. David pays
$95,000 for 30 percent of Eric’s equity and Glenn pays $190,000 for 70 percent of Eric’s
equity.

Answer:
Goodwill 90,000
Eric, capital 90,000

Eric, capital ($200,000 + $90,000) 290,000

David, capital ($290,000 x .30) 87,000
Glenn, capital ($290,000 x .70) 203,000

325. (10 Points) easy

Rich, Sam, and Clarence are partners who share profits and losses 15 percent, 45 percent,
and 40 percent, respectively. Sam announced his withdrawal from the company when
the partners’ capital accounts were $90,000, $210,000, and $190,000, respectively. The
articles of partnership indicate that the withdrawing partner’s goodwill is to be
recognized at the date of withdrawal. Estimated goodwill attributable to Sam’s
ownership percentage is $60,000. Prepare the journal entry (entries) necessary to reflect
Sam’s withdrawal assuming that the partnership acquires Sam’s equity.
 Answer:
Goodwill 60,000
Sam, capital 60,000

Sam, capital ($210,000 + $60,000) 270,000

Cash 270,000

326. (10 Points) easy

Hal, Norris, and Eddie are partners who share profits and losses 25 percent, 15 percent,
and 60 percent, respectively. Hal announced his withdrawal from the company when the
partners’ capital accounts were $120,000, $100,000, and $380,000, respectively. The
articles of partnership indicate that the withdrawing partner’s goodwill is to be
recognized at the date of withdrawal. Estimated goodwill attributable to Hal’s ownership
percentage is $30,000. Prepare the journal entry (entries) necessary to reflect Hal’s
withdrawal assuming that the partnership acquires Hal’s equity.

Answer:
Goodwill 30,000
Hal, capital 30,000

Hal, capital ($120,000 + $30,000) 150,000

Cash 150,000

327. (10 Points) moderate

James, Kris, and Lance are partners in a local company. Kris has announced her
withdrawal from the company. The articles of partnership indicate that the entire
partnership’s goodwill is to be recognized at the date of withdrawal. James, Kris, and
Lance share profits in a 30 percent, 25 percent, and 45 percent ratio, respectively, and
their respective capital accounts just prior to the withdrawal are $160,000, $120,000, and
$225,000, respectively. Estimated goodwill is $180,000. Prepare the journal entry
(entries) necessary to reflect the withdrawal of Kris assuming that Felix has been
approved to become the new partner. Felix pays Kris $175,000 for 100 percent of her
partnership equity.

Answer:
Goodwill 180,000
James, capital ($180,000 x .30) 54,000
Kris, capital ($180,000 x .25) 45,000
Lance, capital ($180,000 x .45) 81,000

Kris, capital ($120,000 + $45,000) 165,000

Felix, capital 165,000

328. (10 Points) moderate

Nicole, Melvin, and Joshua are partners in a local company. Melvin has announced his
withdrawal from the company. The articles of partnership indicate that the entire
 partnership’s goodwill is to be recognized at the date of withdrawal. Nicole, Melvin, and
Joshua share profits in a 40 percent, 25 percent, and 35 percent ratio, respectively, and
their respective capital accounts just prior to the withdrawal are $200,000, $150,000, and
$190,000, respectively. Estimated goodwill is $120,000. Prepare the journal entry
(entries) necessary to reflect the withdrawal of Melvin assuming that Hans has been
approved to become the new partner. Hans pays Melvin $160,000 for 100 percent of his
partnership equity.

Answer:
Goodwill 120,000
Nicole, capital ($120,000 x .40) 48,000
Melvin, capital ($120,000 x .25) 30,000
Joshua, capital ($120,000 x .35) 42,000

Melvin, capital ($150,000 + $30,000) 180,000

Hans, capital 180,000

329. (10 Points) moderate

Kim, Jennifer, and David are partners who share profits and losses 40 percent, 25
percent, and 35 percent, respectively. Kim announced her withdrawal from the company
when the partners’ capital accounts were $250,000, $180,000, and $210,000,
respectively. The articles of partnership indicate that the entire partnership’s goodwill is
to be recognized at the date of withdrawal. Estimated goodwill is $95,000. Prepare the
journal entry (entries) necessary to reflect Kim’s withdrawal assuming that Jennifer and
David acquire Kim’s equity. Jennifer pays Kim $180,000 for 60 percent of her equity
and David pays $130,000 for 40 percent of Kim’s equity.

Answer:
Goodwill 95,000
Kim, capital ($95,000 x .40) 38,000
Jennifer, capital ($95,000 x .25) 23,750
David, capital ($95,000 x .35) 33,250

Kim, capital ($250,000 + $38,000) 288,000

Jennifer, capital ($288,000 x .60) 172,800
David, capital ($288,000 x .40) 115,200

330. (10 Points) moderate

Natalie, Oscar, and Paul are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Paul announced his withdrawal from the company when
the partners’ capital accounts were $180,000, $160,000, and $320,000, respectively. The
articles of partnership indicate that the entire partnership’s goodwill is to be recognized
at the date of withdrawal. Estimated goodwill is $110,000. Prepare the journal entry
(entries) necessary to reflect Paul’s withdrawal assuming that Natalie and Oscar acquire
Paul’s equity. Natalie pays Paul $140,000 for 30 percent of his equity and Oscar pays
$310,000 for 70 percent of Paul’s equity.
 Answer:
Goodwill 110,000
Natalie, capital ($110,000 x .30) 33,000
Oscar, capital ($110,000 x .25) 27,500
Paul, capital ($110,000 x .45) 49,500

Paul, capital ($320,000 + $49,500) 369,500

Natalie, capital ($369,500 x .30) 110,850
Oscar, capital ($369,500 x .70) 258,650

331. (10 Points) easy

Cindy, Tony, and Ben are partners who share profits and losses 25 percent, 55 percent,
and 20 percent, respectively. Ben announced his withdrawal from the company when the
partners’ capital accounts were $120,000, $250,000, and $100,000, respectively. The
articles of partnership indicate that the entire partnership’s goodwill is to be recognized
at the date of withdrawal. Estimated goodwill is $40,000. Prepare the journal entry
(entries) necessary to reflect Ben’s withdrawal assuming that the partnership acquires
Ben’s equity.

Answer:
Goodwill 40,000
Cindy, capital ($40,000 x .25) 10,000
Tony, capital ($40,000 x .55) 22,000
Ben, capital ($40,000 x .20) 8,000

Ben, capital ($100,000 + $8,000) 108,000

Cash 108,000

332. (10 Points) easy

Mary, Nick, and Shawn are partners who share profits and losses 15 percent, 25 percent,
and 60 percent, respectively. Mary announced her withdrawal from the company when
the partners’ capital accounts were $80,000, $140,000, and $280,000, respectively. The
articles of partnership indicate that the entire partnership’s goodwill is to be recognized
at the date of withdrawal. Estimated goodwill is $50,000. Prepare the journal entry
(entries) necessary to reflect Mary’s withdrawal assuming that the partnership acquires
Mary’s equity.

Answer:
Goodwill 50,000
Mary, capital ($50,000 x .15) 7,500
Nick, capital ($50,000 x .25) 12,500
Shawn, capital ($50,000 x .60) 30,000

Mary, capital ($80,000 + $7,500) 87,500

Cash 87,500
 Short Answer Questions

333. Helen and Richard are considering forming a partnership. They have worked out many
of the issues but they are unsure about how the accounting records have to be maintained.
They come to you for information pertaining to the application of GAAP for partnership
records.

Answer: Partnerships are not required to comply with generally accepted accounting
principles (GAAP) unless the entity has publicly traded debt securities or the entity is
required to comply with GAAP by a creditor.

334. What are the similarities and differences among proprietorships, partnerships, and
corporations with regard income tax filing.

Answer: Partnerships and proprietorships are viewed as an extension of the owners.

Neither entity is separately taxed on income. The taxable income or loss is allocated to
the owners according to the partners’ profit and loss sharing agreement. Once a partner’s
taxable partnership income is determined, the income is included on the partner’s
individual tax return. The partnership is required to file an informational tax return
(Form 1065) to disclose how the taxable income has been allocated to the partners. The
corporation, on the other hand, is a taxable entity and income tax is paid on the
corporation’s taxable income.

335. Three individuals are considering forming a business together. One of their concerns is
the liability exposure from the business. Prepare a short note to these individuals
explaining the extent of liability each has when forming a partnership and a corporation.

Answer: A partner may bind the partnership by contract when conducting business in the
name of the partnership. This results in each partner being liable for the partnership
business dealings of the other partners. In addition, partners have unlimited liability with
regard to partnership debts. On the other hand, stockholders of a corporation do not
share such legal liability. The corporation is a legal entity separate from the owners and
management can commit the corporation to legal contracts in the name of the
corporation, but not the stockholders. Thus, management of the corporation can sue in
the name of the corporation and the corporation can be sued. As a result, the
stockholders are generally not liable for the debts of the corporation beyond the amount
invested.

336. Alex is the owner of a small local business. He has operated as a proprietorship for many
years but his health is starting to fail. As a result, Alex is going to reduce the number of
hours worked in the business. He has asked you to explain how changing his business to
a partnership would affect him (legally). Prepare a brief memo outlining the similarity
and differences between a proprietorship and a partnership with regard to legal issues.
 Answer: Similarities to be discussed include (1) ease of formation and (2) unlimited
owner’s liability. Difference to be discussed is shared management.

337. Compare and contrast the proprietary theory of equity and the entity theory of equity
with regard to partnerships.

Answer: The proprietary theory is based on the notion that the business entity is an
extension of the owners. The entity theory is based on the notion that the business entity
is distinct and separate from the owners. Partnerships contain elements of both the
proprietary and entity theories. Support for the proprietary theory can be found in the
following:
Individual partners are liable for all debts of the partnership
Salaries of partners are viewed as distributions of income, not components of net
income
The admission of a new partner or withdrawal of an existing partner results in the
dissolution of the partnership
Assets contributed to the partnership retain the existing tax basis to the partner
contributing
A partner’s income tax includes the partner’s share of partnership net income, and
the partnership does not pay income taxes

Support for the entity theory can be found in the following:

Assets contributed to the partnership become property of the partnership
A partnership can enter into contracts
Partners do not have claims to specific assets
Partnership creditors have priority claim to partnership assets and the creditors of
partners have priority claim to partner’s assets in the event of liquidation
Continuity of the partnership when admission or withdrawal of partners occurs
338. Partnership accounting applies elements of both the proprietary and entity theories.
Explain the underlying theoretical basis for the proprietary theory and the entity theory.

Answer: The proprietary theory is based on the notion that the business entity is an
extension of the owners. The entity theory is based on the notion that the business entity
is distinct and separate from the owners.

339. Hans and Felix are attempting to work out the final issues for forming a partnership.
They are currently debating the values to assign to noncash assets contributed to the
partnership by each partner. Hans believe that the market value has to be assigned to
these assets while Felix believes there may be other alternatives. Prepare a short note to
the two potential partners clarifying this issue.

Answer: The three most likely valuations that can be assigned to noncash assets are the
1) contributor’s carrying value, 2) contributor’s tax basis, or 3) market or appraised value
of the asset. The amount to be assigned to the noncash assets can be determined by
agreement among the partners or by appraisal (if market values are used).

340. Berry and Charlie plan to start a partnership. One partner is contributing an old building
while the other partner is contributing several delivery trucks. Both partners are also
contributing cash. A difference of opinion exists regarding the amount at which the
building and delivery trucks are to be placed on the partnership’s books. Berry believes
the carrying values should be recorded. Charlie objects because it would give Berry too
great a share of the partnership’s owners’ equity. Charlie believes the tax basis should
be used. Berry objects to the tax basis for the same reason Charlie objects to the book
basis. The partners ask for your opinion. How do you respond?

Answer: The amounts recorded on the partnership’s books do not determine the amounts
assigned to each individual capital account. The amount recorded for the assets will help
determine total capital, not how total capital is divided between the partners.

341. Explain how the assumption of a liability by the partnership on an asset contributed by a
partner impacts the contributing partner’s capital account and tax basis in that asset.

Answer: Generally the value assigned to the asset (e.g., carrying value, tax basis, market
value) is explicitly reduced by the amount of the liability assumed to determine the
contributing partner’s capital account balance. The reduction may be implicit if partners
agree to create capital accounts in equal amounts through such techniques as the
recognition of goodwill for other partners. The tax basis of a contributing partner is only
reduced by the part of the liability assumed by the partnership because the IRS interprets
this event as all partners sharing the obligation so the contributing partner is still
obligated for part of the liability.

342. Clark, Mitchell, and Thomas are forming a partnership. Each partner is contributing cash
and other tangible assets. In addition, Clark has a significant amount of experience in
operating the type of business being created. The partners do not like the idea of
 recording goodwill but they are not sure how to otherwise recognize the additional
contribution Clark is making. Prepare a brief memo explaining a different way to
recognize Clark’s contribution.

Answer: The initial capital accounts can be modified to reflect Clark’s additional
contribution. Mitchell and Thomas would give up an agreed amount of capital to be
assigned to Clark. This approach is called the bonus method. Mitchell and Thomas are
giving a bonus to Clark because of the additional contribution that cannot be measured in
a traditional manner.

343. James and Rachel are forming a partnership. They agree on the values to assign to all of
the assets and liabilities. The partners also want to recognize that Rachel has many
contacts that will be of value to the business. A mutual friend who owns a business has
told them the bank will be unhappy with their balance sheet if they record goodwill for
Rachel. How else can they recognize Rachel’s contacts?

Answer: The bonus method can be used instead of the goodwill method. The bonus
method reallocates capital from James to Rachel to recognize the contribution made by
Rachel in excess of the identifiable assets. As a result, James will have a reduced capital
account balance and Rachel will have a greater balance.

344. Barry, George, and Felix are forming a partnership. Each partner is contributing cash
and other tangible assets. George and Felix are contributing greater amounts of cash and
other tangible assets but Barry has a significant amount of experience in operating the
type of business being created. A mutual friend has suggested that the three make their
initial capital accounts equal in value. George and Felix do not like the idea of recording
their capital accounts at an amount less than the market value of what they are
contributing but they are not sure how to otherwise recognize the additional contribution
Barry is making. Prepare a brief memo explaining a different way to recognize Barry’s
contribution.

Answer: The additional contribution being made by Barry could be recorded as goodwill.
This intangible asset would be created at an amount agreed by the partners. Goodwill
results in an increase in the value of Barry’s capital account but it does not result in a
decrease in the value of the other partners’ capital accounts.

345. Explain how partners may determine the dollar amount of goodwill recognized at the
date a partnership is formed.

Answer: The value assigned to goodwill can be determined in any legal manner
agreeable to the partners. One possibility is to have an independent appraisal of the
intangible asset contributed. Another possibility is for the partners to agree on an
assigned value of the intangible asset.

346. Explain how a drawing account used by a partnership is similar in concept to a dividend
account used by a corporation.
 Answer: Both accounts contain information pertaining to distributions to owners. These
distributions can take any form such as cash, inventory, and other assets. Both accounts
are temporary in nature. They do not exist on the company’s balance sheet and they are
closed at the end of the accounting period to permanent equity accounts (partnership
capital accounts for drawing accounts and retained earnings for dividends).

347. Vicky, Robert, and Ray are forming a partnership. They have asked for some
information regarding the allocation of profits and losses among the partners. While they
believe that each partner will contribute significantly to the partnership, this contribution
will take different forms. They are unsure how to recognize these different types of
contributions. Prepare a short note explaining the different components that might be
considered when allocating partnership profits to individual partners.

Answer: Partnership profits and losses can be allocated in any manner but there are four
common components: interest on capital balance, salary, bonus, and residual percentages.
These different components reward partners for contributions of economic resources,
labor and expertise, taking on special responsibilities, and agreed allocation of any
residual profit or loss remaining after the other components have been considered.

348. Susan is joining an already existing partnership. She is reading the profit and loss
sharing part of the partnership agreement. She calls you with a question regarding a term
she does not understand, weighted average capital balance. Prepare a short note
explaining what is meant by this term.

Answer: The weighted average capital balance is the calculated average dollar amount in
the capital account after considering the length of time that balance existed. This method
of computing the average is less subject to manipulation that the simple average, which is
beginning amount plus ending amount divided by two.

349. Ben is a new partner in a local company. When he became a partner, he received a copy
of the partnership agreement including the profit and loss sharing agreement. Ben is
concerned about the interest on capital balance portion of the profit and loss sharing
agreement because his capital account is very small. Prepare a short note explaining the
reason this component of profit and loss allocation exists.

Answer: The interest on capital balance is meant to reward partners for contributions of
economic resources. As a new partner, a small capital account will likely exist and
therefore this component of the profit allocation will be small. As the capital account
grows through additional investment and profit accumulation, this component of the
profit and loss allocation will also grow.

350. Michelle is a new partner is considering becoming a partner in a small company. She
obtained a copy of the most recent income statement and is surprised when she does not
find salaries on the income statement. She asks you if it is unusual for partners to not
receive a salary from their work in the partnership.
 Answer: The lack of salary expense on the income statement does not mean that the
partners do not receive a salary. Partner salaries are not on the income statement, they
are part of the profit allocation.

351. Are there any differences between bonuses offered to partners and bonuses offered to
managers in corporations?

Answer: Bonuses offered to partners and bonuses offered to managers in corporations

are the same. Both are forms of compensations designed to encourage performance.
Furthermore, both should be based on criteria within the control of the person who will
receive the bonus.

352. Ben and Natalie are forming a partnership. They have worked out many of the details
but they are confused about how to divide profits and losses. They have spoken with
several associates who are in different partnership and there seems to be some
inconsistencies. Some partnerships have residual profit and loss ratios while others do
not. Prepare a note to Ben and Natalie informing them of the reason for this
inconsistency.

Answer: Residual profit and loss ratios are not needed if the ratios are to be equal. The
default profit and loss ratio, if not stated, is that all partners will share the residual profit
and loss equally. If the desire is to share the residual amount of profit or loss in some
other proportion, the allocation must be disclosed.

353. Do partnership residual profit ratios have to be the same as partnership residual loss
ratios? Why or why not.

Answer: Residual profit and loss ratios are part of a contractual agreement among the
partners. As a result, the partnership can apply any ratios agreed by the partners. The
ratios are typically the same for profits and losses but they can differ.

354. Alex, Shawn, and Tammy are partners in a local company. They have been conducting
business for a number of years and Shawn recently told the partners that he is going to
reduce his activities in the partnership. As a result, the partners have agreed that the
profit and loss sharing arrangement should be modified. They have agreed to adjust the
salaries and the profit and loss residuals. They come to you with a concern regarding the
assets that are currently owned by the partnership. The partners know that the assets are
worth more than the amount recorded on the financial records but they do not know how
this should be considered when the profit and loss ratios are changed. Prepare a short
note to the partners outlining the their options.

Answer: The difference between the market and book values of assets that exist when the
profit and loss ratios change can be addressed in several ways. One way is to make a list
of these assets and their market value at the date of the change. When the assets are sold,
the amount of the gain that existed when the profit and loss ratios were changed would be
 allocated based on the previous profit and loss ratios and any change in market value that
occurs after the ratios are changed would be allocated based on the new ratios. Another
approach is to revalue the assets at the date the profit and loss ratios are changed. The
gain would be allocated based on the previous ratios. A third approach is to determine
the impact of the unrealized gains on the capital accounts due to the change in the ratios
and directly adjust the capital accounts. The gain on the assets at the date of sale would
then be allocated based on the new ratios. All three approaches give the same end result,
the choice is a matter of preference by the partners.

355. Partners sometimes change the profit and loss ratios used to determine the allocation of
profits and losses. When this occurs, why would the partners choose to prepare a list of
assets with market values different from book values when they could have chosen to
revalue the assets to market value at the date the profit and loss ratios were changed?

Answer: Some partners and possibly their creditors may not want to have the assets
revalued to market value. The revaluation is a significant departure from GAAP and the
partners and their creditors may prefer to have the partnership’s financial records
maintained in accord with GAAP.

356. Sarah, a friend who knows you are a CPA comes to you with a concern. She has been
asked by a colleague to consider becoming a partner in a small company. She will be the
fourth partner in the company. Sarah has had two meetings with the current partners.
She is concerned that one of the current partners who does not know her has been asking
a variety of questions pertaining to her business practices beliefs and her personal ethics.
Sarah asks if you have any idea why this partner would ask such questions. How do you
respond?

Answer: The current partner may be concerned because the existing partners will have
unlimited liability for the actions of the new partner. Given that this partner does not
know Sarah, he/she is gathering information so a choice can be made about accepting
such risk.

357. Don and Jerry are partners in a publishing company. Don is interested in reducing his
involvement in the company and they have been searching for a new partner to take on
some of the work. They learn that Ted is interested in joining the partnership and they
enter into negotiations. Don is willing to support Ted joining the partnership if Ted will
pay Don $250,000. Don will not transfer any of his equity to Ted but will allocate 30
percent of his profit allocation to Ted. Ted comes to you with a concern about Don’s
unwillingness to allocate any equity to him even though a significant investment is
required. How do you respond?

Answer: There is no requirement for a partner to give up equity to a new partner

acquiring part of his ownership. Ted’s is purchasing an ownership in the income stream
of the partnership. His capital account would start at $0 an increase as the partnership
has income.
358. Sally, Robert, and Stuart are partners in a manufacturing company. They are considering
allowing Dick to acquire an ownership interest in the partnership by purchasing part of
Stuart’s equity. Dick is interested in purchasing 40 percent of Stuart’s equity. Dick
comes to you with a question just before a negotiating session with the current partners.
He asks if his ownership in Stuart’s equity gives him the right to 40 percent of Stuart’s
profit allocation or if that is a separate issue. How do you respond?

Answer: A purchase of Stuart’s equity is a separate issue from the allocation of profits
and losses. These two items have to be negotiated simultaneously but they are
independent. Dick has to be comfortable with the outcome on both issues if he is going
to acquire a part ownership in the partnership.

359. Fred is negotiating an investment to join a partnership. The existing partners are asking
for an investment of $80,000 for a 20 percent ownership in the partnership’s equity.
Fred is encouraged by this proposal but then he learns that the partners plan to revalue
the assets before Fred’s admission. Fred does not understand the reason for the
revaluations. Prepare a note to Fred explaining why the existing partners want to revalue
the assets before he is admitted.

Answer: The partners believe that the difference between market value and book value of
existing assets belong to them because they have been the partners during the time period
when the assets value increased. As a result, they intend to have the unrealized increase
in value added to their capital accounts so that it will not be shared with the new partner.
Any changes in value after Fred becomes a member of the partnership will be allocated
to all of the partners, including Fred.

360. Why are some people opposed to the revaluation of partnership assets when a new
partner is admitted to the partnership?

Answer: These individuals contend that the partnership is still in operation and there
should be no change in the values assigned to assets and liabilities while the partnership
is in operation. There has not been a change in ownership so there is no transaction to
justify the revaluation.

361. You are a staff accountant for a local company. The partners of a client are discussing
the admission of a new partner. Some partners believe that the partnership’s assets
should be revalued before admission of the new partner while other partners are opposed
to the revaluation. Prepare a short note explaining why it may be appropriate to revalue
the partnership’s assets at this time.

Answer: The change in value of the assets has occurred over time and the partners during
that time should share in the increase in value. The new partner should have no claim to
increases in value before that partner’s investment in the company. In addition, when the
new partner joins the company, there is a new legal entity so recording the assets at the
market value at that date is not inappropriate.
362. Sam and Mark are discussing bringing Susan into the partnership. Susan understands
that the partnership’s assets will be revalued before her admission but she does not
understand why she should invest more in the partnership than her share of the market
value of the partnership’s assets. Prepare a short note to Susan explaining the reason that
it may require a greater investment to become a member of this partnership.

Answer: Revaluing the partnership’s assets does not recognize the goodwill that exists in
the company. The partners have chosen to not record goodwill on the company’s
balance sheet but goodwill still exists. The amount that Susan is investing in excess of
the capital account created represents her investment in the goodwill that already exists in
the company. She is paying a bonus to the existing partners for allowing her to share in
the goodwill of the partnership.

363. Steve is negotiating with the partners in a local business. He would like to become a new
partner in the business but there are several issues he does not understand. One of the
primary issues pertains to the amount of his capital account at the date of investment.
The partners told Steve that he would have to invest $100,000 to join the business but his
capital account would be created for $85,000. Prepare a short note to Steve explaining
why his capital account would be recognized at an amount less than his investment.

Answer: The partnership has an unidentified asset (goodwill) that has value to the
company. The partners have chosen to not record goodwill on the company’s balance
sheet but goodwill still exists. The amount that Steve is investing in excess of the capital
account created represents his investment in the goodwill that already exists in the
company. He is paying a bonus to the existing partners for allowing him to share in the
goodwill of the partnership.

364. Jim and Fred have decided to admit Richard into their partnership. Jim and Fred know
that they are going to apply something called the bonus method to record the admission
of Richard into the partnership but they do not understand the technical accounting part
of the transaction. As a result, they do not understand why Richard’s capital account will
be created at an amount greater than the amount of his investment in the partnership.
Prepare a short note to Jim and Fred explaining the reason that Richard’s capital account
is created for this amount.

Answer: The parties have agreed that Richard is going to receive a certain percentage of
the partnership’s equity at the date of the investment. They have also agreed on the
amount that Richard will invest. When the investment takes place, the bonus method
required Richard’s capital account to be created at the agreed percentage of the total
capital after the investment. This amount may be less than, equal to, or more than the
amount invested. If it is less than or more than the amount of the investment, the capital
accounts of the existing partners is adjusted to make up for the difference.

365. John and Joel are negotiating with a potential partner to join their local business. They
would like Laura to become a new partner in the business but there are several issues
they do not understand. One of the primary issues pertains to the amount of his capital
 account at the date of investment. The partners agreed that Laura would have to invest
$75,000 to join the business and they agree that he is going to have a 30% equity interest
in the partnership. What they did not realize is that their capital accounts were going to
decrease when Laura joined the partnership. Prepare a short note to John and Joel
explaining why their capital accounts would be reduced when Laura joins the company.

Answer: The partners have agreed that Laura is contributing something to the partnership
in addition to the tangible assets. They have also agreed on the value of this contribution
when they established the interest she would have in the partnership’s total capital.
When the bonus method is applied, the total capital (based on the existing partners’
capital plus the investment) is allocated to the new and existing partners in the agreed
manner. If the new partner is receiving an equity interest more or less than the amount
invested, the existing partners’ capital accounts must be adjusted. In this instance, the
capital account of the new partner is greater than the amount invested so the existing
partners’ capital accounts must be reduced.

366. Shawn is currently in discussion with Ted and Mark regarding his joining their
partnership. Initial discussions resulted in an agreement that Shawn would contribute
$50,000 for a 20 percent equity interest in the partnership. The last discussion was about
how the transaction would be disclosed in the partnership’s financial statements. Shawn
noticed that the Ted and Mark’s capital accounts were greater in the pro forma balance
sheet and that goodwill had been added to the balance sheet. Shawn asks for an
explanation of this change. You are the accountant attending the meetings, how do you
respond?

Answer: The partnership agreement indicates that the goodwill method is to be applied
when new partners join the company. In this instance, Shawn is contributing more than
his share of the book value of the company. This implies that there exists goodwill in the
company. The goodwill is recorded and allocated to Ted and Mark because they were
the partners when the goodwill was developed. As a result, Shawn’s $50,000 investment
will exactly equal his share of the partnership’s book value after the goodwill is recorded.

367. You are conducting training for new loan officers of a bank. The topic of the day is
partnerships and their changes in ownership. The bank often receives loan requests when
partnerships are expanding. At the same time, the partnership may also be adding a new
partner to increase the company’s capital and improving its potential for a loan from the
bank. You hand out several partnership balance sheets before and after a new partner has
joined. One loan officer asks about the reason for a change in existing partner capital
accounts and the addition of goodwill to the balance sheet. How do you respond?

Answer: Partnerships are permitted to record goodwill when a new partner joins the
company. Estimated goodwill is determined by evaluating the new partner’s investment
and that partner’s share of the partnership’s total equity after the investment. If the
investment results in the new partner receiving less than his/her share of the partnership’s
equity, goodwill is said to exist in the current partners. As a result, this goodwill is
recorded and allocated to the current partners.
368. Three investors have asked for your assistance in planning the formation of a partnership.
After about two hours of discussion the group arrives at the topic of how to admit
additional partners in the future or retire existing partners. You explain that there are two
methods that can be used to account for these events: the bonus method and the goodwill
method. One of the partners listens to the explanation of the two methods and then asks
for you to summarize the criteria that may be used to determine which method this
partnership wants to use. Prepare a response to the partner’s request.

Answer: The difference that exists when comparing the bonus method and the goodwill
method is whether the partners wish to recognize goodwill on the balance sheet. The
goodwill method will result in greater total assets than the bonus method but the
relationship that exists among the partners will be the same regardless of the method
applied.

369. Why would partners in an existing partnership agree to allocate an equity interest to a
new partner that is greater than the value of the identifiable net assets contributed by the
new partner?

Answer: The existing partners would be willing to allocate a capital account to a new
partner greater than the value of the identifiable new assets contributed because the new
partner is contributing unidentifiable assets to the partnership. These other assets may
include business expertise, a good reputation, or existing customers. The additional
assets contributed to the partnership result in the new partner having goodwill.

370. You are an analyst for a local bank. A question just arrived in your email from a new
loan officer. The loan officer is reviewing information from a small partnership
requesting a loan. The partnership indicates that one of the partners is withdrawing from
the partnership. The remaining partners send a current balance sheet and a pro forma
balance sheet after the withdrawal. The loan officer is confused because the withdrawing
partner’s capital account is deleted and all of the other partners’ capital accounts have
been reduced. Why might all of the other partners’ capital accounts be reduced?

Answer: There are two reasons why the remaining partners’ capital accounts could be
reduced. First, the partnership may have revalued assets to their market value. If the
market value were less than book value, the capital accounts would be reduced. The
second, and more likely, reason is that the remaining partners are going to pay a bonus to
the withdrawing partner. As a result, each of the remaining partners’ capital accounts
will be reduced by his/her proportion of the bonus paid.

371. Jennifer is confused with regard to the recognition of the withdrawal of a partner from
the company. The partnership agreement indicates that they will apply the bonus method
to recognize the withdrawal and that any bonus will be shared by the remaining partners
based on their profit and loss ratio. Jennifer was surprised when she is assigned 40
percent of the bonus paid even though she only has a 35 percent ownership interest in the
partnership. How do you respond?
Answer: The remaining partners, based on their profit and loss residual ratios, absorb the
bonus paid to the withdrawing partner. As a result, Jennifer’s 35 percent ownership
became 40 percent of the remaining equity after the existing partner was removed from
consideration.
 CHAPTER 7
PARTNERSHIP FORMATION, OPERATION,
AND CHANGE IN OWNERSHIP
SUMMARY OF ITEMS BY TOPIC

Conceptual Computational
True- Multiple Multiple Short
False Choice Choice Problems Answer
Contrasting partnerships, 1-15 107-112 333-336
proprietorships, and
corporations
Equity theories applied to 16-21 113-115 337-338
partnerships
Articles of partnership 22-25 116-117
Initial capital 26-28 118-119 275-277 339-340
contributions
Carrying value assigned 29-30 120 169 275-276
noncash assets
Tax basis assigned 31-33 121 276
noncash assets
Market value assigned 34-36 122 277
noncash assets
Liabilities assumed by 37-40 123 170 278 341
partnership
Partnership formation, 41-47, 124-126 171-173 279-280 342-343
bonus method 49
Partnership formation, 41-44, 127-129 174-176 281-282 344-345
goodwill method 48-50
Drawing accounts 51-53 130-132 346
Sharing profits and losses 54-55 133 347
Interest on capital 56-59 134, 136 177-178, 185, 283-284, 348-349
balances portion of profit 187 288-289
and loss allocation
Salary portion of profit 60-62 135, 137 185-186 288-289 350
and loss allocation
Bonus portion of profit 63-65 138-139 179-181, 185 285-286, 351
and loss allocation 288-289
Residual ratio portion of 66-71 140-142 182-187 287-289 352-353
profit and loss allocation
Unrealized holding gains 72-74 143-144 188-205 290-295, 354-355
and losses 297
 Changes in ownership 75-77 145 356
Admission of new partner 78-80 146-148 206-207 296-297 357-358
- no change in net assets
Admission of new partner 81-83 149-150 208-209 298-299, 359-361
- change in net assets - 302, 305,
revaluation of existing 308
assets
Admission of new partner 84-86 151-153 210-219 300-302 362-363
- bonus to existing
partners
Admission of new partner 87-89 154-155 220-230 303-305 364-365
- bonus to new partner
Admission of new partner 90-92 153, 156- 231-240 306-308 366-368
- goodwill to existing 157
partners
Admission of new partner 90, 93- 158-159 241-249 309-311 368-369
- goodwill to new partner 94
Withdrawal of partner - 95-100 160-162 250-253 312-317
revaluation of existing
assets
Withdrawal of partner - 95-97, 163-165 254-261 318-320 370-371
bonus method 101-103
Withdrawal of partner - 95-97, 166-168 262-274 321-332
goodwill method 104-106

True-False Statements
1. A partnership is an association of two or more investors to carry on as co-owners a
business for profit.

2. Only individuals are allowed to be partners in a partnership.

3. Proprietorships and partnerships are similar in that they are both easily formed.

4. Proprietorships and partnerships are different in that proprietors have unlimited legal
liability while each partner’s legal liability is limited to his/her percentage ownership in
the partnership.

5. A partner’s personal assets may be taken by creditors to pay partnership debts if the
partnership is unable to meet its obligations.

6. Partnerships are not required to prepare financial statements in accordance with

Generally Accepted Accounting Principles unless they have publicly traded debt or are
required to follow GAAP by a creditor.
7. For a partnership to get an unqualified audit opinion, the financial records must conform
to Generally Accepted Accounting Principles.

8. Most small partnerships maintain their financial information in accordance with

Generally Accepted Accounting Principles.

9. Tax authorities basically view partnerships and proprietorships as extensions of their

owners.

10. Partnerships are not required to pay any taxes.

11. The taxable income of all partners does not necessarily sum to the net income of the
partnership.

12. The only accounting difference that must exist between partnerships and corporations is
the reporting of the ownership equity.

13. The manner in which a partnership and a corporation are formed is very similar.

14. It is generally easier to transfer ownership interest in a corporate form of business than in
a partnership.

15. A partnership legally ceases to exist each time a new partner joins the partnership or an
existing partner leaves the partnership

16. The proprietary theory of equity is based on the notion that a business entity is distinct
from the owners.

17. The entity theory of equity is based on the notion that a business entity is distinct from
the owners.

18. An individual partner’s personal responsibility for partnership debts is an example of the
entity theory of equity.

19. The dissolution of a partnership because of the admission of a new partner or withdrawal
of an existing partner is an example of the proprietary theory of equity.

20. The fact that partnerships can enter into contracts is an example of the proprietary theory
of equity.

21. Contributed assets becoming property of the partnership is an example of the entity
theory of equity.

22. The Uniform Partnership Act is the basis for partnership laws in many states.

23. A written agreement is required to form a partnership.

24. When a partnership is formed without a written agreement, the state laws where the
partnership is formed will establish the legal relationship between partners.

25. All provisions of state partnership law must be applied when a partnership is formed.

26. Partners make contributions of equal size when forming a partnership

27. There are different ways the partnership can value noncash assets contributed to the
partnership.

28. Appraisals are not necessarily required when assigning value to noncash assets
contributed to the partnership.

29. Assigning a noncash asset the contributor’s carrying value could result in a misallocation
of gain or loss if the asset is sold.

30. An asset’s carrying value should not be considered when establishing the initial capital
accounts of partners.

31. The tax basis of contributed noncash assets must be used to determine partnership
income allocation for tax reporting purposes.

32. Partnerships are required to file an informational return (Form 1065) with the IRS
indicating the amount of partnership income allocated to each partner.

33. The income assigned to each partner for financial accounting purposes will equal the
partner’s partnership income included on the partner’s individual income tax return.

34. The market value of noncash assets contributed to the partnership may be used for
computing the partners’ taxable income.

35. A contributing partner’s capital account may be assigned the market value of noncash
assets contributed but a market value assignment is not required.

36. The market value of noncash assets contributed to a partnership is the only relevant value
when determining the partners’ beginning capital balances.

37. The assumption of a liability by the partnership with regard to a noncash asset
contributed to the partnership by a partner will affect the value assigned to the partner’s
capital account.

38. The tax basis of a noncash asset contributed to a partnership with an accompanying
liability will not change as a result of the contribution.

39. When a noncash asset is contributed to a partnership with an accompanying liability, the
book value of the asset must become the cost basis of the asset on the partnership’s
financial records.
40. The assumption of a liability related to a noncash asset contributed to a partnership
reduces the value contributed.

41. Initial partner capital balances must equal the sum of the net assets contributed to the
partnership by the partner.

42. Initial partner capital balances are determined by agreement among the partners.

43. Only tangible assets contributed to the partnership can be considered when creating
initial capital balances.

44. There are two ways to consider unidentifiable intangible assets contributed to a
partnership: the bonus method and the goodwill method.

45. The bonus method of recognizing unidentifiable intangible assets contributed at a

partnership’s formation does not result in a net increase in total owners’ equity.

46. The bonus method of recognizing unidentifiable intangible assets contributed at a

partnership’s formation has to make the capital account balances for all partners equal.

47. The bonus method of recognizing unidentifiable intangible assets contributed at a

partnership’s formation will result in all of the partner’s capital accounts increasing.

48. Application of the goodwill method when forming a partnership requires partners to
agree on the amount of goodwill to be assigned to a partner(s).

49. At the date the partnership is formed, the total partner capital will be the same regardless
of whether the bonus method or the goodwill method is used to recognize unidentifiable
intangible assets.

50. Goodwill can be assigned to more than one partner at the date the partnership is formed.

51. The ability of partners to withdraw resources from the partnership is controlled
exclusively by the laws of the state where the partnership resides.
52. The articles of partnership often control the size of withdrawals partners are allowed to
make.

53. If a partnership makes a payment on behalf of a partner, a withdrawal has occurred.

54. Partnerships are required to indicate the manner in which profits and losses are to be
allocated among the partners.

55. With the exception of the residual profit and loss ratio, partners can agree to apply profit
and loss allocation components in any order.

56. The interest component of partnership profit and loss allocation rewards the partner for
labor and expertise brought into the partnership.
57. The purpose of the interest on capital balances component of partnership profit and loss
allocation is to reward partners for contributing economic resources to the partnership.

58. The interest on capital balances component of partnership profit and loss allocation is
always based on each partner’s beginning or period capital balance.

59. The interest on capital balances component of partnership profit and loss allocation is
generally stated as a percentage of the capital balance.

60. The salary portion of the profit and loss allocation is set in the articles of partnership and
will not change over time.

61. The salary portion of the partnership profit and loss allocation is not included in the
partnership’s income statement.

62. The salary portion of the partnership profit and loss allocation is used to compensate
partners for the time and effort expected in the business.

63. Partnerships are required to have bonus clauses in the articles of partnership.

64. Bonus to partners can be based on any criteria on which the partners agree.

65. Partnership bonus arrangements must consider net income as part of the bonus
calculation.

66. A residual interest is always a component of partnership profit and loss allocation.

67. Partnership profit and loss residual percentages must be equal.

68. Partnership profit and loss residual percentages must be the same for profits as they are
for losses.
69. Partnership profit and loss residual percentages are used to allocate any remaining profit
or loss to partners after all other allocation components have been considered.

70. Partnership residual profit and loss percentages may be changed by agreement of the
partners.

71. Partnership residual profit and loss percentages do not have to be the last component
applied in the profit and loss allocation process.

72. When partnership profit and loss ratios are changed, the difference between market and
book values should be determined and allocated to partners based on the currently
existing profit and loss ratios.

73. Partnerships must revalue assets up and/or down when the profit and loss ratios are
adjusted.
74. When an error is discovered in the financial records of a partnership, it should be
corrected immediately. Allocation of any change to capital accounts as a result of an
error correction should be based on the profit and loss ratios that existed when the error
occurred.

75. The dissolution of a partnership occurs only when the partnership is terminating
operations and going out of business.

76. One reason a change in the number of partners in a partnership through the addition or
withdrawal of a partner is important because the partners have unlimited liability.

77. A new partner in a partnership accepts unlimited liability for actions that occurred before
that partner joined the partnership.

78. The admission of a new partner into a partnership can occur without any new assets
being invested into the partnership.

79. If a new partner is going to acquire an ownership interest in a partnership directly from
another partner, the other partners do not need to approve the admission.

80. If a new partner acquires 40 percent of an existing partner’s equity in the partnership, the
new partner is also entitled to 40 percent of the existing partner’s profit and loss
allocation.

81. When a new partner is joining a partnership by making a payment to the partnership for
an amount more than book value, the partners are required to choose one of three
methods of recording the new partner’s payment in excess of book value.

82. The revaluation of assets and liabilities at the date a new partner joins the partnership, by
investing assets directly into the partnership, does not eliminate the possibility that the
partnership might need to record bonuses or goodwill as part of the admission of the new
partner.

83. The amount that assets are revalued when a new partner joins a partnership is always
shared by existing partners equally.

84. If a new partner’s capital account is created for an amount less than the value of net
assets contributed, an error has been made in the partnership’s accounting records.

85. The recognition of a bonus to existing partners at the date a new partner is admitted to a
partnership often occurs in lieu of the recognition of goodwill for the existing partners.

86. The bonus recognized by existing partners when a new partner is admitted to a
partnership is commonly shared among the existing partners based on the existing
partners’ relative profit and loss residual ratios.

87. It is possible for a new partner’s capital account to be established at an amount greater
than the market value of the identifiable assets invested.
88. New partners are never recipients of bonuses when they join the partnership.

89. A bonus paid to a new partner results in a reduction to the capital accounts of the existing
partners in proportion to their profit and loss sharing ratios.

90. The goodwill method of admitting a new partner to a partnership results in greater total
assets than the bonus method of admitting a new partner.

91. When the goodwill method is applied to recognize the admission of a new partner and
the existing partners are responsible for the goodwill, the new partner’s capital account
will always be established equal to the amount of the contribution to the partnership.

92. The existing partners will always recognize goodwill when a new partner is admitted to
the company and the goodwill method is applied.

93. When the goodwill method is applied to recognize the admission of a new partner and
the new partner is responsible for the goodwill, the new partner’s capital account will be
established at the amount of the contribution.

94. When new partner goodwill is recognized at the date the partner joins the partnership, the
existing partners’ capital accounts do not change as a result of the new partner’s
admission

95. A partner may withdraw from a partnership at any time without notice given to the
existing partners.

96. A withdrawing partner may have his/her partnership interest acquired by an outside
investor agreed to by the remaining partners, the remaining partners, or the partnership.

97. If existing partners acquire a withdrawing partner’s equity, the existing partners must
purchase the withdrawing partner’s equity in proportion to their residual profit and loss
ratios.

98. The revaluation of assets when a partner withdraws from the partnership may be a
complete revaluation or a partial revaluation, reflecting the change in value with regard
to the withdrawing partner’s ownership interest.

99. A partnership’s assets must be revalued when a partner withdraws.

100. When a partnership’s assets are revalued at the date a partner withdraws from the
partnership, the withdrawing partner’s equity must be acquired by the partnership. It
cannot be acquired by an outside investor or the existing partners personally.

101. Withdrawing partners from a partnership may receive a bonus or pay a bonus to
remaining partners.
102. If the assets of a partnership are revalued at the date of a partner’s withdrawal, there can
be no bonus recorded.

103. A bonus can be recorded for a retiring partner only if the partnership acquires the equity
of the partner.

104. At the date a partner withdraws from a partnership, the partners must choose to either
recognize the goodwill with respect to the withdrawing partner or they can choose to
recognize all of the partnership’s goodwill.

105. Any goodwill recognized at the date a partner withdraws from a partnership is usually
allocated to partners based on their residual profit and loss ratios.

106. Partnerships may have both a revaluation of assets and liabilities as well as goodwill
recognition at the date a partner withdraws from a partnership.

True-False Statement Solutions

1. T
2. F, Individuals, partnerships, and corporations are allowed to be partners in a partnership.
3. T
4. F, All of the general partners are liable for all the partnership’s debts.
5. T
6. T
7. F, Partnerships may receive an unqualified audit opinion when using a comprehensive
basis of accounting other that accrual such as cash, modified accrual, or the tax basis.
8. F, Most small partnerships maintain their financial information using the tax basis.
9. T
10. F, While the partnership does not pay income taxes, it is responsible for other taxes such
as payroll taxes and franchise taxes.
11. T
12. T
13. F, Partnerships and corporations are formed by two are more parties. A written
agreement is not necessary and state approval is not required for a partnership but a
corporation must file articles of incorporation with the state to attain a corporate charter.
14. T
15. T
16. F, The proprietary theory is based on the notion that the business entity is an aggregation
of the owners
17. T
18. F, This is an example of the proprietary theory of equity.
19. T
20. F, This is an example of the entity theory of equity.
21. T
22. T
23. F, While a written agreement is generally recommended when forming a partnership, it is
not required.
24. T
25. F, Most provisions only apply if there is no agreement among the partners with regard to
that specific issue.
26. F, Initial capital contributions are determined by agreement among the partners and do
not have to be equal in size.
27. T
28. T
29. T
30. F, Any basis (i.e., carrying value, tax basis, or market value) can be used to value
noncash assets contributed to a partnership
31. T
32. T
33. F, There are numerous differences that can cause the income assigned to partners for
accounting purposes to differ from income assigned to partners for tax purposes such as
noncash assets contributed to the partnership valued at an amount different than the
contributing partner’s tax basis
34. F, The tax basis of noncash assets contributed to the partnership must be used to
determine taxable income.
35. T
36. F, Partners should agree on the method to be used to value noncash asset contributions
when preparing the articles of partnership. A variety of bases can be used and the market
value is one of the alternatives.
37. T
38. F, The amount of the liability assumed by the partnership, excluding the contributing
partners share of that liability, will reduce the tax basis of the asset contributed.
39. F, The assumption of a liability has no impact on the valuation approach by the
partnership.
40. T
41. F, The capital balances established can be any amounts agreed by the partners.
42. T
43. F, Partners may contribute tangible and intangible assets to the partnership. It is possible
to consider both when determining initial partnership capital account balances.
44. T
45. T
46. F, The bonus method reallocates the total partnership capital among the partners’ capital
based on the agreed value of unidentifiable intangible assets contributed. Capital
accounts do not have to be the same when the process is completed.
47. F, The bonus method reallocates the total partnership capital among the partners based on
the agreed value of unidentifiable intangible assets contributed. It will always result in
one or more partner’s capital accounts decreasing while the remaining partner(s) capital
accounts increase.
48. T
49. F, The goodwill method requires an additional asset (Goodwill) to be recognized on the
balance sheet. As a result, the partners’ capital accounts will be greater in aggregate.
The bonus method results in a reallocation of capital among the partners and does not
result in a change in total partnership capital.
50. T
51. F, While states may have laws indicating that the partners cannot withdraw resources and
make the partnership insolvent, withdrawals are typically controlled by the articles of
partnership.
52. T,
53. T
54. F, If the partnership agreement is silent with regard to profit and loss allocation, profits
and losses are shared equally.
55. T
56. F, The interest component of partnership profit and loss allocation rewards partners for
capital contributions.
57. T
58. F, The interest on capital balances component of partnership profit and loss allocation
may be based on the beginning, ending, simple average capital balance, or weighted
average capital balance.
59. T
60. F, The salary component of the partnership profit and loss allocation would be expected
to be renegotiated periodically as the duties of the partners change.
61. T
62. T
63. F, Partnerships can offer bonuses to anyone. The choice is up to the partners. On the
other hand, there is no requirement to ever offer a bonus.
64. T
65. F, While many bonuses are based on a measure of income, it is not required. Bonus can
be based on other criteria such as market share, revenue, or average cost per unit.
66. T
67. F, Residual interests may be equal but they are not required to be equal.
68. F, While profit residual ratios and loss residual ratios are generally the same, they can
differ.
69. T
70. T
71. F, Residual profit and loss percentages are the last component of the profit and loss
allocation process applied because they are designed to allocate any remaining amount to
the partners.
72. T
73. F, There are several ways that the difference between market and book value of assets
can be addressed when the profit and loss ratios are changed. Revaluing the assets is one
of the possibilities along with maintaining a record of assets with market and book value
differences as well as directly adjusting capital accounts while leaving asset values
unchanged.
74. T
75. F, A dissolution occurs every time there is a change in relationship among the partners.
This can occur when a new partner enters the partnership or an existing partner leaves the
partnership. A dissolution occurs when the partnership is going out of business but the
termination of business is not a requirement for a dissolution.
76. T
77. F, A new partner's liability for actions that occurred before joining the partnership is
limited to the amount invested in the partnership.
78. T
79. F, Regardless how a new partner enters a partnership, the other partners have to approve
the admission because they must accept unlimited liability due to actions of the new
partner taken on behalf of the partnership.
80. F, There is no necessary relationship between the percentage of equity acquired and the
amount of profit or loss received. These are separate contractual issues.
81. F, There are three methods that may be used when a new partner is paying an amount
more than book value for the investment: revaluation of existing assets, bonus method,
and goodwill method. The partners do not have to choose one method. It would not be
inconsistent to revalue the assets and apply either the bonus or the goodwill method to
record the investment.
82. T
83. F, Existing partners share the difference between market value and book value equally if
that is the manner in which profits and losses are shared. If profits and losses are shared
in some other manner, then the difference between market and book values are shared in
that manner.
84. F, While it is possible that an error has been made, it is more likely that the existing
partners recognized an increase in their capital accounts via a bonus. The difference
between the amount credited to the new partner’s capital account and the amount
invested is shared by the existing partners.
85. T
86. T
87. T
88. F, New partners may receive a bonus if they bring value to the partnership in excess of
the tangible assets invested. This additional amount may be from such things as
expertise, experience, or business contacts. The bonus allocated to the new partner is
payment for these types of unidentifiable assets contributed to the partnership.
89. T
90. T
91. T
92. F, Goodwill may be recognized with regard to the existing partners but it may also be
recognized with regard to the new partner.
93. F, When goodwill is recognized with regard to the new partner, the new partner’s capital
account will be greater than the amount invested by the recognized goodwill.
94. T
95. F, The articles of partnership may include an agreement on the length of advanced notice
a partner must give before withdrawing from a partnership. Failure to provide the agreed
notice may result in the withdrawing partner being liable for damages suffered by the
partnership.
96. T
97. F, If existing partners acquire a withdrawing partner’s equity, they can divide the
purchase of that equity among themselves in any manner they choose.
98. T
99. F, Partnership assets may be revalued but they may also remain at their carrying value.
100. F, The revaluation of the partnership’s assets is unrelated to the purchase of the
withdrawing partners ownership interest in the partnership.
101. T
102. F, The revaluation of partnership assets at the time of a partner’s withdrawal has no
impact on the recognition of a bonus or goodwill.
103. T
104. F, While the partners can recognize either the withdrawing partner’s goodwill or the
entire partnership’s goodwill, there is no requirement to recognize any goodwill when a
partner withdraws from a partnership.
105. T
106. T

Conceptual Multiple Choice Questions

107. Which of the following is not a reason for forming a partnership?
a. Combine economic resources
b. Share managerial talent
c. Avoid complicated tax laws
d. Undertake a specific business objective

108. Which of the following business entity forms is (are) required to maintain their financial
information in accordance with Generally Accepted Accounting Principles?
a. Corporations
b. Corporation and Partnership
c. Partnership and Proprietorships
d. Corporation, Partnerships, and Proprietorships

109. Which of the following statements is not true with regard to tax issues of partnerships?
a. Partnerships are viewed as an extension of the owners
b. Partnerships are required to pay some forms of taxes
c. The IRS must be informed as to the manner partnership income is allocated to the
partners
d. All of the above are true

110. Which of the following is not a similarity that exists between proprietorships and
partnerships?
a. Neither requires approval by a state to form
b. Both can use an accounting method that does not conform to GAAP
c. Owners put the company’s income on the owner’s individual tax return
d. All of the above are similarities of proprietorships and partnerships

111. Which of the following is not an area where there are differences when comparing
partnerships and corporations?
a. The ease of formation
b. The level of owner legal liability
c. The ease of ownership transferability
d. All of the above are areas where partnerships and corporations differ

112. Which of the following is not a difference when comparing partnerships and
corporations?
a. Corporations must conform to GAAP whereas partnerships are not required to
conform to GAAP
b. Partnerships and corporations neither are required to attain state approval to form
 c. Partners have unlimited liability while corporation shareholders generally do not
have unlimited liability
d. Corporations are required to pay income tax while partnerships are not required to
pay income taxes

113. What theory of equity is applicable for partnerships?

a. Proprietary theory
b. Entity theory
c. A mix of proprietary and entity theory
d. Partnership theory

114. Which of the following is not an example of the proprietary theory of equity?
a. Partners do not have claims to specific assets
b. Individual partners are liable for all debts of the partnership
c. A partner’s income tax includes the partner’s share of partnership net income, and
the partnership does not pay income taxes
d. Salaries of partners are viewed as distributions of income, not components of net
income

115. Which of the following is not an example of the entity theory of equity?
a. Continuity of the partnership when admission or withdrawal of partners occurs
b. A partnership can enter into contracts
c. Assets contributed to the partnership retain the existing tax basis to the partner
contributing
d Partnership creditors have priority claim to partnership assets and the creditors of
partners have priority claim to the partner’s assets in the event of liquidation

116. Which of the following statements is not true with regard to articles of partnership?
a. Written articles of partnership are not required to form a partnership
b. The Uniform Partnership Act provides a list of items that must be included in
articles of partnership
c. A written partnership agreement enables the partners to detail the agreed working
relationship among the partners
d. State law applies only if there is not agreement among the partners with regard to
that specific issue

117. When a partnership agreement is silent with regard to any aspect of a partnership
operation, who/what decides on that aspect of the partnership’s operations?
a. State law
b. Uniform Partnership Act
c. Majority vote of stockholders
d. Decision by senior partner

118. Which of the following valuation amounts is not allowed when assigning values to
noncash assets in a partnership formation?
a. Contributor’s carrying value
b. Contributor’s tax basis
c. Market (appraised) value
 d. All of the above valuation amounts are allowed

119. Which of the following statements is correct with regard to the creation of initial capital
account balances on a partnership’s financial records?
a. The capital accounts can be created for any dollar amount agreed by all partners
b. The market value of noncash assets must be considered when creating the initial
capital balances
c. Each partner’s capital account must have a non-zero value assigned to it
d. All of the above statements are correct

120. Which of the following statements is not true with regard to assigning the carrying value
of noncash assets contributed to those assets at the date of a partnership’s formation?
a. Use of the noncash asset’s historical cost can result in the misstatement of the
partners’ capital accounts
b. Assigning the historical cost to noncash assets contributed to a partnership may
require the partnership agreement to address profit/loss distribution that will
occur when the contributed asset is sold
c. Assigning the historical cost to noncash assets contributed to a partnership will
not cause partner taxable income to differ from the partner’s share of partnership
income
d. All of the above statements are correct

121. Which of the following statements is true with regard to assigning a noncash asset
contributed to a partnership the tax basis of the contributing partner?
a. The tax basis of noncash assets contributed must be used if the partnership is a
taxable entity
b. The tax basis must be considered when determine each partner’s allocation of
taxable partnership income
c. The contributing partner’s tax basis may not be used for financial accounting
records
d. None of the above statements are true

122. Which of the following statements is not true with regard to assigning the market value
of noncash assets contributed to those assets at the date of a partnership’s formation?
a. Gains or losses would likely not be recorded if the asset were sold at the date for
partnership is formed
b. The contributing partner’s share of the partnership’s income would be adjusted by
the difference between the market value and tax basis at the date the asset is
contributed to the partnership
c. The market value is the most commonly assigned value to contributed noncash
assets
d. All of the above statements are correct

123. Which of the following statements is correct with regard to the contribution of assets and
associated liabilities to a partnership?
a. Liabilities associated with assets contributed to a partnership remain the liability
of the contributing partner
 b. Liabilities associated with assets contributed to a partnership become the liability
of the partnership
c. Liabilities associated with assets contributed to a partnership become the liability
of both the contributing partner and the partnership
d. Assets may not be contributed to a partnership if there is a liability associated
with the asset

124. The bonus method of recognizing unidentifiable intangible asset contributions to a

partnership does which of the following?
a. It recognizes that partners may contribute more than the observable assets to the
partnership
b. It increases total partnership capital
c. Can only increase partner capital accounts
d. b and c are correct

125. This method of recognizing unidentifiable intangible assets does not result in a change to
total contributed capital.
a. Goodwill method
b. Bonus method
c. Reciprocal method
d. None of these methods will result in a change to total contributed capital

126. When can the bonus method be applied?

a. When a partnership is formed
b. When a new partner is added to the partnership
c. When an existing partner retires from the partnership
d. The bonus method can be applied in all three of the above circumstances

127. Shawn, Harris, and Derek are forming a partnership. The partners agree that Harris
should be assigned goodwill because of his knowledge of the business. Which partners’
capital accounts will have the dollar assigned dollar amounts altered due to the
recognition of the goodwill?
a. Shawn
b. Harris
c. Derek
d. All dollar amount assigned to all three partners’ capital accounts will be altered.

128. This method of recognizing unidentifiable intangible assets results in a change to total
contributed capital.
a. Goodwill method
b. Bonus method
c. Reciprocal method
d. None of these methods will result in a change to total contributed capital

129. The goodwill method always results in which of the following?

a. A change in the dollar value assigned to two or more partners’ capital accounts
b. A decrease in a partner’s capital account
c. An increase in a partner’s capital account
 d. An increase in a partner’s capital account and a decrease in at least one partners’
capital account

130. For what purpose(s) might a drawing account be used for a partnership?
a. To keep a list of business contacts made by a partner
b. To recognize a loan made to a partner
c. To recognize inventory removed from the partnership by the partner
d. None of the above ore possible uses of a drawing account

131. Which of the following is not a withdrawal that may be found in a partnership’s drawing
account?
a. Removal of cash by a partner
b. Payment of a partner’s speeding ticket by the partnership
c. Removal of inventory by a partner
d. All of the above may be found in a drawing account

132. Which of the following statements is correct with regard to drawing accounts that may be
used by a partnership?
a. Drawing accounts are closed to the partners’ capital accounts at the end of the
accounting period
b. Drawing accounts establish the amount that may be taken from the partnership by
a partner in a given time period
c. Drawing accounts are similar to Retained Earnings in a corporation
d. Drawing accounts appear on the balance sheet as a contra-equity account

133. Which of the following should not be done by the accountant with regard to partnership
profit and loss allocation?
a. Prepare an analysis of alternative methods to allocate profits and losses
b. Recommend a particular method for allocating profits and losses
c. Inform partners of different ways that profits and losses could be allocated
d. All of the above are reasonable duties of the accountant

134. What is the underlying purpose of the interest on capital balances component of
allocating partnership profits and losses?
a. Compensate partners who contribute economic resources to the partnership
b. Reward labor and expertise contributions
c. Reward for special responsibilities undertaken
d. None of the above

135. What is the underlying purpose of the salary component of allocating partnership profits
and losses?
a. Compensate partners who contribute economic resources to the partnership
b. Reward labor and expertise contributions
c. Reward for special responsibilities undertaken
d. None of the above

136. Which of the following interest component calculation bases is least susceptible to
manipulation when allocating profits and losses to partners?
 a. Beginning capital account balance
b. Average of beginning and ending capital account balances
c. Weighted average capital account balance
d. Ending capital account balance

137. Which component of the partnership profit and loss allocation compensates partners for
the routine time and effort expended in the business?
a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest

138. Which component of the partnership profit and loss allocation is most commonly offered
to the partner who manages the business?
a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest

139. Which of the following may be a basis for determining the amount of a partner’s bonus?
a. Operating income
b. Market share
c. Average cost per unit
d. All of the three may be bases for determining the amount of a partner’s bonus

140. Which component of the partnership profit and loss allocation must be performed last?
a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest

141. Which of the following statements is true with regard to partnership residual profit and
loss ratios?
a. A partner’s residual profit ratio must be the same as the loss ratio
b. Residual profit and loss ratios can be changed by agreement
c. The residual profit and loss ratio must always be applied
d. All of the above are true statements

142. Applying the partnership residual profit and loss ratio can have which of the following
effects on a partner’s allocation of profit and/or loss?
a. Increase
b. Decrease
c. Increase or decrease
d. The residual profit and loss ratio is not used for the allocation or profit and/or loss

143. Which of the following should be done when the partnership profit and loss ratios are
changed?
a. The book and market value of assets and liabilities should be evaluated
 b. The capital accounts should be modified to reflect the new profit and loss ratios
c. The creditors should be informed that the profit and loss ratios have been changed
d. The partners must draft new articles of partnership.

144. Which of the following is not a common way to address the difference between market
and book values of assets and liabilities when the partnership profit and loss ratios are
changed?
a. Assets and liabilities are revalued to market value
b. Assets with a difference between market and book value are sold and the profit is
distributed to partners based on existing profit and loss ratios
c. A list of differences between market value and book value are made
d. Capital accounts of the partners are altered to reflect the difference between
market and book values at the date the profit and loss ratios change

145. Which of the following occurs every time a new partner is admitted to a partnership or an
existing partner leaves the partnership?
a. Dissolution
b. Termination
c. Dissolution and termination
d. None of the above occurs

146. Which of the following forms of new partner admission will not result in a change in the
partnership’s net assets?
a. Purchase of an ownership interest directly from the partnership
b. Purchase of an ownership interest directly from an existing partner
c. Either of the above
d. Neither of the above

147. Which of the following must occur for a new partner to enter the partnership by
acquiring an ownership interest directly from an existing partner?
a. Existing partners must know the amount the new partner is paying for the
ownership interest
b. The new partner must acquire all of the current partner’s ownership interest
c. Existing partners must approve the admission of the new partner into the
partnership
d. The new partner must live in the same state as the other partners

148. Which of the following must be true when a new partner acquires an ownership interest
directly from an existing partner?
a. Capital must be assigned to the new partner
b. The new partner’s profit and loss allocation must be proportionate to the capital
account balance
c. The new partner must be allocated some amount of profit and loss
d. The existing partners must provide a list of all the partnership’s outstanding
liabilities to the new partner

149. When a new partner joins a partnership by investing assets into the partnership, what
method may be used to record the admission of the new partner?
 a. Revaluation of existing assets
b. Recognition of goodwill
c. Application of the bonus method
d. Any of the three or a combination may be applied

150. Which of the following is a reason to not revalue partnership assets at the date a new
partner is admitted to the partnership?
a. There has been a change in ownership
b. A new legal entity exists
c. The partnership has not ceased operations
d. All three are reasons to not revalue partnership assets at the date of a new
partner’s admission

151. A bonus is recognized by existing partners at the date a new partner joins a partnership
when which of the following relationships occur?
a. The new partner’s contribution exceeds his/her percentage of total partnership
capital after the investment is made
b. The new partner’s contribution is less than his/her percentage of total partnership
capital after the investment is made
c. The new partner’s contribution is equal to his/her percentage of total partnership
capital after the investment is made
d. It is not possible to determine the answer to this question

152. Which of the following is not a criterion for recognizing a bonus to existing partners
when a new partner joins the partnership?
a. Only cash assets were contributed to the partnership by the new partner
b. The existing partners desire to not recognize goodwill on the balance sheet
c. The articles of partnership indicate that the bonus method will be used to admit
new partners
d. The new partner invests more into the partnership that his/her share of total
partnership capital after the investment is made

153. Which method of recording the admission of a new partner into a partnership potentially
results in the existing partners’ capital accounts changing in value?
a. Bonus method
b. Goodwill method
c. Either bonus method or goodwill method
d. Existing partners’ capital accounts never change when a new partner is admitted
into a partnership.

154. A bonus recognized by a new partner at the date of admission into the partnership is
generally shared by the existing partners in what way?
a. Equally
b. In proportion to capital account balances
c. In proportion to profit and loss residual ratios
d. In proportion to salaries
155. Which of the following is not a criterion for recognizing a bonus to a new partner when
the new partner joins the partnership?
a. Only cash assets were contributed to the partnership by the new partner
b. The existing partners desire to not recognize goodwill on the balance sheet
c. The articles of partnership indicate that the bonus method will be used to admit
new partners
d. The new partner invests less into the partnership that his/her share of total
partnership capital after the investment is made

156. When the goodwill method of recognizing the admission of a new partner is applied and
the existing partners contribute the goodwill, which of the following will result?
a. An increase in the capital accounts of existing partners
b. A decrease in the amount invested by the new partner
c. A decrease in the partnership’s total assets
d. A new partner’s capital account less than the amount invested

157. Which of the following will occur when the existing partners contribute goodwill and a
new partner is admitted to the partnership?
a. The existing partner’s capital accounts will be decreased
b. The existing partner will receive cash from the partnership
c. The partnership’s total assets will be increased
d. The new partner will be required to reduce his/her profit and loss sharing ratio

158. Which of the following statements is false with regard to the goodwill recognized for a
new partner entering a partnership?
a. The new partner’s capital account balance will exceed the amount invested
b. The existing partners’ capital accounts will remain unchanged
c. The amount invested by the new partner will be less than his/her proportion of the
partnership’s book value before goodwill is recognized
d. The three partners will have equal capital account balances when the transaction
is completed

159. Which of the following statements presents a reason that goodwill may be recorded with
regard to a new partner at the date of that partner’s admission to the partnership?
a. The existing partnership is worth more than the appraised value of the tangible
net assets
b. The new partner has a strong desire to become a member of the partnership
c. The total value of the new partner’s contribution to the partnership is greater than
the value of the identifiable net assets contributed
d. The new partner’s residual interest in profits and losses is greater than 30 percent

160. What portion of the partnership’s assets must be revalued when a partner withdraws from
the partnership?
a. The withdrawing partner’s share must be revalued
b. All of the partnership’s assets must be revalued
c. Any or all of the partnership’s assets may be revalued but none have to be
revalued
d. Partnership assets may not be revalued when a partner withdraws
161. Who may acquire the ownership interest of a partner who is withdrawing from a
partnership?
a. Existing partners
b. New investor
c. The partnership
d. All of the above

162. If existing partners acquire the equity of a withdrawing partner, in what manner do they
divide the equity?
a. In any manner they choose
b. Equally
c. Proportionate to their residual profit and loss ratios
d. Existing partners are not permitted to acquire the equity of a withdrawing partner

163. Which of the following must exist to create the potential for a retiring partner to have a
bonus recognized at the date of withdrawal?
a. The retiring partner must be paid more than the book value of his equity
b. The existing partners must decide to not admit a new partner to the partnership
c. The retiring partner’s equity must be acquired by the partnership
d. All of the above are necessary for a bonus to be recognized

164. In what manner do the remaining partners share in the bonus paid to a withdrawing
partner?
a. In proportion to their residual profit and loss ratios
b. Equally
c. In proportion to their capital account balances
d. The partner with the greatest capital account is assigned the bonus

165. Which of the following statements is true with regard to a withdrawing partner?
a. A bonus must be paid to the retiring partner
b. A bonus may be paid to the retiring partner
c. A bonus must be paid to the retiring partner or to the remaining partners
d. Recognizing a bonus is not appropriate when a partner retires

166. What change occurs to continuing partners’ capital accounts when a withdrawing partner
is assigned goodwill at the date of withdrawal?
a. Continuing partners’ capital accounts decease by their profit and loss ratio
proportion of the goodwill assigned to the withdrawing partner
b. Continuing partners’ capital accounts increase
c. Continuing partners’ capital accounts do not change
d. Goodwill cannot be recognized with regard to withdrawing partners

167. What amount of goodwill can be recognized at the date a partner withdraws from a
partnership?
a. The withdrawing partner’s portion of goodwill
b. The continuing partners’ portion of goodwill
c. Goodwill may not be recognized at the date a partner withdraws
 d. Either the withdrawing partner’s portion of goodwill or the goodwill attributable
to the entire partnership

168. Which of the following will occur when the goodwill method is used to recognize the
withdrawal of a partner?
a. The partnership must acquire the equity of the withdrawing partner
b. The withdrawing partner will be paid the book value of his/her equity after the
goodwill is recognized
c. The existing partners will divide the salary of the withdrawing partner
d. The total equity of the partnership will not change as a result of the partner’s
withdrawal

Conceptual Multiple Choice Question Difficulty and Solutions

107. easy c
108. moderate a
109. moderate d
110. easy d
111. easy d
112. moderate b
113. moderate c
114. difficult a
115. difficult c
116. moderate b
117. moderate a
118. easy d
119. moderate a
120. difficult c
121. moderate b
122. moderate d
123. easy b
124. easy a
125. easy b
126. moderate d
127. easy b
128. easy a
129. moderate c
130. easy c
131. moderate d
132. moderate a
133. easy b
134. easy a
135. easy b
136. easy c
137. easy c
138. easy b
139. moderate d
140. easy d
141. moderate b
142. easy c
143. moderate a
144. easy b
145. easy a
146. easy b
147. easy c
148. moderate c
149. easy d
150. moderate c
151. moderate b
152. easy a
153. easy c
154. easy c
155. easy a
156. moderate a
157. easy c
158. easy d
159. moderate c
160. easy c
161. easy d
162. moderate a
163. moderate d
164. easy a
165. easy b
166. easy c
167. easy d
168. easy b

Computational Multiple Choice Questions

169. Paul, Jeremy, and Juan are forming a partnership. Juan contributes a building having an
historical cost, accumulated depreciation, and market value of $290,000, $100,000, and
$400,000, respectively. The building is initially recorded on the partnership’s books at
Juan’s book value ($190,000). Two years later the building is sold for a $270,000 gain.
What portion of the profit or loss should be allocated to Juan?
a. $20,000
b. $230,000
c. $210,000
d. $90,000

170. Philip, Ray, and Sarah are forming a partnership. Philip contributes cash of $100,000;
Ray contributes inventory with a value of $100,000; and Sarah contributes a building
with a market value of $300,000. The partnership also assumed the $210,000 mortgage
on the building. What is the amount of capital assigned to each partner?
Philip Ray Sarah
a. $30,000 $30,000 $230,000
b. $56,000 $56,000 $174,000
c. $100,000 $100,000 $90,000
 d. $100,000 $100,000 $300,000

171. Max, Ike, and Tony are forming a partnership. The appraised value of assets contributed
is $60,000, $80,000, and $100,000, respectively. In addition, Max and Tony agree that
Ike’s experience is worth $30,000. The partners desire to apply the bonus method where
applicable. What is the total capital recorded at the date the partnership is formed?
a. $210,000
b. $240,000
c. $270,000
d. Some other dollar amount

172. Richardson, Peterson, and Wilkerson are forming a partnership. The partners contribute
cash and noncash assets valued at $30,000, $50,000, and $25,000, respectively. The
partners choose to apply the bonus method where applicable. If the partners agree to
establish equal capital account balances when the partnership is formed, how much of a
bonus is received by Richardson?
a. $15,000
b. $10,000
c. $5,000
d. Richardson does not receive a bonus

173. Richardson, Peterson, and Wilkerson are forming a partnership. The partners contribute
cash and noncash assets valued at $30,000, $50,000, and $25,000, respectively. The
partners choose to apply the bonus method where applicable. If the partners agree to
establish equal capital account balances when the partnership is formed, how much
capital is Peterson sacrificing to give a bonus to Richardson and Wilkerson?
a. $15,000
b. $10,000
c. $5,000
d. Richardson does not receive a bonus

174. Albert, Claude, and Jamie form a partnership by contributing $25,000, $70,000, and
$80,000, respectively. In addition, the partners agree that Albert should receive $20,000
of goodwill because of his special skills relevant to this business. What amount of capital
will exist for Albert when the partnership is formed?
a. $20,000
b. $25,000
c. $65,000
d. $45,000

175. Albert, Claude, and Jamie form a partnership by contributing $25,000, $70,000, and
$80,000, respectively. In addition, the partners agree that Albert should receive $20,000
of goodwill because of his special skills relevant to this business. What amount of capital
will exist for Claude when the partnership is formed?
a. $60,000
b. $65,000
c. $70,000
d. Some other amount
176. Chris and David are forming a partnership with contributions of $75,000 and $125,000,
respectively. In addition, they agree that they will recognize $25,000 goodwill with
regard to David’s contacts in the area. What is the total amount of capital that will exist
for the partnership immediately after it is formed?
a. $75,000
b. $125,000
c. $150,000
d. $225,000

177. Chris is a partner in a local partnership. The profit and loss sharing agreement includes
an interest allocation of 7 percent on the invested capital. The capital account of Chris
reveals that he had a beginning capital account balance of $50,000. He withdrew
$10,000 on May 1 and invested $25,000 on October 31. Rounded to the nearest dollar,
what is Chris’ weighted average capital balance?
a. $57,500
b. $51,667
c. $47,500
d. $28,333

178. Richard is a partner in a local partnership. The profit and loss sharing agreement
includes an interest allocation of 8 percent on the invested capital. Richard had a
beginning capital balance of $60,000. He invested $30,000 on March 1, withdrew
$20,000 on August 1, and invested $40,000 on December 1. Rounded to the nearest
dollar, what dollar amount is allocated to Richard as interest on capital balance if the
weighted average capital balance is used as the basis of the computation?
a. $82,500
b. $6,400
c. $80,000
d. $6,600

179. Shawn is a managing partner in a local business. Part of his profit allocation is a bonus
based on the store’s operating income. The bonus is 8 percent of operating income in
excess of $200,000 after deducting the bonus. If operating income for the year is
$250,000, what is Shawn’s bonus (rounded to the nearest dollar)?
a. $3,703
b. $40,000
c. $20,000
d. $4,000

180. James has a bonus as part of his partner profit allocation. The bonus is based on the
partnerships net income. James receives a bonus equal to 5 percent that the net income
exceeds $150,000. If the net income in the current year is $180,000, how much bonus
does James receive?
a. $30,000
b. $7,500
c. $1,500
d. $9,000
181. Cheryl is the manager of a local store. She is also a partner in the company and she
receives a bonus as part of the profit and loss allocation. Cheryl’s bonus is based on the
increase in revenues recorded during the period. The bonus arrangement is that Cheryl
receives 1 percent of net income for every full percentage point growth for revenues in
excess of a 5 percent revenue growth. During the most recent period, revenues grew
from $500,000 to $540,000 and net income grew from $98,000 to $120,000. How much
bonus does Cheryl receive for this period?
a. $2,000
b. $1,100
c. $6,000
d. $3,600

182. Norman, Sarah, and Taylor are partners. The partnership income for the period is
$130,000. The partnership agreement assigns salaries to the partners of $10,000,
$15,000, and $18,000, respectively. In addition, the partners have profit and loss residual
ratios of 30%, 45%, and 25%. What is the amount of profit and loss allocated to Sarah
as a result of applying the residual ratios?
a. $39,150
b. $54,150
c. $58,500
d. $51,750

183. Jim and Scott are partners who have residual profit and loss ratios of 55% and 45%,
respectively. The partnership has income of $60,000 for the current period. How much
of this income is allocated to Scott?
a. $30,000
b. $33,000
c. $14,850
d. $27,000

184. Mike and Michelle are partners in a local business. The business has a $25,000 loss this
year. How much of this loss is allocated to Mike?
a. $12,500
b. $0
c. $25,000
d. Losses cannot be allocated without residual profit and loss ratios

185. Nick, Joe, and Mike are partners. The company has $150,000 net income for the period.
How is this income divided to the partners if the following profit and loss allocation
process is followed?
Nick Joe Mike
Weighted average capital $200,000 $350,000 $180,000
Salary 25,000 15,000 35,000
Bonus .1 (NI - $100,000)
Residual profit/loss ratios .25 .45 .30
Return on invested capital 9%
 Nick Joe Mike
a. $43,000 $46,500 $60,500
b. $45,325 $50,685 $53,990
c. $50,000 $50,000 $50,000
d. $44,075 $48,435 $57,490

186. Harriet, Bob, and Tim are partners. Income for the current year is $500,000. The profit
and loss agreement states that salaries are $35,000, $50,000, and $40,000, respectively.
In addition, the residual profit and loss ratios are 40%, 30%, and 30%, respectively.
How much of the profit is allocated to Harriet?
a. $150,000
b. $185,000
c. $162,500
d. $152,500

187. Suzanne, Thomas, and Vicky are partners. They have average capital account balances
of $200,000, $250,000, and $400,000, respectively. In addition, they have residual profit
and loss ratios of 15%, 25%, and 60%, respectively. If income for the year is $300,000
and the partners earn 8 percent return on invested capital, how much will be allocated to
Thomas?
a. $78,000
b. $100,000
c. $50,800
d. $171,200

188. Johnson and Pritchard are partners. They are changing the profit and loss ratios from the
current 60/40 to 70/30. At the date of the change, vacant land owned by the partnership
has a book value of $50,000 and a market value of $60,000. The partners choose to
prepare an itemized list of assets with market values different from book values. If the
land is sold in the future for $80,000, how much of the gain will be assigned to Johnson?
a. $21,000
b. $18,000
c. $27,000
d. $20,000

189. Johnson and Pritchard are partners. They are changing the profit and loss ratios from the
current 60/40 to 70/30. At the date of the change, vacant land owned by the partnership
has a book value of $50,000 and a market value of $60,000. The partners choose to
prepare an itemized list of assets with market values different from book values. If the
land is sold in the future for $80,000, how much of the gain will be assigned to
Pritchard?
a. $12,000
b. $10,000
c. $9,000
d. $13,000

190. Karen and Andrea are currently changing their partnership profit and loss ratios from
75/25 to 60/40. They have created a list of assets that have market and book value
 differences. One of the assets is a building with a $300,000 market value and $200,000
book value. Two years after changing the profit and loss ratios, the building is sold for
$380,000. How much of the profit is allocated to Karen?
a. $135,000
b. $108,000
c. $123,000
d. $183,000

191. Karen and Andrea are currently changing their partnership profit and loss ratios from
75/25 to 60/40. They have created a list of assets that have market and book value
differences. One of the assets is a building with a $300,000 market value and $200,000
book value. Two years after changing the profit and loss ratios, the building is sold for
$380,000. How much of the profit is allocated to Andrea?
a. $57,000
b. $45,000
c. $72,000
d. $97,000

192. Peter and Ronald are partners. They have shared profits and losses 65/35 for a number of
years. Peter has indicated that he is going to reduce his involvement in the partnership so
the profit and loss ratio is being modified to 45/55. At the date of the change in the profit
and loss ratio, the partnership own vacant land with a market value of $300,000 and a
book value of $100,000. Peter and Ronald compile a list of assets with market and book
value differences. Two years after the change in the profit and loss ratios, the land is sold
for $450,000. How much of the gain is allocated to Peter?
a. $197,500
b. $227,500
c. $157,500
d. $287,500

193. Peter and Ronald are partners. They have shared profits and losses 65/35 for a number of
years. Peter has indicated that he is going to reduce his involvement in the partnership so
the profit and loss ratio is being modified to 45/55. At the date of the change in the profit
and loss ratio, the partnership own vacant land with a market value of $300,000 and a
book value of $100,000. Peter and Ronald compile a list of assets with market and book
value differences. Two years after the change in the profit and loss ratios, the land is sold
for $450,000. How much of the gain is allocated to Ronald?
a. $122,500
b. $192,500
c. $152,500
d. $262,500

194. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
changed, the land is sold for $200,000. What is the amount of change to Jennifer’s
capital account at the date the land is revalued?
 a. $72,000
b. $42,000
c. $30,000
d. $28,000

195. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
changed, the land is sold for $200,000. What is the amount of change to Robert’s capital
account at the date the land is revalued?
a. $72,000
b. $42,000
c. $30,000
d. $28,000

196. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
changed, the land is sold for $200,000. What is the amount of change to Jennifer’s
capital account at the date the land is sold?
a. $48,000
b. $67,500
c. $31,500
d. $36,000

197. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
changed, the land is sold for $200,000. What is the amount of change to Robert’s capital
account at the date the land is sold?
a. $44,000
b. $82,500
c. $32,000
d. $60,000

198. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to James’
capital account at the date the building is revalued?
a. $105,000
b. $91,000
c. $45,000
 d. $39,000

199. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to Bruce’s
capital account at the date the building is revalued?
a. $105,000
b. $91,000
c. $45,000
d. $39,000

200. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to James’
capital account at the date the building is sold?
a. $91,000
b. $78,000
c. $39,000
d. $52,000

201. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to Bruce’s
capital account at the date the building is sold?
a. $91,000
b. $78,000
c. $39,000
d. $52,000

202. Theresa and Craig are partners. Their current profit and loss ratios (70/30) are being
changed to (60/40). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, land has a market value of
$250,000 and a book value of $120,000. How much will Theresa’s capital account be
adjusted at the date of the change in the profit and loss ratios?
a. $52,000 increase
b. $13,000 increase
c. $52,000 decrease
d. $13,000 decrease
203. Theresa and Craig are partners. Their current profit and loss ratios (70/30) are being
changed to (60/40). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, land has a market value of
$250,000 and a book value of $120,000. How much will Craig’s capital account be
adjusted at the date of the change in the profit and loss ratios?
a. $52,000 increase
b. $13,000 increase
c. $52,000 decrease
d. $13,000 decrease

204. Eric and Phillip have been partners for several years. During that time they have shared
profits and losses (60/40). They are currently revising the profit and loss ratios to
(70/30). Eric and Phillip decide to adjust the capital accounts at the date of the change to
reflect the difference between market value and book value of assets and liabilities. At
the date of the change, the partnership owns a building with a book value of $350,000
and a market value of $600,000. How much will Eric’s capital account be adjusted at the
date of the change in the profit and loss ratios?
a. $25,000 increase
b. $50,000 increase
c. $25,000 decrease
d. $50,000 decrease

205. Eric and Phillip have been partners for several years. During that time they have shared
profits and losses (60/40). They are currently revising the profit and loss ratios to
(70/30). Eric and Phillip decide to adjust the capital accounts at the date of the change to
reflect the difference between market value and book value of assets and liabilities. At
the date of the change, the partnership owns a building with a book value of $350,000
and a market value of $600,000. How much will Phillip’s capital account be adjusted at
the date of the change in the profit and loss ratios?
a. $25,000 increase
b. $50,000 increase
c. $25,000 decrease
d. $50,000 decrease

206. Jenna is about to purchase some of Cynthia’s partnership interest. Cynthia currently has
partnership equity of $84,500. If Jenna pays Cynthia $30,000 for 30 percent of her
capital, what amount will be recorded in the partnership accounting records?
Jenna Cynthia
a. $30,000 credit $25,350 debit
b. $25,350 credit $25,350 debit
c. $30,000 credit $30,000 debit
d. $25,350 debit $25,350 credit

207. Sam and Ray are partners with capital accounts of $150,000 and $225,000, respectively.
They are considering allowing Richard to purchase 30 percent of Ray’s equity. At the
date of the proposed transaction, Sam and Ray want to revalue the partnership’s assets
 and allocate any differences based on their 40/60 profit sharing agreement. Assume that
the net market versus book value differences is $100,000. What amount would Richard
pay for the 30 percent interest?
a. $67,500
b. $76,500
c. $97,500
d. The amount cannot be determined from the information provided

208. Jesse, Joseph, and Leslie are partners with capital accounts of $70,000, $120,000, and
$90,000, respectively. The partnership share profits and losses 45%, 30%, and 25%,
respectively. They are considering allowing Hans to join the partnership by investing
directly into the partnership. The partners intend to revalue the assets before Hans’
admission. Neither bonus nor goodwill are required. If the asset’s market value exceeds
book value $150,000, how much will Hans invest to acquire a 20% equity interest in the
partnership?
a. $107,500
b. $86,000
c. $70,000
d. $100,000

209. Sandra and Joshua are partners. They have capital account balances of $250,000 and
$200,000, respectively, and they share profits and losses 70/30. The partners are
considering admitting Judy as a new partner with a 25 percent equity interest for an
investment in the partnership of $180,000. Before admission, Sandra and Joshua will
revalue the partnership’s assets. If the net increase in the partnership’s assets is
$125,000, what will be the balance in Sandra’s capital account immediately before Judy’s
admission?
a. $575,000
b. $337,500
c. $528,500
d. $262,500

210. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of Susan’s capital
account at the date of admission?
a. $142,500
b. $150,000
c. $144,000
d. The dollar amount cannot be determined from this information

211. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of bonus recognized
in Ken’s capital account at the date of admission?
a. $4,500
 b. $34,500
c. $6,000
d. $1,500

212. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of bonus recognized
in Robert’s capital account at the date of admission?
a. $6,000
b. $1,500
c. $144,000
d. $4,500

213. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of Ken’s capital
account at the date of admission?
a. $274,500
b. $304,500
c. $144,000
d. $271,500

214. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of Robert’s capital
account at the date of admission?
a. $271,500
b. $301,500
c. $144,000
d. $304,500

215. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of Pierre’s capital account at
the date of admission?
a. $933,000
b. $450,000
c. $388,750
d. $622,000

216. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
 and the bonus method is applied. What is the dollar amount of bonus recognized in
John’s capital account at the date of admission?
a. $98,000
b. $61,250
c. $24,500
d. $36,750

217. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of bonus recognized in
Sam’s capital account at the date of admission?
a. $98,000
b. $61,250
c. $24,500
d. $36,750

218. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of John’s capital account at
the date of admission?
a. $516,750
b. $661,750
c. $649,500
d. $504,500

219. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of John’s capital account at
the date of admission?
a. $516,750
b. $661,750
c. $649,500
d. $504,500

220. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of Frank’s capital
account at the date of admission?
a. $137,500
b. $120,000
c. $143,333
d. The dollar amount cannot be determined from this information
221. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of bonus recognized
in Frank’s capital account at the date of admission?
a. $70,000
b. $23,333
c. $17,500
d. $52,500

222. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of the reduction to
Kris’ capital account at the date of admission?
a. $5,250
b. $12,250
c. $17,500
d. $100,333

223. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of the reduction to
Mark’s capital account at the date of admission?
a. $5,250
b. $12,250
c. $17,500
d. $100,333

224. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of Kris’ capital
account at the date of admission?
a. $157,750
b. $254,750
c. $164,750
d. $247,750

225. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of Mark’s capital
account at the date of admission?
a. $157,750
b. $254,750
c. $164,750
 d. $247,750

226. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg into
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of Greg’s capital account at
the date of admission?
a. $60,000
b. $78,530
c. $429,250
d. $75,750

227. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of reduction to Tom’s capital
account at the date of admission?
a. $6,300
b. $9,450
c. $54,300
d. $81,450

228. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of reduction to Barbara’s
capital account at the date of admission?
a. $6,300
b. $9,450
c. $54,300
d. $81,450

229. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of Tom’s capital account at
the date of admission?
a. $255,550
b. $258,700
c. $173,700
d. $170,550

230. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of Barbara’s capital account
at the date of admission?
a. $255,550
 b. $258,700
c. $173,700
d. $170,550

231. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, which partner(s) are contributing the goodwill?
a. Both new and existing partners are contributing goodwill
b. New partner is contributing goodwill
c. Existing partners are contributing goodwill
d. There is not enough information to answer this question

232. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jacob is admitted?
a. $130,000
b. $26,000
c. $87,500
d. $32,500

233. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Jacob immediately after he
is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000

234. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Michelle immediately after
Jacob is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000
235. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Steve immediately after
Jacob is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000

236. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
d. There is not enough information to answer this question

237. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jane is admitted?
a. $31,250
b. $125,000
c. $183,333
d. $41,667

238. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Jane immediately after she is
admitted?
a. $225,000
b. $281,250
c. $293,750
d. $183,333

239. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
 recognized, what will be the capital account balance of Susan immediately after Jane is
admitted?
a. $318,750
b. $356,250
c. $368,750
d. $306,250

240. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of David immediately after Jane is
admitted?
a. $318,750
b. $356,250
c. $368,750
d. $306,250

241. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jason is admitted?
a. $11,250
b. $8,438
c. $186,250
d. $15,000

242. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Jason immediately after he
is admitted?
a. $190,000
b. $175,000
c. $15,000
d. $186,250

243. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Dan immediately after Jason
is admitted?
a. $285,000
b. $186,250
 c. $250,000
d. $320,000

244. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Stephanie immediately after
Jason is admitted?
a. $285,000
b. $186,250
c. $250,000
d. $320,000

245. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
d. There is not enough information to answer this question

246. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Julia is admitted?
a. $142,000
b. $150,000
c. $10,000
d. $8,000

247. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Julia immediately after she is
admitted?
a. $160,000
b. $150,000
c. $152,000
d. $158,000

248. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
 are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Juan immediately after Julia is
admitted?
a. $280,000
b. $142,000
c. $320,000
d. $240,000

249. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Felix immediately after Julia is
admitted?
a. $280,000
b. $142,000
c. $320,000
d. $240,000

250. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25 percent,
respectively. Harry is withdrawing from the partnership. At the date of withdrawal, the
partners are revaluing Harry’s portion of the partnership’s assets. If the value of the
partnership’s assets are $200,000 greater than book value, what is the dollar amount of
capital account adjustment that will be recorded?
a. $50,000
b. $70,000
c. $80,000
d. $200,000

251. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25 percent,
respectively. Harry is withdrawing from the partnership. At the date of withdrawal, the
partners are revaluing all of the partnership’s assets. If the value of the partnership’s
assets are $200,000 greater than book value, what is the dollar amount of capital account
adjustment that will be recorded?
a. $50,000
b. $70,000
c. $80,000
d. $200,000

252. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25 percent,
respectively. The partners have capital account balances of $80,000, $110,000, and
$55,000, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing all of the partnership’s assets, an increase of
$200,000. If Susan and Walter acquire Harry’s equity, what will be the amount of
Susan’s capital on the partnership’s balance sheet immediately after Harry’s withdrawal,
rounded to the nearest dollar?
a. $110,000
 b. $230,000
c. $282,308
d. Susan’s capital account balance cannot be determined from the information given

253. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25 percent,
respectively. The partners have capital account balances of $80,000, $110,000, and
$55,000, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing all of the partnership’s assets, an increase of
$200,000. If Susan and Walter acquire Harry’s equity, what will be the amount of total
capital on the partnership’s balance sheet immediately after Harry’s withdrawal?
a. $245,000
b. $445,000
c. $365,000
d. $295,000

254. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
Frank’s capital account be reduced if the bonus method is applied for the withdrawal?
a. $40,000
b. $24,000
c. $20,000
d. $16,000

255. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. What will be the
balance in Frank’s capital account if the bonus method is applied for the withdrawal?
a. $160,000
b. $104,000
c. $184,000
d. $136,000

256. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
George’s capital account be reduced if the bonus method is applied for the withdrawal?
a. $40,000
b. $24,000
c. $20,000
d. $16,000
257. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. What will be the
balance in George’s capital account if the bonus method is applied for the withdrawal?
a. $120,000
b. $104,000
c. $184,000
d. $136,000

258. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. How much
will Melissa’s capital account be reduced if the bonus method is applied for the
withdrawal?
a. $36,000
b. $60,000
c. $24,000
d. $30,000

259. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. What will be
the balance in Melissa’s capital account if the bonus method is applied for the
withdrawal?
a. $336,000
b. $300,000
c. $264,000
d. $246,000

260. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. How much
will Sarah’s capital account be reduced if the bonus method is applied for the
withdrawal?
a. $36,000
b. $60,000
c. $24,000
d. $30,000
261. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. What will be
the balance in Sarah’s capital account if the bonus method is applied for the withdrawal?
a. $336,000
b. $300,000
c. $264,000
d. $246,000

262. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is $22,500. Assuming that Bob’s equity
is purchased by a new partner (Deborah) approved by Claire and Jack, what is the
amount of Deborah’s initial capital account?
a. $150,000
b. $170,000
c. $172,500
d. The amount cannot be determined because the amount Deborah paid for Bob’s
equity is not known

263. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is $22,500. Assuming that Bob’s equity
is purchased by Claire (60 percent) and Jack (40 percent), what is the amount of Claire’s
capital account at the date of Bob’s withdrawal?
a. $238,500
b. $307,500
c. $186,750
d. $180,000

264. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is $22,500. Assuming that Bob’s equity
 is purchased by Claire (60 percent) and Jack (40 percent), what is the amount of Jack’s
capital account at the date of Bob’s withdrawal?
a. $397,500
b. $294,000
c. $285,000
d. $159,000

265. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the
partnership’s goodwill $75,000. Assuming that Bob’s equity is purchased by a new
partner (Deborah) approved by Claire and Jack, what is the amount of Deborah’s initial
capital account?
a. $150,000
b. $170,000
c. $172,500
d. The amount cannot be determined because the amount Deborah paid for Bob’s
equity is not known

266. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the
partnership’s goodwill $75,000. Assuming that Bob’s equity is purchased by Claire (60
percent) and Jack (40 percent), what is the amount of Claire’s capital account at the date
of Bob’s withdrawal?
a. $175,500
b. $247,500
c. $257,250
d. $327,750

267. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the
partnership’s goodwill $75,000. Assuming that Bob’s equity is purchased by Claire (60
percent) and Jack (40 percent), what is the amount of Jack’s capital account at the date of
Bob’s withdrawal?
a. $175,500
b. $247,500
c. $257,250
 d. $327,750

268. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.
Assuming that Sally’s equity is purchased by a new partner (Mary) approved by Bonnie
and Gwen, what is the amount of Mary’s initial capital account?
a. $240,000
b. $390,000
c. $320,000
d. The amount cannot be determined because the amount Mary paid for Sally’s
equity is not known

269. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.
Assuming that Sally’s equity is purchased by Bonnie (60 percent) and Gwen (40
percent), what is the amount of Bonnie’s capital account at the date of Sally’s
withdrawal?
a. $446,000
b. $494,000
c. $424,000
d. $376,000

270. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.
Assuming that Sally’s equity is purchased by Bonnie (60 percent) and Gwen (40
percent), what is the amount of Gwen’s capital account at the date of Sally’s withdrawal?
a. $446,000
b. $494,000
c. $424,000
d. $376,000

271. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
 partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
equity is purchased by a new partner (Mary) approved by Bonnie and Gwen, what is the
amount of Mary’s initial capital account?
a. $87,500
b. $237,500
c. $350,000
d. The amount cannot be determined because the amount Mary paid for Sally’s
equity is not known

272. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is the amount of
Bonnie’s capital account at the date of Sally’s withdrawal?
a. $441,000
b. $490,000
c. $560,000
d. $420,000

273 Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is the amount of
Bonnie’s capital account at the date of Sally’s withdrawal?
a. $441,000
b. $490,000
c. $560,000
d. $420,000

274. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is total
partnership equity after the withdrawal?
a. $980,000
b. $780,000
c. $830,000
d. $630,000
Computational Multiple Choice Question Difficulty and Solutions
169. difficult b
($400,000 - $190,000) + [$270,000 - ($400,000 - $190,000)]/3 = $230,000
170. easy c
171. easy b
$60,000 + $80,000 + $100,000 = $240,000
172. easy c
$30,000 + $50,000 + $25,000 = $105,000/3 = $35,000 - $30,000 = $5,000
173. moderate a
$30,000 + $50,000 + $25,000 = $105,000/3 = $35,000
$50,000 - $30,000 = $15,000
174. easy d
175. easy c
176. easy d
177. moderate c
[($50,000 x 4) + ($40,000 x 6) + ($65,000 x 2)]/12 = $47,500
178. moderate b
[($60,000 x 2) + ($90,000 x 5) + ($70,000 x 4) + $110,000] (.08) = $6,400
179. difficult a
B = .08($250,000 - $200,000 - B)
180. moderate c
B = .05($180,000 - $150,000)
181. difficult d
B = {[($540,000 - $500,000)/$500,000] - .05} $120,000
182. moderate a
($130,000 - $10,000 - $15,000 - $18,000) .45
183. easy d
$60,000 x .45
184. easy a
Profits and losses are allocated equally if there is no allocation provided
185. difficult d
Nick Joe Mike Total
Interest on capital
$200,000 x .09 $18,000
$350,000 x .09 $31,500
$180,000 x .09 $16,200 $65,700
Salary 25,000 15,000 35,000 75,000
Bonus .1($150,000 - $100,000) 5,000 5,000
Residual
$4,300 x .25 1,075
$4,300 x .45 1,935
$4,500 x .30 1,290 4,300
Totals $44,075 $48,435 $57,490 $150,000
186. moderate b
$35,000 + ($500,000 - $35,000 - $50,000 - $40,000) .4
187. moderate a
($250,000 x .08) + [$300,000 - ($200,000 + $250,000 + $400,000)(.08)] .25
188. moderate d
 ($60,000 - $50,000)(.60) + ($80,000 - $60,000)(.70)
189. moderate b
($60,000 - $50,000)(.40) + ($80,000 - $60,000)(.30)
190. moderate c
($300,000 - $200,000)(.75) + ($380,000 - $300,000)(.60)
191. moderate a
($300,000 - $200,000)(.25) + ($380,000 - $300,000)(.40)
192. moderate a
($300,000 - $100,000)(.65) + ($450,000 - $300,000)(.45)
193. moderate c
($300,000 - $100,000)(.35) + ($450,000 - $300,000)(.55)
194. easy b
($120,000 - $50,000)(.60)
195. easy d
($120,000 - $50,000)(.40)
196. easy d
($200,000 - $120,000)(.45)
197. easy a
($200,000 - $120,000)(.55)
198. moderate a
($520,000 - $370,000)(.70)
199. moderate c
($520,000 - $370,000)(.30)
200. moderate b
($650,000 - $520,000)(.60)
201. moderate d
($650,000 - $520,000)(.40)
202. difficult b
($250,000 - $120,000)(.70 - .60)
203. difficult d
($250,000 - $120,000)(.30 - .40)
204. difficult c
($600,000 - $350,000)(.70 - .60)
205. difficult a
($600,000 - $350,000)(.40 - .30)
206. easy b
$84,500 x .3
207. difficult d
The amount that Richard will pay Ray depends on many factors and cannot be
determined from the information provided here.
208. difficult a
[($70,000 + $120,000 + $90,000 + $150,000)/.80](.20)
209. easy b
$250,000 + ($125,000 x .70)
210. moderate c
($270,000 + $300,000 + $150,000)(.20)
211. moderate a
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.75)
212. moderate b
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.25)
213. difficult a
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.75) + $270,000
214. difficult b
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.25) + $300,000
215. moderate c
($625,000 + $480,000 + $450,000)(.25)
216. moderate d
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.60)
217. moderate c
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.40)
218. difficult b
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.60) + $625,000
219. difficult d
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.40) + $480,000
220. moderate a
($170,000 + $260,000 + $120,000)(.25)
221. moderate c
[$120,000 - ($170,000 + $260,000 + $120,000)(.25)]
222. moderate b
[$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.70)
223. moderate a
[$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.30)
224. difficult a
$170,000 - [$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.70)
225. difficult b
$260,000 - [$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.30)
226. moderate d
($265,000 + $180,000 + $60,000)(.15)
227. moderate a
[$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.40)
228. moderate b
[$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.60)
229. difficult b
$265,000 - [$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.40)
230. difficult d
$180,000 - [$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.60)
231. moderate c
($150,000 + $200,000 + $120,000)(.20) = $94,000
232. difficult a
($150,000 + $200,000 + $120,000)(.20) = $94,000, goodwill to existing partners
$120,000 + $0 = .2($150,000 + $200,000 + $120,000 + goodwill)
$120,000 = $94,000 + .2 goodwill
$26,000 = .2 goodwill
Goodwill = $130,000
233. moderate d
 ($150,000 + $200,000 + $120,000)(.20) = $94,000, goodwill to existing partners; new
partner capital account recognized at amount invested
234. difficult a
($150,000 + $200,000 + $120,000)(.20) = $94,000, goodwill to existing partners
$120,000 + $0 = .2($150,000 + $200,000 + $120,000 + goodwill)
$120,000 = $94,000 + .2 goodwill
$26,000 = .2 goodwill
Goodwill = $130,000
$150,000 + $130,000 x .60
235. difficult b
($150,000 + $200,000 + $120,000)(.20) = $94,000, goodwill to existing partners
$120,000 + $0 = .2($150,000 + $200,000 + $120,000 + goodwill)
$120,000 = $94,000 + .2 goodwill
$26,000 = .2 goodwill
Goodwill = $130,000
$200,000 + $130,000 x .40
236. moderate b
($250,000 + $300,000 + $225,000)(.25) = $193,750
237. difficult b
($250,000 + $300,000 + $225,000)(.25) = $193,750, goodwill to existing partners
$225,000 + $0 = .25($250,000 + $300,000 + $225,000 + goodwill)
$225,000 = $193,750 + .25 goodwill
$31,250 = .25 goodwill
Goodwill = $125,000
238. moderate a
($250,000 + $300,000 + $225,000)(.25) = $193,750, goodwill to existing partners; new
partner capital account recognized at amount invested
239. difficult d
($250,000 + $300,000 + $225,000)(.25) = $193,750, goodwill to existing partners
$225,000 + $0 = .25($250,000 + $300,000 + $225,000 + goodwill)
$225,000 = $193,750 + .25 goodwill
$31,250 = .25 goodwill
Goodwill = $125,000
$250,000 + $125,000 x .45
240. difficult c
($250,000 + $300,000 + $225,000)(.25) = $193,750, goodwill to existing partners
$225,000 + $0 = .25($250,000 + $300,000 + $225,000 + goodwill)
$225,000 = $193,750 + .25 goodwill
$31,250 = .25 goodwill
Goodwill = $125,000
$300,000 + $125,000 x .55
241. difficult d
($250,000 + $320,000 + $175,000)(.25) = $186,250, goodwill to new partner
$175,000 + goodwill = .25($250,000 + $320,000 + $175,000 + goodwill)
$175,000 + goodwill = $186,250 + .25 goodwill
.75 goodwill = 11,250
Goodwill = $15,000
242. difficult a
 ($250,000 + $320,000 + $175,000)(.25) = $186,250, goodwill to new partner
$175,000 + goodwill = .25($250,000 + $320,000 + $175,000 + goodwill)
$175,000 + goodwill = $186,250 + .25 goodwill
.75 goodwill = 11,250
Goodwill = $15,000
$175,000 + $15,000
243. moderate c
($250,000 + $320,000 + $175,000)(.25) = $186,250, goodwill to new partner; existing
partners’ capital accounts do not change
244. moderate d
($250,000 + $320,000 + $175,000)(.25) = $186,250, goodwill to new partner; existing
partners’ capital accounts do not change
245. moderate a
($240,000 + $320,000 + $150,000)(.20) = $142,000
246. difficult c
($240,000 + $320,000 + $150,000)(.20) = $142,000, goodwill to new partner
$150,000 + goodwill = .20($240,000 + $320,000 + $150,000 + goodwill)
$150,000 + goodwill = $142,000 + .20 goodwill
.80 goodwill = $8,000
Goodwill = $10,000
247. difficult a
($240,000 + $320,000 + $150,000)(.20) = $142,000, goodwill to new partner
$150,000 + goodwill = .20($240,000 + $320,000 + $150,000 + goodwill)
$150,000 + goodwill = $142,000 + .20 goodwill
.80 goodwill = $8,000
Goodwill = $10,000
$160,000 + $10,000
248. moderate d
($240,000 + $320,000 + $150,000)(.20) = $142,000, goodwill to new partner, capital
accounts of existing partners do not change
249. moderate c
($240,000 + $320,000 + $150,000)(.20) = $142,000, goodwill to new partner, capital
accounts of existing partners do not change
250. easy b
$200,000 x .35
251. easy d
252. moderate d
253. moderate b
$80,000 + $110,000 + $55,000 + $200,000
254. moderate b
($250,000 - $210,000)(45/75)
255. moderate d
$160,000 - ($250,000 - $210,000)(45/75)
256. moderate d
($250,000 - $210,000)(30/75)
257. moderate b
$120,000 - ($250,000 - $210,000)(30/75)
258. moderate a
 ($240,000 - $180,000)(42/70)
259. moderate c
$300,000 - ($240,000 - $180,000)(42/70)
260. moderate c
($240,000 - $180,000)(28/70)
261. moderate d
$270,000 - ($240,000 - $180,000)(28/70)
262. easy c
$150,000 + $22,500
263. moderate a
$135,000 + ($150,000 + $22,500)(.60)
264. moderate b
$225,000 + ($150,000 + $22,500)(.40)
265. easy c
$150,000 + ($75,000 x .3)
266. difficult c
$135,000 + ($75,000 x .25) + [$150,000 + ($75,000 x .30)](.60)
267. difficult d
$225,000 + ($75,000 x .45) + [$150,000 + ($75,000 x .30)](.40)
268. easy a
$200,000 + $40,000
269. moderate b
$350,000 + ($200,000 + $40,000)(.60)
270. moderate c
$280,000 + ($200,000 + $40,000)(.40)
271. easy b
$200,000 + ($150,000 x .25)
272. difficult c
$350,000 + ($150,000 x .45) + [$200,000 + ($150,000 x .25)](.60)
273 difficult d
$280,000 + ($150,000 x .30) + [$200,000 + ($150,000 x .25)](.40)
274. moderate a
$350,000 + $280,000 + $200,000 + $150,000

Problems
275. (10 Points) moderate
Alan, Betty, and Carl are forming a partnership. Each will contribute cash and noncash
assets. Assume the initial capital account balances will be determined based on the value
of the assets contributed. Information regarding the initial contributions is provided
below:

Alan Betty Carl__

Cash $150,000 $275,000 $125,000
Plant Assets - historical cost 280,000 350,000 540,000
Plant Assets - carrying value 215,000 225,000 300,000
Plant Assets - tax basis 200,000 190,000 230,000
Plant Assets - market value 350,000 260,000 310,000
 Required:
a. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the carrying value is used to determine the value assigned to
noncash assets contributed. Assume also that each partner’s capital account is
assigned a value equal to the cash and noncash assets contributed by that partner.
b. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the carrying value is used to determine the value assigned to
noncash assets contributed. Assume also that all of the partners’ capital accounts
are equal when the journal entry is completed.
c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?

Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($215,000 + $225,000 + $300,000) 740,000
Alan, Capital ($150,000 + $215,000) 365,000
Betty, Capital ($275,000 + $225,000) 500,000
Carl, Capital ($125,000 + $300,000) 425,000
Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($215,000 + $225,000 + $300,000) 740,000
Alan, Capital ($550,000 + $740,000)/3 430,000
Betty, Capital ($550,000 + $740,000)/3 430,000
Carl, Capital ($550,000 + $740,000)/3 430,000

Part c. Alan has significantly more capital when it is divided equally when compared to
assigning the sum of the carrying values of assets contributed. On the other hand,
Betty has significantly less capital when it is divided equally. Carl has
approximately the same amount under either assignment method. One possibility
is that Betty is giving up some capital to Alan because Alan has substantially
more expertise in running the business. Thus, Betty is paying a bonus to Alan.

276. (10 Points) moderate

Alan, Betty, and Carl are forming a partnership. Each will contribute cash and noncash
assets. Assume the initial capital account balances will be determined based on the value
of the assets contributed. Information regarding the initial contributions is provided
below:

Alan Betty Carl__

Cash $150,000 $275,000 $125,000
Plant Assets - historical cost 280,000 350,000 540,000
Plant Assets - carrying value 220,000 225,000 300,000
Plant Assets - tax basis 200,000 190,000 230,000
Plant Assets - market value 350,000 260,000 310,000

Required:
 a. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the tax basis is used to determine the value assigned to noncash
assets contributed. Assume also that each partner’s capital account is assigned a
value equal to the cash and noncash assets contributed by that partner.
b. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the tax basis is used to determine the value assigned to noncash
assets contributed. Assume also that all of the partners’ capital accounts are equal
when the journal entry is completed.
c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?

Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($200,000 + $190,000 + $230,000) 620,000
Alan, Capital ($150,000 + $200,000) 350,000
Betty, Capital ($275,000 + $190,000) 465,000
Carl, Capital ($125,000 + $230,000) 355,000

Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($200,000 + $190,000 + $230,000) 620,000
Alan, Capital ($550,000 + $620,000)/3 390,000
Betty, Capital ($550,000 + $620,000)/3 390,000
Carl, Capital ($550,000 + $620,000)/3 390,000

Part c. Alan and Carl each have significantly more capital when it is divided equally
when compared to assigning the sum of the carrying values of assets contributed.
On the other hand, Betty has significantly less capital when it is divided equally.
One possibility is that Betty is giving up some capital to Alan and Carl because
they have substantially more expertise in running the business. Thus, Betty is
paying a bonus to Alan and Carl.

277. (10 Points) moderate

Alan, Betty, and Carl are forming a partnership. Each will contribute cash and noncash
assets. Assume the initial capital account balances will be determined based on the value
of the assets contributed. Information regarding the initial contributions is provided
below:

Alan Betty Carl__

Cash $150,000 $275,000 $125,000
Plant Assets - historical cost 280,000 350,000 540,000
Plant Assets - carrying value 220,000 225,000 300,000
Plant Assets - tax basis 200,000 190,000 230,000
Plant Assets - market value 350,000 260,000 310,000

Required:
 a. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the market value is used to determine the value assigned to
noncash assets contributed. Assume also that each partner’s capital account is
assigned a value equal to the cash and noncash assets contributed by that partner.
b. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the market value is used to determine the value assigned to
noncash assets contributed. Assume also that all of the partners’ capital accounts
are equal when the journal entry is completed.
c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?

Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($350,000 + $260,000 + $310,000) 920,000
Alan, Capital ($150,000 + $350,000) 500,000
Betty, Capital ($275,000 + $260,000) 535,000
Carl, Capital ($125,000 + $310,000) 435,000

Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($350,000 + $260,000 + $310,000) 920,000
Alan, Capital ($550,000 + $920,000)/3 490,000
Betty, Capital ($550,000 + $920,000)/3 490,000
Carl, Capital ($550,000 + $920,000)/3 490,000

Part c. Carl has significantly more capital when it is divided equally when compared to
assigning the sum of the carrying values of assets contributed. On the other hand,
Betty has significantly less capital when it is divided equally. Alan has
approximately the same amount under either assignment method. One possibility
is that Betty is giving up some capital to Carl because Carl has substantially more
expertise in running the business. Thus, Betty is paying a bonus to Carl.

278. (5 Points) easy

Alex, Bill, and Martha contribute the following assets to begin partnership operations:

Alex Bill Martha_

Cash $150,000 $225,000 $175,000
Inventory 57,000 89,000
Plant Assets 350,000 100,000
Accounts Payable 14,000 40,000
Notes Payable 160,000

Record the journal entry to establish the assets and owners’ equity of the partnership.

Answer:
Cash ($150,000 + $225,000 + $175,000) 550,000
Inventory ($57,000 + $89,000) 146,000
 Plant Assets ($350,000 + $100,000) 450,000
Accounts Payable ($14,000 + $40,000) 54,000
Notes Payable 160,000
Alex, capital ($150,000 + $57,000 - $14,000) 193,000
Bill, capital ($225,000 + $350,000 - $160,000) 415,000
Martha, capital ($175,000 + $89,000 + 324,000
$100,000 - $40,000)

279. (10 Points) moderate

William, Casey, and Samantha are forming a partnership. Below is a table outlining the
contributions of each partner.

William Casey Samantha

Cash $ 15,000 $20,000 $ 10,000
Inventory 100,000 60,000 80,000
Plant Assets 250,000 160,000
Liabilities Assumed by Partnership 130,000 90,000

In addition, Casey brings significant experience needed to run the business. It is agreed
that partners will receive capital allocations equal to the market value of the net assets
contributed and that Casey will receive additional capital of $75,000 and the bonus
method will be applied. Two-thirds of the bonus is to come from William and one-third
from Samantha. Record the journal entry for the creation of the partnership.

Answer:
Cash ($15,000 + $20,000 + $10,000) 45,000
Inventory ($100,000 + $60,000 + $80,000) 240,000
Plant Assets ($250,000 + $160,000) 410,000
Liabilities ($130,000 + $90,000) 220,000
Casey, Capital ($20,000 + $60,000 + $75,000) 155,000
Samantha, Capital [$10,000 + $80,000 + 135,000
$160,000 - $90,000 - ($75,000/3)]
William, Capital [$15,000 + $100,000 + 185,000
$250,000 - $130,000 - ($75,000 x 2/3)]

280. (10 Points) moderate

Bonnie, Connie, and Deborah are forming a partnership. The partners will contribute the
following identifiable assets:

Bonnie Connie Deborah

Cash $150,000 $200,000 $140,000
Inventory 160,000 190,000 180,000
Plant Assets 300,000 340,000
Liabilities Assumed by Partnership 180,000 130,000

In addition, Bonnie brings significant experience because she has run a similar type of
business. It is agreed that Bonnie will receive additional capital of $80,000 and the
 bonus method will be applied. Sixty percent of the bonus is to come from Deborah and
forty percent from Connie. Record the journal entry for the creation of the partnership.

Answer:
Cash ($150,000 + $200,000 + $140,000) 490,000
Inventory ($160,000 + $190,000 + $180,000) 530,000
Plant Assets ($300,000 + $340,000) 640,000
Liabilities ($180,000 + $130,000) 310,000
Bonnie, Capital ($150,000 + $160,000 + 510,000
$300,000 - $180,000 + $80,000)
Connie, Capital [$200,000 + $190,000 - 358,000
($80,000 x .4)]
Deborah, Capital [$140,000 + $180,000 + 482,000
$340,000 - $130,000 - ($80,000 x .6)]

281. (10 Points) moderate

Able, Baker, and Charlie are forming a partnership. Charlie has significant experience in
the type of business the partners are starting. As a result, Able and Baker agree that
goodwill of $50,000 should be recognized with regard to Charlie. The partners
contribute the following tangible assets:

Able Baker Charlie

Cash $20,000 $35,000 $55,000
Plant Assets 75,000 90,000 60,000
Liabilities 25,000 45,000 15,000

Record the journal entry to establish the partnership.

Answer:
Cash ($20,000 + $35,000 + $55,000) 110,000
Plant Assets ($75,000 + $90,000 + $60,000) 225,000
Goodwill 50,000
Liabilities ($25,000 + $45,000 + $15,000) 85,000
Able, Capital ($20,000 + $75,000 - $25,000) 70,000
Baker, Capital ($35,000 + $90,000 - $45,000) 80,000
Charlie, Capital ($55,000 + $60,000 - $15,000 + 150,000
$50,000)

282. (15 Points) moderate

Jessica, Mary, and Susan currently operate three separate businesses. They are planning
to combine and form a partnership to operate as one business. The prospective partners
agree that, in addition to the net market value of the tangible assets contributed to the
partnership, Jessica and Susan should have goodwill recognized in the amounts of
$80,000 and $40,000, respectively. The following table presents the market value of the
assets and liabilities contributed to the partnership.

Jessica Mary Susan

Cash $100,000 $250,000 $170,000
 Inventory 280,000 400,000 450,000
Plant Assets 750,000 500,000 600,000
Accounts Payable 190,000 270,000 260,000
Mortgage Payable 340,000 200,000 320,000

Required:
a. Record the journal entry to establish the partnership.
b. What appears to be the partners’ intent when creating the new partnership?

Answer:
Part a.
Cash ($100,000 + $250,000 + $170,000) 520,000
Inventory ($280,000 + $400,000 + $450,000) 1,130,000
Plant Assets ($750,000 + $500,000 + $600,000) 1,850,000
Goodwill 120,000
Accounts Payable ($190,000 + $270,000 + 720,000
$260,000)
Mortgage Payable ($340,000 + $200,000 + 860,000
$320,000)
Jessica, Capital ($100,000 + $280,000 + 680,000
$750,000 - $190,000 - $340,000 + $80,000)
Mary, Capital ($250,000 + $400,000 + 680,000
$500,000 - $270,000 - $200,000)
Susan, Capital ($170,000 + $450,000 + 680,000
$600,000 - $260,000 - $320,000 + $40,000)

Part b.
The apparent intent of the partners is to make all three partner capital accounts of equal
dollar amount when the partnership is formed.

283. (20 Points) moderate

Tom, Jon, and Sandy are partners in a thriving business. You work for the firm that
provides accounting services to the partnership. The accounting period recently ended
and you have been assigned the task of helping with the profit allocation to the partners.
The following information has been extracted from the partnership’s accounting records:

Date Tom Jon Sandy____

1/1 Balance $850,000 Balance $680,000 Balance $450,000
4/30 Withdraw $75,000 Withdraw $30,000
9/1 Invest $120,000 Withdraw $100,000
12/1 Invest $90,000 Invest $40,000 Withdraw $60,000

The partnership agreement stipulates that the weighted-average capital balance is the
basis for the interest on capital component of profit and loss allocation and the rate of
return on invested capital is 12 percent. What is the amount of interest on capital
allocated to each partner as a part of the profit and loss allocation?

Answer:
 TOM’S AVERAGE CAPITAL BALANCE
Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $850,000 4 months $ 3,400,000
April 30 Withdraw $75,000 775,000 4 months 3,100,000
September 1 Invest $120,000 895,000 3 months 2,685,000
December 1 Invest $90,000 985,000 1 month 985,000
$10,170,000
Average capital ($10,170,000 / 12) $847,500

JON’S AVERAGE CAPITAL BALANCE

Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $680,000 8 months $5,440,000
September 1 Withdraw $100,000 580,000 3 months 1,740,000
December 1 Invest $40,000 620,000 1 month 620,000
$7,800,000
Average capital ($7,800,000 / 12) $650,000

SANDY’S AVERAGE CAPITAL BALANCE

Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $450,000 4 months $1,800,000
April 30 Withdraw $30,000 420,000 7 months 2,940,000
December 1 Withdraw $60,000 360,000 1 month 360,000
$5,100,000
Average capital ($5,100,000 / 12) $425,000

Interest on capital contributions:

Tom: $847,500 x .12 = $101,700
Jon: $650,000 x .12 = $78,000
Sandy: $425,000 x .12 = $51,000

284. (20 Points) moderate

John, Roger, and Troy are partners in a local business. You are a staff accountant at a
firm that provides accounting services to the partnership. You were just assigned the task
of helping prepare the profit allocation to the partners. The following information was
extracted from the partnership’s accounting records:

Date John Roger Troy_____

1/1 Balance $250,000 Balance $350,000 Balance $500,000
3/31 Withdraw $30,000 Invest $50,000
8/31 Invest $40,000 Withdraw $90,000
11/1 Invest $25,000 Invest $60,000 Withdraw $60,000

The partnership agreement stipulates that the weighted-average capital balance is the
basis for the interest on capital component of profit and loss allocation and the rate of
 return on invested capital is 10 percent. What is the amount of interest on capital
allocated to each partner as a part of the profit and loss allocation?

Answer:
JOHN’S AVERAGE CAPITAL BALANCE
Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $250,000 3 months $ 750,000
March 31 Withdraw $30,000 220,000 5 months 1,100,000
August 31 Invest $40,000 260,000 2 months 520,000
November 1 Invest $25,000 285,000 2 months 570,000
$2,940,000
Average capital ($2,940,000 / 12) $245,000

ROGER’S AVERAGE CAPITAL BALANCE

Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $350,000 8 months $2,800,000
August 31 Withdraw $90,000 260,000 2 months 520,000
November 1 Invest $60,000 320,000 2 months 640,000
$3,960,000
Average capital ($3,960,000 / 12) $330,000

TROY’S AVERAGE CAPITAL BALANCE

Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $500,000 3 months $1,500,000
March 31 Invest $50,000 550,000 7 months 3,850,000
November 1 Withdraw $60,000 490,000 2 months 980,000
$6,330,000
Average capital ($6,660,000 / 12) $527,500

Interest on capital contributions:

John: $245,000 x .10 = $24,500
Roger: $330,000 x .10 = $33,000
Troy: $527,500 x .10 = $52,750

285. (10 Points) easy

Philip is the managing partner of a local company. Part of his profit and loss allocation is
a bonus based on the store operating income. The bonus arrangement is 8 percent of
operating income in excess of $200,000 after deducting the bonus. How much is Philip’s
bonus this year if operating income before deducting the bonus is $350,000?

Answer:
Bonus = .08($350,000 - $200,000 - B)
1.08 Bonus = $12,000
Bonus = $11,111.11
286. (10 Points) easy
Sally is a partner, and business manager, in a local partnership. Part of the profit and loss
agreement in the articles of partnership is a bonus to be paid to the business manager.
The bonus is currently calculated at 12 percent of income in excess of $250,000 after
subtracting the bonus.

How much bonus will Sally receive if income is $400,000?

Answer:
Bonus = .12 ($400,000 - $250,000 - B)
Bonus = $16,071.43

287. (10 Points) easy

Frank, George, and Hank are partners. Partnership profits for the year are $90,000.

Required:
a. How much is allocated to each partner if the profit and loss residual ratios are
30%, 20%, and 50%, respectively?

b. How would the profit be allocated if there were no profit and loss residual ratios?

Answer:
Part a.
Frank $90,000 x .30 = $27,000
George $90,000 x .20 = $18,000
Hank $90,000 x .50 = $45,000

Part b.
Frank, George and Hank $90,000/3 = $30,000

288. (30 Points) difficult

Beverly, Brad, and Bob are partners in the 3Bs company. The partners have been in
business for a number of years. The following information exists with regard to the
allocation of profits and losses.

Beverly _ Brad Bob__

Weighted-average capital balance $400,000 $650,000 $550,000
Salary 40,000 65,000 80,000
Bonus .1(Net income - $200,000)
Residual 40% 35% 25%

The interest portion of the profit and loss allocation is 8 percent of the weighted-average
capital balance. Profit allocation is determined in the order presented above. Assume the
allocation is completed regardless of the level of profit. Partnership losses, on the other
hand, are allocated by the residual ratios only.

Required:
 a. Determine the profit allocation if the partnership net income is $580,000.
b. Determine the profit allocation if the partnership net income is $250,000.
c. Determine the loss allocation if the partnership net loss is ($50,000).

Solution:
Part a.
Beverly Brad Bob Total__
Interest on capital
$400,000 x .08 $ 32,000
$650,000 x .08 $ 52,000
$550,000 x .08 $ 44,000 $128,000
Salary 40,000 65,000 80,000 185,000
Bonus
.1($580,000 - $200,000) 38,000 38,000
Residual
$229,000 x .4 91,600
$229,000 x .35 80,150
$229,000 x .25 57,250 229,000
$163,600 $235,150 $181,250 $580,000

Part b.
Beverly Brad Bob Total__
Interest on capital
$400,000 x .08 $32,000
$650,000 x .08 $ 52,000
$550,000 x .08 $44,000 $128,000
Salary 40,000 65,000 80,000 185,000
Bonus
.1($250,000 - $200,000) 5,000 5,000
Residual
($68,000) x .4 (27,200)
($68,000) x .35 (23,800)
($68,000) x .25 (17,000) (68,000)
$44,800 $98,200 $107,000 $250,000

Part c.
Beverly Brad Bob Total__
Residual
($50,000) x .4 ($20,000)
($50,000) x .35 ($17,500)
($50,000) x .25 ($12,500) ($50,000)

289. (15 Points) difficult

Tiffany, Jason, and Shanel are partners in a marketing firm. They allocate profits and
losses based on four criteria: (1) 6 percent return on invested capital; (2) salary, based on
$40 per billable hour; (3) bonus to Jason for managing the business [.15 (net income -
$250,000 - bonus)]; and (4) residual allocation. For the year, the partners have the
following average invested capital and billable hours.
 Tiffany Jason Shanel_
Average invested capital $200,000 $180,000 $160,000
Billable hours 1,500 1,700 2,200

Prepare a schedule allocating the partnership’s $450,000 profit. Round all

amounts to the nearest dollar.

Solution:
Tiffany Jason Shanel Total_
Interest on capital
$200,000 x .06 $ 12,000
$180,000 x .06 $ 10,800
$160,000 x .06 $ 9,600 $ 32,400
Salary
1,500 x $40 60,000
1,700 x $40 68,000
2,200 x $40 88,000 216,000
Bonus
.15($450,000 - $250,000 - B) 26,087 26,087
Residual
$175,513/3 58,504 58,504 58,505 175,513
$130,504 $163,391 $156,105 $450,000

290. (10 Points) moderate

Stan and Allan have been partners for several years. Their current partnership profit and
loss ratios are being changed from 75/25 to 60/40. As part of the change, they have
created a list of assets that have market and book value differences. One of the assets is
vacant land with a $200,000 market value and a $110,000 book value. One year after
changing the profit and loss ratios, the building is sold for $280,000. Record (1) the sale
of the land and (2) the distribution of the gain on sale to the partners.

Solution:
Cash 280,000
Land 110,000
Gain on Sale of Land 170,000

Gain on Sale of Land 170,000

Stan, capital ($200,000 - $110,000)(.75) + 115,500
($280,000 - $200,000)(.60)
Allan, capital ($200,000 - $110,000)(.25) + 54,500
($280,000 - $200,000)(.40)

291. (10 Points) moderate

Susan and Mary have been partners for several years. Their current partnership profit
and loss ratios are being changed from 65/35 to 55/45. As part of the change, they have
created a list of assets that have market and book value differences. One of the assets is a
 building with a $370,000 market value and a $150,000 book value. One year after
changing the profit and loss ratios, the building is sold for $500,000. Record (1) the sale
of the building and (2) the distribution of the gain on sale to the partners.

Solution:
Cash 500,000
Building 150,000
Gain on Sale of Building 350,000

Gain on Sale of Land 350,000

Susan, capital ($370,000 - $150,000)(.65) + 214,500
($500,000 - $370,000)(.55)
Mary, capital ($370,000 - $150,000)(.35) + 135,500
($500,000 - $370,000)(.45)

292. (10 Points) easy

Janice and Richard are partners who are changing their profit and loss ratios from 40/60
to 55/45. At the date of the change, the partners chooses to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$250,000 and a market value of $420,000. Two years after the profit and loss ratio is
changed, the land is sold for $600,000. Record (1) the revaluation of the land, (2) the
sale of the land, and (3) the distribution of the gain on sale of land to the partners.

Solution:
Land ($420,000 - $250,000) 170,000
Janice, capital ($170,000 x .40) 68,000
Richard, capital ($170,000 x .60) 102,000

Cash 600,000
Land 420,000
Gain on Sale of Land ($600,000 - $420,000) 180,000

Gain on Sale of Land 180,000

Janice, capital ($180,000 x .55) 99,000
Richard, capital ($180,000 x .45) 81,000

293. (10 Points) moderate

John and Renee are partners who are changing their profit and loss ratios from 70/30 to
60/40. At the date of the change, the partners chooses to revalue assets with market value
different from book value. One asset revalued is a building with a net book value of
$100,000 and a market value of $340,000. One year after the profit and loss ratio is
changed, the building is sold for $270,000. Record (1) the revaluation of the building,
(2) the sale of the building, and (3) the distribution of the loss on sale of the building to
the partners.

Solution:
Building ($340,000 - $100,000) 240,000
 John, capital ($240,000 x .70)
168,000
Renee, capital ($240,000 x .30) 72,000

Cash 270,000
Loss on Sale of Building ($270,000 - $340,000) 70,000
Building 340,000

John, capital ($70,000 x .60) 42,000

Renee, capital ($70,000 x .40) 28,000
Loss on Sale of Building 70,000

294. (10 Points) moderate

Tom and Darris are partners. Their current profit and loss ratios (80/20) are being
changed to (70/30). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, land has a market value of
$350,000 and a book value of $140,000. Record the adjustment to the capital accounts at
the date of the change in the profit and loss ratios.

Solution:
Darris, capital [($340,000 - $150,000)(.20-.30)] 21,000
Tom, capital [($340,000 - $150,000)(.80 - .70)] 21,000

295. (10 Points) moderate

Tim and Donna are partners. Their current profit and loss ratios (60/40) are being
changed to (45/55). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, a building has a book
value of $400,000 and a market value of $650,000. Record the adjustment to the capital
accounts at the date of the change in the profit and loss ratios.

Solution:
Donna, capital [($650,000 - $400,000)(.40-.55)] 37,500
Tim, capital [($650,000 - $400,000)(.60 - .45)] 37,500

296. (5 Points) easy

Wesley, Slyvia, and Mel are partners. They have capital accounts of $60,000, $95,000,
and $105,000, respectively. Heather is talking to Mel about joining the partnership and
acquiring 1/3 of his equity. Wesley and Slyvia know Heather and they have approved her
admission into the partnership. Record Heather’s admission assuming she pays $50,000
to acquire 1/3 of Mel’s equity.

Solution:
Mel, capital ($105,000/3) 35,000
Heather, capital 35,000

297. (10 Points) moderate

 John, Linda, and Bill are partners with capital accounts of $78,000, $59,000, and
$183,000, respectively. In addition, they share profits and losses 30%, 25%, and 45%,
respectively. Bill is planning to partially retire and has asked John and Linda if they
would approve Mitch as a new partner. John and Linda respond that Mitch is acceptable
but they want to revalue the partnership’s assets before Mitch is admitted. At the date of
the admission, the net assets are written up $250,000. Mitch pays Bill $200,000 for 60
percent of his equity. Record the revaluation of the assets and the admission of Mitch
into the partnership.

Solution:
Assets 250,000
John, capital ($250,000 x .30)
75,000
Linda, capital ($250,000 x .25) 62,500
Bill, capital ($250,000 x .45) 112,500

Bill, capital ($183,000 + $112,500)(.60) 177,300

Mitch, capital 177,300

298. (20 Points) moderate

Susan and Tom are partners with capital accounts of $280,000 and $182,500,
respectively. The partners share profits and losses 60/40. They are considering admitting
Scott into the partnership as a 25% equity ownership for an investment into the
partnership of $187,500. Before admission of Scott, the partnership’s assets will be
revalued up $100,000. Record the revaluation of the assets and the admission of Scott
into the partnership.

Solution:
Assets 100,000
Susan, capital ($100,000 x .60) 60,000
Tom, capital ($100,000 x .40) 40,000

Book value of capital before the investment $562,500

($280,000 + $182,500 + $100,000)
Scott’s investment 187,500
Total book value of capital after the investment $750,000
Scott’s percentage ownership 0.25
Book value of Scott’s ownership percentage capital $187,500

Cash 187,500
Scott, capital 187,500

299. (20 Points) moderate

Wayne and Dennis are partners with capital accounts of $250,000 and $300,000,
respectively. The partners share profits and losses 30/70. They are considering admitting
Dorothy into the partnership with a 20% equity ownership for an investment into the
partnership of $193,750. Before admission of Dorothy, the partnership’s assets will be
 revalued up $225,000. Record the revaluation of the assets and the admission of Dorothy
into the partnership.

Answer:
Assets 225,000
Wayne, capital ($225,000 x .30) 67,500
Dennis, capital ($225,000 x .70) 157,500

Book value of capital before the investment $775,000

($250,000 + $300,000 + $225,000)
Dorothy’s investment 193,750
Total book value of capital after the investment $968,750
Dorothy’s percentage ownership 0.20
Book value of Scott’s ownership percentage capital $193,750

Cash 193,750
Dorothy, capital 193,750

300. (10 Points) easy

Louise and Jane are considering admitting Mary into their partnership. Louise and Jane
share profits at losses 70/30 and their capital account balances are $260,000 and
$190,000, respectively. The partnership agreement indicates that the bonus method will
be applied when new partners are admitted to the company. Louise and Jane want to
know what the journal entry would look like if Mary is admitted with a 20 percent equity
interest in the partnership for an investment of $140,000. Prepare the journal entry at the
date of admission.

Answer:
Cash 140,000
Jane, capital ($140,000 - $118,000)(.30) 6,600
Louise, capital ($140,000 - $118,000)(.70) 15,400
Mary, capital ($260,000 + $190,000 + $140,000)(.20) 118,000

301. (10 Points) easy

Steve and Ray are partners with capital accounts of $300,000 and $460,000, respectively.
They share profits and losses 60/40. Their business is growing and they need to admit a
new partner. Sheila has indicated that she would like to be part of the business.
Negotiations occur and Sheila is admitted with a 25 percent equity interest for $325,000.
Record the admission of Sheila if the bonus method is applied.

Answer:
Cash 325,000
Sheila, capital ($300,000 + $460,000 + 271,250
$325,000)(.25)
Ray, capital ($325,000 - $271,250)(.40) 21,500
Steve, capital ($325,000 - $271,250)(.60) 32,250

302. (20 Points) moderate

 Deborah and Randy are partners who share profits and losses 55/45. They have capital
account balances of $450,000 and $380,000, respectively. The partners have been
negotiating with Marsha about her joining the partnership. The parties agree that the
partnership will revalue assets to their market value ($150,000 above book value) and
that Marsha will invest $250,000 for a 15 percent equity interest. Record the revaluation
and the admission of Marsha into the partnership assuming the bonus method is applied.

Answer:
Assets 150,000
Deborah, capital ($150,000 x .55) 82,500
Randy, capital ($150,000 x .45) 67,500

Cash 250,000
Deborah, capital ($250,000 - $184,500)(.55) 36,025
Marsha, capital ($450,000 + $380,000 + 184,500
$150,000 + $250,000)(.15)
Randy, capital ($250,000 - $184,500)(.45) 29,475

303. (10 Points) easy

Jennifer and Juan are partners with capital accounts of $100,000 and $160,000,
respectively. They share profits and losses 45/55. The business is expanding and they
need to admit a new partner. Kathryn has indicated that she would like to join the
partnership. Negotiations occur and Kathryn is admitted with a 25 percent equity interest
for $75,000. Record the admission of Kathryn assuming the bonus method is applied.

Answer:
Cash 80,000
Jennifer, capital ($85,000 - $80,000)(.45) 2,250
Juan, capital ($85,000 - $80,000)(.55) 2,750
Kathryn, capital ($100,000 + $160,000 + 85,000
$80,000)(.25)

304. (10 Points) easy

Fred and Laurie are considering admitting John into their partnership. Fred and Laurie
share profits at losses 60/40 and their capital account balances are $160,000 and
$290,000, respectively. The partnership agreement indicates that the bonus method will
be applied when new partners are admitted to the company. Fred and Laurie have asked
you to prepare the journal entry to admit John with a 25 percent equity interest in the
partnership for an investment of $125,000.

Answer:
Cash 125,000
Fred, capital ($143,750 - $125,000)(.60) 11,250
Laurie, capital ($143,750 - $125,000)(.40) 7,500
John, capital ($160,000 + $290,000 + 143,750
$125,000)(.25)

305. (20 Points) moderate

 Jo Ann and Robert are partners who share profits and losses 30/70. They have capital
account balances of $150,000 and $280,000, respectively. The partners have been
negotiating with Bill about him joining the partnership. The parties agree that the
partnership will revalue assets to their market value ($80,000 above book value) and that
Bill will invest $100,000 for a 20 percent equity interest. Record the revaluation and the
admission of Bill into the partnership assuming the bonus method is applied.

Answer:
Assets 80,000
Jo Ann, capital ($80,000 x .30) 24,000
Robert, capital ($80,000 x .70) 56,000

Cash 100,000
Jo Ann, capital ($122,000 - $100,000)(.30) 6,600
Robert, capital ($122,000 - $100,000)(.70) 15,400
Bill, capital ($280,000 + $150,000 + 122,000
$80,000 + $100,000)(.20)

306. (20 Points) moderate

Robert and Steven are partners in a local company. They have capital accounts in the
amounts of $250,000 and $320,000, respectively, when they agree to admit a new
partner, Don, to the company. Don has agreed to contribute $225,000 for a 25 percent
interest in the owners’ equity of the partnership. Before Don’s admission to the
partnership, Robert and Steven share profits and losses 80 percent and 20 percent,
respectively. Record the admission of Don assuming the goodwill method is applied.

Answer:
Book value of capital before the investment $570,000
Don’s investment 225,000
Total book value of capital after the investment $795,000
Don’s percentage ownership 0.25
Book value of Don’s ownership percentage capital $198,750

Goodwill to existing partners

$225,000 = (.25)($795,000 + Goodwill)

$225,000 = $198,750 + .25 (Goodwill)
$26,250 = .25 (Goodwill)
Goodwill = $105,000

Cash 225,000
Goodwill 105,000
Don, capital 225,000
Robert, capital ($105,000 x .80) 84,000
Steve, capital ($105,000 x .20) 21,000

307. (20 Points) moderate

 Ann and Sarah are partners in a local company. They have capital accounts in the
amounts of $150,000 and $220,000, respectively, when they agree to admit a new
partner, John, to the company. John has agreed to contribute $175,000 for a 25 percent
interest in the owners’ equity of the partnership. Before John’s admission to the
partnership, Ann and Sarah share profits and losses 40 percent and 60 percent,
respectively. Record the admission of John assuming the goodwill method is applied.

Answer:
Book value of capital before the investment $370,000
John’s investment 175,000
Total book value of capital after the investment 545,000
John’s percentage ownership 0.25
Book value of John’s ownership percentage capital 136,250

Goodwill to existing partners

$175,000 = (.25)($495,000 + Goodwill)

$175,000 = $136,250 + .25 (Goodwill)
$38,750 = .25 (Goodwill)
Goodwill = $155,000

Cash 175,000
Goodwill 155,000
Ann, capital ($155,000 x .40) 62,000
John, capital 175,000
Sarah, capital ($155,000 x .60) 93,000

308. (30 Points) difficult

Bob and Norman are partners and they share profits and losses 70/30. They have capital
accounts balances of $350,000 and $480,000, respectively, when they agree to admit
Richard to the company. All parties have agreed that the partnership will first revalue
tangible assets to their market value ($150,000 above book value) and then Richard will
invest $300,000 for a 20 percent interest in the partnership’s owners’ equity. Record the
revaluation and the admission of Richard into the partnership assuming the goodwill
method is applied.

Answer:
Assets 150,000
Bob, capital ($150,000 x .70) 105,000
Norman, capital ($150,000 x .30) 45,000

Book value of capital before the investment $ 980,000

($350,000 + $480,000 + $150,000)
Richard’s investment 300,000
Total book value of capital after the investment $1,280,000
Richard’s percentage ownership 0.20
Book value of Richard’s ownership percentage capital $ 256,000
 Goodwill to existing partners

$300,000 = (.20)($1,280,000 + Goodwill)

$300,000 = $256,000 + .20 (Goodwill)
$44,000 = .20 (Goodwill)
Goodwill = $220,000

Cash 300,000
Goodwill 220,000
Bob, capital ($220,000 x .70) 154,000
Norman, capital ($220,000 x .30) 66,000
John, capital 300,000

309. (10 Points) moderate

Skip and Amy are partners in a struggling company. An investor, James, has offered to
join the partnership and provide the needed expertise. Skip and Amy have capital
account balances in the amount of $120,000 and $160,000, respectively, at the date James
is admitted to the partnership and their respective profit and loss ratios are 60 percent and
40 percent. James agrees to invest $60,000 for a 20 percent interest in the partnership
capital. Assuming the goodwill method is applied, record the admission of James.

Answer:
Book value of capital before the investment $280,000
($120,000 + $160,000)
James’ investment 60,000
Total book value of capital after the investment $340,000
James’ percentage ownership 0.20
Book value of James’ ownership percentage capital $ 68,000

Goodwill to new partner

$60,000 + goodwill = (.20)($340,000 + Goodwill)

$60,000 + goodwill = $68,000 + .20 (Goodwill)
.80 goodwill = $8,000
Goodwill = $10,000

Cash 60,000
Goodwill 10,000
James, capital 70,000

310. (10 Points) moderate

Rich and Barbara are partners who share profits and losses 70/30. They have been
looking for a new partner to help with the expanding business. Frank has expressed an
interest and discussions are underway. Frank is willing to join the partnership by
investing $270,000 for a 25 percent equity interest. At the date Frank joins the
partnership, Rich and Barbara have capital account balances of $370,000 and $500,000,
respectively. Assuming the goodwill method is applied, record Frank’s admission to the
partnership.
 Answer:
Book value of capital before the investment $ 870,000
($370,000 + $500,000)
Frank’s investment 270,000
Total book value of capital after the investment 1,140,000
Frank’s percentage ownership 0.25
Book value of Frank’s ownership percentage capital $ 285,000

Goodwill to new partner

$270,000 + goodwill = (.25)($1,140,000 + Goodwill)

$270,000 + goodwill = $285,000 + .25 (Goodwill)
.75 goodwill = $15,000
Goodwill = $20,000

Cash 270,000
Goodwill 20,000
Frank, capital 290,000

311. (30 Points) difficult

Clark and Nick are partners and they share profits and losses 75/25. They have capital
accounts balances of $250,000 and $380,000, respectively, when they agree to admit Ron
to the company. All parties have agreed that the partnership will first revalue tangible
assets to their market value ($200,000 above book value) and then Ron will invest
$170,000 for a 20 percent interest in the partnership’s owners’ equity. Record the
revaluation and Ron’s admission into the partnership assuming the goodwill method is
applied.

Answer:
Assets 200,000
Clark, capital ($200,000 x .75) 150,000
Nick, capital ($200,000 x .25) 50,000

Book value of capital before the investment $ 830,000

($250,000 + $380,000 + $200,000)
Ron’s investment $ 170,000
Total book value of capital after the investment $1,000,000
Ron’s percentage ownership 0.20
Book value of Ron’s ownership percentage capital $ 200,000

Goodwill to new partner

$170,000 + goodwill = (.20)($1,000,000 + Goodwill)

$170,000 + goodwill = $200,000 + .20 (Goodwill)
.80 goodwill = $30,000
Goodwill = $37,500
 Cash 170,000
Goodwill 37,500
Ron, capital 207,500

312. (10 Points) easy

Sarah, Tanya, and Theresa are partners who share profits and losses 25 percent, 35
percent, and 40 percent, respectively. Theresa has decided to leave the partnership. The
fixed assets of the partnership are undervalued by $50,000. The capital accounts of
Sarah, Tanya, and Theresa before Theresa’s withdrawal are $82,000, $130,000, and
$156,000, respectively. The articles of partnership state that the withdrawing partner’s
share of any differences between market value and carrying value should be recognized
when a partner leaves the partnership. Record the journal entry for the revaluation of the
assets. Record also Theresa’s withdrawal assuming that Marsha purchases Theresa’s
equity.

Answer:
Assets ($50,000 x .40) 20,000
Theresa, capital ($50,000 x .40) 20,000

Theresa, capital ($156,000 + $20,000) 176,000

Marsha, capital 176,000

313. (10 Points) easy

Sarah, Tanya, and Theresa are partners who share profits and losses 25 percent, 35
percent, and 40 percent, respectively. Theresa has decided to leave the partnership. The
fixed assets of the partnership are undervalued by $50,000. The capital accounts of
Sarah, Tanya, and Theresa before Theresa’s withdrawal are $82,000, $130,000, and
$156,000, respectively. The articles of partnership state that the full market value of all
assets and liabilities should be recognized when a partner leaves the partnership. Record
the journal entry for the revaluation of the assets. Record also Theresa’s withdrawal
assuming that Marsha purchases Theresa’s equity.

Answer:
Assets 50,000
Sarah, capital ($50,000 x .25) 12,500
Tanya, capital ($50,000 x .35) 17,500
Theresa, capital ($50,000 x .40) 20,000

Theresa, capital ($156,000 + $20,000) 176,000

Marsha, capital 176,000

314. (10 Points) moderate

Sam, Tim, and Tyrone are partners who share profits and losses 15 percent, 40 percent,
and 45 percent, respectively. Tyrone has decided to leave the partnership. The fixed
assets of the partnership are undervalued by $80,000. The partners’ capital account
balances before the withdrawal are $70,000, $190,000, and $250,000, respectively. The
articles of partnership state that the withdrawing partner’s share of any differences
between market value and carrying value should be recognized when a partner leaves the
 partnership. Record the journal entry for the revaluation of the assets. Record the
withdrawal assuming that Sam purchases 30 percent and Tim purchase 70 percent of
Tyrone’s equity.

Answer:
Assets ($80,000 x .45) 36,000
Tyrone, capital 36,000

Tyrone, capital ($250,000 + $36,000) 286,000

Sam, capital ($286,000 x .30) 85,800
Tim, capital ($286,000 x .70) 200,200

315. (10 Points) moderate

Sam, Tim, and Tyrone are partners who share profits and losses 15 percent, 40 percent,
and 45 percent, respectively. Tyrone has decided to leave the partnership. The fixed
assets of the partnership are undervalued by $80,000. The partners’ capital account
balances before the withdrawal are $70,000, $190,000, and $250,000, respectively. The
articles of partnership state that the full market value of all assets and liabilities should be
recognized when a partner leaves the partnership. Record the journal entry for the
revaluation of the assets. Record the withdrawal assuming that Sam purchases 30 percent
and Tim purchase 70 percent of Tyrone’s equity.

Answer:
Assets 80,000
Sam, capital ($80,000 x .15) 12,000
Tim, capital ($80,000 x .40) 32,000
Tyrone, capital ($80,000 x .45) 36,000

Tyrone, capital ($250,000 + $36,000) 286,000

Sam, capital ($286,000 x .30) 85,800
Tim, capital ($286,000 x .70) 200,200

316. (10 Points) easy

Don, Mark, and James are partners who share profits and losses 25 percent, 20 percent,
and 55 percent, respectively. Mark has decided to leave the partnership. The articles of
partnership state that the withdrawing partner’s share of any differences between market
value and carrying value should be recognized when a partner leaves the partnership.
The fixed assets of the partnership are undervalued by $75,000. The partners’ capital
account balances before the withdrawal are $90,000, $110,000, and $240,000,
respectively. Record the journal entry for the revaluation of the assets. Record the
withdrawal assuming that the partnership acquires Mark’s equity.

Answer:
Assets ($75,000 x .20) 15,000
Mark, capital 15,000

Mark, capital ($110,000 + $15,000) 125,000

Cash 125,000
317. (10 Points) easy
Don, Mark, and James are partners who share profits and losses 25 percent, 20 percent,
and 55 percent, respectively. Mark has decided to leave the partnership. The articles of
partnership state that the full market value of all assets and liabilities should be
recognized when a partner leaves the partnership. The fixed assets of the partnership are
undervalued by $75,000. The partners’ capital account balances before the withdrawal
are $90,000, $110,000, and $240,000, respectively. Record the journal entry for the
revaluation of the assets. Record the withdrawal assuming that the partnership acquires
Mark’s equity.

Answer:
Assets 75,000
Don, capital ($75,000 x .25) 18,750
Mark, capital ($75,000 x .20) 15,000
James, capital ($75,000 x .55) 41,250

Mark, capital ($110,000 + $15,000) 125,000

Cash 125,000

318. (30 Points) difficult

Berry, Carl, and Phil have been partners for many years. Carl has indicated that he plans
to withdraw from the partnership. To prepare for his departure, the following
information is gathered:

Book Market
Value Value_
Current Assets 210,000 210,000
Fixed Assets 850,000 980,000
Total Assets 1,060,000
Current Liabilities 110,000 110,000
Long-term Debt 220,000 180,000
Berry, Capital (45%) 380,000
Carl, Capital (25%) 180,000
Phil, Capital (30%) 170,000
Total Liabilities and Partnership Equity 1,060,000

The partnership agreement specifies that the withdrawing partner’s portion of the change
in value of any assets and liabilities should be recognized at the date of withdrawal. The
partners agree that $300,000 of partnership assets will be used to purchase Carl’s
ownership equity. The assets are to be financed by borrowing the money on long-term
notes payable. Record these events assuming that the bonus method is used to recognize
the withdrawal.

Answer:
Fixed Assets ($980,000 - $850,000)(.25) 32,500
Long-term Debt ($220,000 - $180,000)(.25) 10,000
Carl, capital 42,500
 Cash 300,000
Long-term Debt 300,000

Carl, capital ($180,000 + $42,500) 222,500

Berry, capital ($300,000 - $222,500)(45/75) 46,500
Phil, capital ($300,000 - $222,500)(30/75) 31,000
Cash 300,000

319. (10 Points) moderate

Barbara, Mitch, and Susan are partners with capital accounts of $280,000, $350,000, and
$420,000, respectively. Barbara has informed Mitch and Susan that she is withdrawing
from the partnership. The partners have agreed that the partnership will purchase
Barbara’s ownership interest for $340,000. The profit and loss residual ratios before
Barbara’s retirement are 30 percent, 28 percent, and 42 percent, respectively. Assuming
the bonus method is applied, record Barbara’s withdrawal.

Answer
Barbara, capital 280,000
Mitch, capital ($340,000 - $280,000)(28/70) 24,000
Susan, capital ($340,000 - $280,000)(42/70) 36,000
Cash 340,000

320. (10 Points) easy

Fred, Greg, and Sam are partners with capital accounts of $175,000, $225,000, and
$150,000, respectively. Sam informs Fred and Greg that is withdrawing from the
partnership. The partners agree that the partnership will purchase Sam’s ownership
interest for $200,000. The profit and loss residual ratios before Sam’s retirement are 45
percent, 35 percent, and 20 percent, respectively. Record Sam’s withdrawal assuming the
bonus method is applied.

Answer:
Sam, capital 150,000
Fred, capital ($200,000 - $150,000)(45/80) 28,125
Greg, capital ($200,000 - $150,000)(35/80) 21,875
Cash 200,000

321. (10 Points) moderate

Jack, Ken, and Laura are partners in a local company. Ken has announced his
withdrawal from the company. The articles of partnership indicate that the withdrawing
partner’s goodwill is to be recognized at the date of withdrawal. Jack, Ken, and Laura
share profits in a 30 percent, 25 percent, and 45 percent ratio, respectively, and their
respective capital accounts just prior to the withdrawal are $225,000, $260,000, and
$325,000, respectively. Estimated goodwill attributable to Ken’s ownership percentage is
$80,000. Prepare the journal entry (entries) necessary to reflect the withdrawal of Ken
assuming that Martin has been approved to become the new partner. Martin pays Ken
$380,000 for 100 percent of his partnership equity.
 Answer:
Goodwill 80,000
Ken, capital 80,000

Ken, capital ($260,000 + $80,000) 340,000

Martin, capital 340,000

322. (10 Points) moderate

Doris, Elmer, and Fran are partners in a local company. Doris has announced her
withdrawal from the company. The articles of partnership indicate that the withdrawing
partner’s goodwill is to be recognized at the date of withdrawal. Doris, Elmer, and Fran
share profits in a 20 percent, 35 percent, and 45 percent ratio, respectively, and their
respective capital accounts just prior to the withdrawal are $120,000, $180,000, and
$275,000, respectively. Estimated goodwill attributable to Doris’ ownership percentage
is $50,000. Prepare the journal entry (entries) necessary to reflect the withdrawal of
Doris assuming that Greg has been approved to become the new partner. Greg pays
Doris $190,000 for 100 percent of her partnership equity.

Answer:
Goodwill 50,000
Doris, capital 50,000

Doris, capital ($120,000 + $50,000) 170,000

Greg, capital 170,000

323. (10 Points) moderate

Shawn, Teresa, and Mark are partners who share profits and losses 25 percent, 35
percent, and 40 percent, respectively. Mark announced his withdrawal from the company
when the partners’ capital accounts were $190,000, $238,000, and $210,000,
respectively. The articles of partnership indicate that the withdrawing partner’s goodwill
is to be recognized at the date of withdrawal. Estimated goodwill attributable to Mark’s
ownership percentage is $75,000. Prepare the journal entry (entries) necessary to reflect
the withdrawal of Mark assuming that Shawn and Teresa acquire Mark’s equity. Shawn
pays Mark $190,000 for 60 percent of Mark’s equity and Teresa pays $130,000 for 40
percent of Mark’s equity.

Answer:
Goodwill 75,000
Mark, capital 75,000

Mark, capital ($210,000 + $75,000) 285,000

Shawn, capital ($285,000 x .60) 171,000
Theresa, capital ($280,000 x .40) 114,000

324. (10 Points) moderate

David, Eric, and Glenn are partners who share profits and losses 35 percent, 40 percent,
and 25 percent, respectively. Eric announced his withdrawal from the company when the
partners’ capital accounts were $220,000, $200,000, and $280,000, respectively. The
 articles of partnership indicate that the withdrawing partner’s goodwill is to be
recognized at the date of withdrawal. Estimated goodwill attributable to Eric’s
ownership percentage is $90,000. Prepare the journal entry (entries) necessary to reflect
Eric’s withdrawal assuming that David and Glenn acquire Eric’s equity. David pays
$95,000 for 30 percent of Eric’s equity and Glenn pays $190,000 for 70 percent of Eric’s
equity.

Answer:
Goodwill 90,000
Eric, capital 90,000

Eric, capital ($200,000 + $90,000) 290,000

David, capital ($290,000 x .30) 87,000
Glenn, capital ($290,000 x .70) 203,000

325. (10 Points) easy

Rich, Sam, and Clarence are partners who share profits and losses 15 percent, 45 percent,
and 40 percent, respectively. Sam announced his withdrawal from the company when
the partners’ capital accounts were $90,000, $210,000, and $190,000, respectively. The
articles of partnership indicate that the withdrawing partner’s goodwill is to be
recognized at the date of withdrawal. Estimated goodwill attributable to Sam’s
ownership percentage is $60,000. Prepare the journal entry (entries) necessary to reflect
Sam’s withdrawal assuming that the partnership acquires Sam’s equity.

Answer:
Goodwill 60,000
Sam, capital 60,000

Sam, capital ($210,000 + $60,000) 270,000

Cash 270,000

326. (10 Points) easy

Hal, Norris, and Eddie are partners who share profits and losses 25 percent, 15 percent,
and 60 percent, respectively. Hal announced his withdrawal from the company when the
partners’ capital accounts were $120,000, $100,000, and $380,000, respectively. The
articles of partnership indicate that the withdrawing partner’s goodwill is to be
recognized at the date of withdrawal. Estimated goodwill attributable to Hal’s ownership
percentage is $30,000. Prepare the journal entry (entries) necessary to reflect Hal’s
withdrawal assuming that the partnership acquires Hal’s equity.

Answer:
Goodwill 30,000
Hal, capital 30,000

Hal, capital ($120,000 + $30,000) 150,000

Cash 150,000

327. (10 Points) moderate

 James, Kris, and Lance are partners in a local company. Kris has announced her
withdrawal from the company. The articles of partnership indicate that the entire
partnership’s goodwill is to be recognized at the date of withdrawal. James, Kris, and
Lance share profits in a 30 percent, 25 percent, and 45 percent ratio, respectively, and
their respective capital accounts just prior to the withdrawal are $160,000, $120,000, and
$225,000, respectively. Estimated goodwill is $180,000. Prepare the journal entry
(entries) necessary to reflect the withdrawal of Kris assuming that Felix has been
approved to become the new partner. Felix pays Kris $175,000 for 100 percent of her
partnership equity.

Answer:
Goodwill 180,000
James, capital ($180,000 x .30) 54,000
Kris, capital ($180,000 x .25) 45,000
Lance, capital ($180,000 x .45) 81,000

Kris, capital ($120,000 + $45,000) 165,000

Felix, capital 165,000

328. (10 Points) moderate

Nicole, Melvin, and Joshua are partners in a local company. Melvin has announced his
withdrawal from the company. The articles of partnership indicate that the entire
partnership’s goodwill is to be recognized at the date of withdrawal. Nicole, Melvin, and
Joshua share profits in a 40 percent, 25 percent, and 35 percent ratio, respectively, and
their respective capital accounts just prior to the withdrawal are $200,000, $150,000, and
$190,000, respectively. Estimated goodwill is $120,000. Prepare the journal entry
(entries) necessary to reflect the withdrawal of Melvin assuming that Hans has been
approved to become the new partner. Hans pays Melvin $160,000 for 100 percent of his
partnership equity.

Answer:
Goodwill 120,000
Nicole, capital ($120,000 x .40) 48,000
Melvin, capital ($120,000 x .25) 30,000
Joshua, capital ($120,000 x .35) 42,000

Melvin, capital ($150,000 + $30,000) 180,000

Hans, capital 180,000

329. (10 Points) moderate

Kim, Jennifer, and David are partners who share profits and losses 40 percent, 25
percent, and 35 percent, respectively. Kim announced her withdrawal from the company
when the partners’ capital accounts were $250,000, $180,000, and $210,000,
respectively. The articles of partnership indicate that the entire partnership’s goodwill is
to be recognized at the date of withdrawal. Estimated goodwill is $95,000. Prepare the
journal entry (entries) necessary to reflect Kim’s withdrawal assuming that Jennifer and
David acquire Kim’s equity. Jennifer pays Kim $180,000 for 60 percent of her equity
and David pays $130,000 for 40 percent of Kim’s equity.
 Answer:
Goodwill 95,000
Kim, capital ($95,000 x .40) 38,000
Jennifer, capital ($95,000 x .25) 23,750
David, capital ($95,000 x .35) 33,250

Kim, capital ($250,000 + $38,000) 288,000

Jennifer, capital ($288,000 x .60) 172,800
David, capital ($288,000 x .40) 115,200

330. (10 Points) moderate

Natalie, Oscar, and Paul are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Paul announced his withdrawal from the company when
the partners’ capital accounts were $180,000, $160,000, and $320,000, respectively. The
articles of partnership indicate that the entire partnership’s goodwill is to be recognized at
the date of withdrawal. Estimated goodwill is $110,000. Prepare the journal entry
(entries) necessary to reflect Paul’s withdrawal assuming that Natalie and Oscar acquire
Paul’s equity. Natalie pays Paul $140,000 for 30 percent of his equity and Oscar pays
$310,000 for 70 percent of Paul’s equity.

Answer:
Goodwill 110,000
Natalie, capital ($110,000 x .30) 33,000
Oscar, capital ($110,000 x .25) 27,500
Paul, capital ($110,000 x .45) 49,500

Paul, capital ($320,000 + $49,500) 369,500

Natalie, capital ($369,500 x .30) 110,850
Oscar, capital ($369,500 x .70) 258,650

331. (10 Points) easy

Cindy, Tony, and Ben are partners who share profits and losses 25 percent, 55 percent,
and 20 percent, respectively. Ben announced his withdrawal from the company when the
partners’ capital accounts were $120,000, $250,000, and $100,000, respectively. The
articles of partnership indicate that the entire partnership’s goodwill is to be recognized at
the date of withdrawal. Estimated goodwill is $40,000. Prepare the journal entry
(entries) necessary to reflect Ben’s withdrawal assuming that the partnership acquires
Ben’s equity.

Answer:
Goodwill 40,000
Cindy, capital ($40,000 x .25) 10,000
Tony, capital ($40,000 x .55) 22,000
Ben, capital ($40,000 x .20) 8,000

Ben, capital ($100,000 + $8,000) 108,000

Cash 108,000
332. (10 Points) easy
Mary, Nick, and Shawn are partners who share profits and losses 15 percent, 25 percent,
and 60 percent, respectively. Mary announced her withdrawal from the company when
the partners’ capital accounts were $80,000, $140,000, and $280,000, respectively. The
articles of partnership indicate that the entire partnership’s goodwill is to be recognized at
the date of withdrawal. Estimated goodwill is $50,000. Prepare the journal entry
(entries) necessary to reflect Mary’s withdrawal assuming that the partnership acquires
Mary’s equity.

Answer:
Goodwill 50,000
Mary, capital ($50,000 x .15) 7,500
Nick, capital ($50,000 x .25) 12,500
Shawn, capital ($50,000 x .60) 30,000

Mary, capital ($80,000 + $7,500) 87,500

Cash 87,500

Short Answer Questions

333. Helen and Richard are considering forming a partnership. They have worked out many
of the issues but they are unsure about how the accounting records have to be maintained.
They come to you for information pertaining to the application of GAAP for partnership
records.

Answer: Partnerships are not required to comply with generally accepted accounting
principles (GAAP) unless the entity has publicly traded debt securities or the entity is
required to comply with GAAP by a creditor.

334. What are the similarities and differences among proprietorships, partnerships, and
corporations with regard income tax filing.

Answer: Partnerships and proprietorships are viewed as an extension of the owners.

Neither entity is separately taxed on income. The taxable income or loss is allocated to
the owners according to the partners’ profit and loss sharing agreement. Once a partner’s
taxable partnership income is determined, the income is included on the partner’s
individual tax return. The partnership is required to file an informational tax return
(Form 1065) to disclose how the taxable income has been allocated to the partners. The
corporation, on the other hand, is a taxable entity and income tax is paid on the
corporation’s taxable income.

335. Three individuals are considering forming a business together. One of their concerns is
the liability exposure from the business. Prepare a short note to these individuals
explaining the extent of liability each has when forming a partnership and a corporation.

Answer: A partner may bind the partnership by contract when conducting business in the
name of the partnership. This results in each partner being liable for the partnership
 business dealings of the other partners. In addition, partners have unlimited liability with
regard to partnership debts. On the other hand, stockholders of a corporation do not
share such legal liability. The corporation is a legal entity separate from the owners and
management can commit the corporation to legal contracts in the name of the
corporation, but not the stockholders. Thus, management of the corporation can sue in
the name of the corporation and the corporation can be sued. As a result, the
stockholders are generally not liable for the debts of the corporation beyond the amount
invested.

336. Alex is the owner of a small local business. He has operated as a proprietorship for many
years but his health is starting to fail. As a result, Alex is going to reduce the number of
hours worked in the business. He has asked you to explain how changing his business to
a partnership would affect him (legally). Prepare a brief memo outlining the similarity
and differences between a proprietorship and a partnership with regard to legal issues.

Answer: Similarities to be discussed include (1) ease of formation and (2) unlimited
owner’s liability. Difference to be discussed is shared management.

337. Compare and contrast the proprietary theory of equity and the entity theory of equity
with regard to partnerships.

Answer: The proprietary theory is based on the notion that the business entity is an
extension of the owners. The entity theory is based on the notion that the business entity
is distinct and separate from the owners. Partnerships contain elements of both the
proprietary and entity theories. Support for the proprietary theory can be found in the
following:
Individual partners are liable for all debts of the partnership
Salaries of partners are viewed as distributions of income, not components of net
income
The admission of a new partner or withdrawal of an existing partner results in the
dissolution of the partnership
Assets contributed to the partnership retain the existing tax basis to the partner
contributing
A partner’s income tax includes the partner’s share of partnership net income, and
the partnership does not pay income taxes

Support for the entity theory can be found in the following:

Assets contributed to the partnership become property of the partnership
A partnership can enter into contracts
Partners do not have claims to specific assets
Partnership creditors have priority claim to partnership assets and the creditors of
partners have priority claim to partner’s assets in the event of liquidation
Continuity of the partnership when admission or withdrawal of partners occurs
338. Partnership accounting applies elements of both the proprietary and entity theories.
Explain the underlying theoretical basis for the proprietary theory and the entity theory.

Answer: The proprietary theory is based on the notion that the business entity is an
extension of the owners. The entity theory is based on the notion that the business entity
is distinct and separate from the owners.

339. Hans and Felix are attempting to work out the final issues for forming a partnership.
They are currently debating the values to assign to noncash assets contributed to the
partnership by each partner. Hans believe that the market value has to be assigned to
these assets while Felix believes there may be other alternatives. Prepare a short note to
the two potential partners clarifying this issue.

Answer: The three most likely valuations that can be assigned to noncash assets are the 1)
contributor’s carrying value, 2) contributor’s tax basis, or 3) market or appraised value of
the asset. The amount to be assigned to the noncash assets can be determined by
agreement among the partners or by appraisal (if market values are used).

340. Berry and Charlie plan to start a partnership. One partner is contributing an old building
while the other partner is contributing several delivery trucks. Both partners are also
contributing cash. A difference of opinion exists regarding the amount at which the
building and delivery trucks are to be placed on the partnership’s books. Berry believes
the carrying values should be recorded. Charlie objects because it would give Berry too
great a share of the partnership’s owners’ equity. Charlie believes the tax basis should be
used. Berry objects to the tax basis for the same reason Charlie objects to the book basis.
The partners ask for your opinion. How do you respond?

Answer: The amounts recorded on the partnership’s books do not determine the amounts
assigned to each individual capital account. The amount recorded for the assets will help
determine total capital, not how total capital is divided between the partners.

341. Explain how the assumption of a liability by the partnership on an asset contributed by a
partner impacts the contributing partner’s capital account and tax basis in that asset.

Answer: Generally the value assigned to the asset (e.g., carrying value, tax basis, market
value) is explicitly reduced by the amount of the liability assumed to determine the
contributing partner’s capital account balance. The reduction may be implicit if partners
agree to create capital accounts in equal amounts through such techniques as the
recognition of goodwill for other partners. The tax basis of a contributing partner is only
reduced by the part of the liability assumed by the partnership because the IRS interprets
this event as all partners sharing the obligation so the contributing partner is still
obligated for part of the liability.

342. Clark, Mitchell, and Thomas are forming a partnership. Each partner is contributing cash
and other tangible assets. In addition, Clark has a significant amount of experience in
operating the type of business being created. The partners do not like the idea of
recording goodwill but they are not sure how to otherwise recognize the additional
 contribution Clark is making. Prepare a brief memo explaining a different way to
recognize Clark’s contribution.

Answer: The initial capital accounts can be modified to reflect Clark’s additional
contribution. Mitchell and Thomas would give up an agreed amount of capital to be
assigned to Clark. This approach is called the bonus method. Mitchell and Thomas are
giving a bonus to Clark because of the additional contribution that cannot be measured in
a traditional manner.

343. James and Rachel are forming a partnership. They agree on the values to assign to all of
the assets and liabilities. The partners also want to recognize that Rachel has many
contacts that will be of value to the business. A mutual friend who owns a business has
told them the bank will be unhappy with their balance sheet if they record goodwill for
Rachel. How else can they recognize Rachel’s contacts?

Answer: The bonus method can be used instead of the goodwill method. The bonus
method reallocates capital from James to Rachel to recognize the contribution made by
Rachel in excess of the identifiable assets. As a result, James will have a reduced capital
account balance and Rachel will have a greater balance.

344. Barry, George, and Felix are forming a partnership. Each partner is contributing cash
and other tangible assets. George and Felix are contributing greater amounts of cash and
other tangible assets but Barry has a significant amount of experience in operating the
type of business being created. A mutual friend has suggested that the three make their
initial capital accounts equal in value. George and Felix do not like the idea of recording
their capital accounts at an amount less than the market value of what they are
contributing but they are not sure how to otherwise recognize the additional contribution
Barry is making. Prepare a brief memo explaining a different way to recognize Barry’s
contribution.

Answer: The additional contribution being made by Barry could be recorded as goodwill.
This intangible asset would be created at an amount agreed by the partners. Goodwill
results in an increase in the value of Barry’s capital account but it does not result in a
decrease in the value of the other partners’ capital accounts.

345. Explain how partners may determine the dollar amount of goodwill recognized at the
date a partnership is formed.

Answer: The value assigned to goodwill can be determined in any legal manner
agreeable to the partners. One possibility is to have an independent appraisal of the
intangible asset contributed. Another possibility is for the partners to agree on an
assigned value of the intangible asset.

346. Explain how a drawing account used by a partnership is similar in concept to a dividend
account used by a corporation.

Answer: Both accounts contain information pertaining to distributions to owners. These

distributions can take any form such as cash, inventory, and other assets. Both accounts
 are temporary in nature. They do not exist on the company’s balance sheet and they are
closed at the end of the accounting period to permanent equity accounts (partnership
capital accounts for drawing accounts and retained earnings for dividends).

347. Vicky, Robert, and Ray are forming a partnership. They have asked for some
information regarding the allocation of profits and losses among the partners. While they
believe that each partner will contribute significantly to the partnership, this contribution
will take different forms. They are unsure how to recognize these different types of
contributions. Prepare a short note explaining the different components that might be
considered when allocating partnership profits to individual partners.

Answer: Partnership profits and losses can be allocated in any manner but there are four
common components: interest on capital balance, salary, bonus, and residual percentages.
These different components reward partners for contributions of economic resources,
labor and expertise, taking on special responsibilities, and agreed allocation of any
residual profit or loss remaining after the other components have been considered.

348. Susan is joining an already existing partnership. She is reading the profit and loss
sharing part of the partnership agreement. She calls you with a question regarding a term
she does not understand, weighted average capital balance. Prepare a short note
explaining what is meant by this term.

Answer: The weighted average capital balance is the calculated average dollar amount in
the capital account after considering the length of time that balance existed. This method
of computing the average is less subject to manipulation that the simple average, which is
beginning amount plus ending amount divided by two.

349. Ben is a new partner in a local company. When he became a partner, he received a copy
of the partnership agreement including the profit and loss sharing agreement. Ben is
concerned about the interest on capital balance portion of the profit and loss sharing
agreement because his capital account is very small. Prepare a short note explaining the
reason this component of profit and loss allocation exists.

Answer: The interest on capital balance is meant to reward partners for contributions of
economic resources. As a new partner, a small capital account will likely exist and
therefore this component of the profit allocation will be small. As the capital account
grows through additional investment and profit accumulation, this component of the
profit and loss allocation will also grow.

350. Michelle is a new partner is considering becoming a partner in a small company. She
obtained a copy of the most recent income statement and is surprised when she does not
find salaries on the income statement. She asks you if it is unusual for partners to not
receive a salary from their work in the partnership.

Answer: The lack of salary expense on the income statement does not mean that the
partners do not receive a salary. Partner salaries are not on the income statement, they
are part of the profit allocation.
351. Are there any differences between bonuses offered to partners and bonuses offered to
managers in corporations?

Answer: Bonuses offered to partners and bonuses offered to managers in corporations

are the same. Both are forms of compensations designed to encourage performance.
Furthermore, both should be based on criteria within the control of the person who will
receive the bonus.

352. Ben and Natalie are forming a partnership. They have worked out many of the details
but they are confused about how to divide profits and losses. They have spoken with
several associates who are in different partnership and there seems to be some
inconsistencies. Some partnerships have residual profit and loss ratios while others do
not. Prepare a note to Ben and Natalie informing them of the reason for this
inconsistency.

Answer: Residual profit and loss ratios are not needed if the ratios are to be equal. The
default profit and loss ratio, if not stated, is that all partners will share the residual profit
and loss equally. If the desire is to share the residual amount of profit or loss in some
other proportion, the allocation must be disclosed.

353. Do partnership residual profit ratios have to be the same as partnership residual loss
ratios? Why or why not.

Answer: Residual profit and loss ratios are part of a contractual agreement among the
partners. As a result, the partnership can apply any ratios agreed by the partners. The
ratios are typically the same for profits and losses but they can differ.

354. Alex, Shawn, and Tammy are partners in a local company. They have been conducting
business for a number of years and Shawn recently told the partners that he is going to
reduce his activities in the partnership. As a result, the partners have agreed that the
profit and loss sharing arrangement should be modified. They have agreed to adjust the
salaries and the profit and loss residuals. They come to you with a concern regarding the
assets that are currently owned by the partnership. The partners know that the assets are
worth more than the amount recorded on the financial records but they do not know how
this should be considered when the profit and loss ratios are changed. Prepare a short
note to the partners outlining the their options.

Answer: The difference between the market and book values of assets that exist when the
profit and loss ratios change can be addressed in several ways. One way is to make a list
of these assets and their market value at the date of the change. When the assets are sold,
the amount of the gain that existed when the profit and loss ratios were changed would be
allocated based on the previous profit and loss ratios and any change in market value that
occurs after the ratios are changed would be allocated based on the new ratios. Another
approach is to revalue the assets at the date the profit and loss ratios are changed. The
gain would be allocated based on the previous ratios. A third approach is to determine
the impact of the unrealized gains on the capital accounts due to the change in the ratios
and directly adjust the capital accounts. The gain on the assets at the date of sale would
 then be allocated based on the new ratios. All three approaches give the same end result,
the choice is a matter of preference by the partners.

355. Partners sometimes change the profit and loss ratios used to determine the allocation of
profits and losses. When this occurs, why would the partners choose to prepare a list of
assets with market values different from book values when they could have chosen to
revalue the assets to market value at the date the profit and loss ratios were changed?

Answer: Some partners and possibly their creditors may not want to have the assets
revalued to market value. The revaluation is a significant departure from GAAP and the
partners and their creditors may prefer to have the partnership’s financial records
maintained in accord with GAAP.

356. Sarah, a friend who knows you are a CPA comes to you with a concern. She has been
asked by a colleague to consider becoming a partner in a small company. She will be the
fourth partner in the company. Sarah has had two meetings with the current partners.
She is concerned that one of the current partners who does not know her has been asking
a variety of questions pertaining to her business practices beliefs and her personal ethics.
Sarah asks if you have any idea why this partner would ask such questions. How do you
respond?

Answer: The current partner may be concerned because the existing partners will have
unlimited liability for the actions of the new partner. Given that this partner does not
know Sarah, he/she is gathering information so a choice can be made about accepting
such risk.

357. Don and Jerry are partners in a publishing company. Don is interested in reducing his
involvement in the company and they have been searching for a new partner to take on
some of the work. They learn that Ted is interested in joining the partnership and they
enter into negotiations. Don is willing to support Ted joining the partnership if Ted will
pay Don $250,000. Don will not transfer any of his equity to Ted but will allocate 30
percent of his profit allocation to Ted. Ted comes to you with a concern about Don’s
unwillingness to allocate any equity to him even though a significant investment is
required. How do you respond?

Answer: There is no requirement for a partner to give up equity to a new partner

acquiring part of his ownership. Ted’s is purchasing an ownership in the income stream
of the partnership. His capital account would start at $0 an increase as the partnership
has income.

358. Sally, Robert, and Stuart are partners in a manufacturing company. They are considering
allowing Dick to acquire an ownership interest in the partnership by purchasing part of
Stuart’s equity. Dick is interested in purchasing 40 percent of Stuart’s equity. Dick
comes to you with a question just before a negotiating session with the current partners.
He asks if his ownership in Stuart’s equity gives him the right to 40 percent of Stuart’s
profit allocation or if that is a separate issue. How do you respond?
 Answer: A purchase of Stuart’s equity is a separate issue from the allocation of profits
and losses. These two items have to be negotiated simultaneously but they are
independent. Dick has to be comfortable with the outcome on both issues if he is going
to acquire a part ownership in the partnership.

359. Fred is negotiating an investment to join a partnership. The existing partners are asking
for an investment of $80,000 for a 20 percent ownership in the partnership’s equity. Fred
is encouraged by this proposal but then he learns that the partners plan to revalue the
assets before Fred’s admission. Fred does not understand the reason for the revaluations.
Prepare a note to Fred explaining why the existing partners want to revalue the assets
before he is admitted.

Answer: The partners believe that the difference between market value and book value of
existing assets belong to them because they have been the partners during the time period
when the assets value increased. As a result, they intend to have the unrealized increase
in value added to their capital accounts so that it will not be shared with the new partner.
Any changes in value after Fred becomes a member of the partnership will be allocated
to all of the partners, including Fred.

360. Why are some people opposed to the revaluation of partnership assets when a new
partner is admitted to the partnership?

Answer: These individuals contend that the partnership is still in operation and there
should be no change in the values assigned to assets and liabilities while the partnership
is in operation. There has not been a change in ownership so there is no transaction to
justify the revaluation.

361. You are a staff accountant for a local company. The partners of a client are discussing
the admission of a new partner. Some partners believe that the partnership’s assets
should be revalued before admission of the new partner while other partners are opposed
to the revaluation. Prepare a short note explaining why it may be appropriate to revalue
the partnership’s assets at this time.

Answer: The change in value of the assets has occurred over time and the partners during
that time should share in the increase in value. The new partner should have no claim to
increases in value before that partner’s investment in the company. In addition, when the
new partner joins the company, there is a new legal entity so recording the assets at the
market value at that date is not inappropriate.

362. Sam and Mark are discussing bringing Susan into the partnership. Susan understands
that the partnership’s assets will be revalued before her admission but she does not
understand why she should invest more in the partnership than her share of the market
value of the partnership’s assets. Prepare a short note to Susan explaining the reason that
it may require a greater investment to become a member of this partnership.

Answer: Revaluing the partnership’s assets does not recognize the goodwill that exists in
the company. The partners have chosen to not record goodwill on the company’s balance
sheet but goodwill still exists. The amount that Susan is investing in excess of the capital
 account created represents her investment in the goodwill that already exists in the
company. She is paying a bonus to the existing partners for allowing her to share in the
goodwill of the partnership.

363. Steve is negotiating with the partners in a local business. He would like to become a new
partner in the business but there are several issues he does not understand. One of the
primary issues pertains to the amount of his capital account at the date of investment.
The partners told Steve that he would have to invest $100,000 to join the business but his
capital account would be created for $85,000. Prepare a short note to Steve explaining
why his capital account would be recognized at an amount less than his investment.

Answer: The partnership has an unidentified asset (goodwill) that has value to the
company. The partners have chosen to not record goodwill on the company’s balance
sheet but goodwill still exists. The amount that Steve is investing in excess of the capital
account created represents his investment in the goodwill that already exists in the
company. He is paying a bonus to the existing partners for allowing him to share in the
goodwill of the partnership.

364. Jim and Fred have decided to admit Richard into their partnership. Jim and Fred know
that they are going to apply something called the bonus method to record the admission
of Richard into the partnership but they do not understand the technical accounting part
of the transaction. As a result, they do not understand why Richard’s capital account will
be created at an amount greater than the amount of his investment in the partnership.
Prepare a short note to Jim and Fred explaining the reason that Richard’s capital account
is created for this amount.

Answer: The parties have agreed that Richard is going to receive a certain percentage of
the partnership’s equity at the date of the investment. They have also agreed on the
amount that Richard will invest. When the investment takes place, the bonus method
required Richard’s capital account to be created at the agreed percentage of the total
capital after the investment. This amount may be less than, equal to, or more than the
amount invested. If it is less than or more than the amount of the investment, the capital
accounts of the existing partners is adjusted to make up for the difference.

365. John and Joel are negotiating with a potential partner to join their local business. They
would like Laura to become a new partner in the business but there are several issues
they do not understand. One of the primary issues pertains to the amount of his capital
account at the date of investment. The partners agreed that Laura would have to invest
$75,000 to join the business and they agree that he is going to have a 30% equity interest
in the partnership. What they did not realize is that their capital accounts were going to
decrease when Laura joined the partnership. Prepare a short note to John and Joel
explaining why their capital accounts would be reduced when Laura joins the company.

Answer: The partners have agreed that Laura is contributing something to the partnership
in addition to the tangible assets. They have also agreed on the value of this contribution
when they established the interest she would have in the partnership’s total capital.
When the bonus method is applied, the total capital (based on the existing partners’
capital plus the investment) is allocated to the new and existing partners in the agreed
 manner. If the new partner is receiving an equity interest more or less than the amount
invested, the existing partners’ capital accounts must be adjusted. In this instance, the
capital account of the new partner is greater than the amount invested so the existing
partners’ capital accounts must be reduced.

366. Shawn is currently in discussion with Ted and Mark regarding his joining their
partnership. Initial discussions resulted in an agreement that Shawn would contribute
$50,000 for a 20 percent equity interest in the partnership. The last discussion was about
how the transaction would be disclosed in the partnership’s financial statements. Shawn
noticed that the Ted and Mark’s capital accounts were greater in the pro forma balance
sheet and that goodwill had been added to the balance sheet. Shawn asks for an
explanation of this change. You are the accountant attending the meetings, how do you
respond?

Answer: The partnership agreement indicates that the goodwill method is to be applied
when new partners join the company. In this instance, Shawn is contributing more than
his share of the book value of the company. This implies that there exists goodwill in the
company. The goodwill is recorded and allocated to Ted and Mark because they were the
partners when the goodwill was developed. As a result, Shawn’s $50,000 investment will
exactly equal his share of the partnership’s book value after the goodwill is recorded.

367. You are conducting training for new loan officers of a bank. The topic of the day is
partnerships and their changes in ownership. The bank often receives loan requests when
partnerships are expanding. At the same time, the partnership may also be adding a new
partner to increase the company’s capital and improving its potential for a loan from the
bank. You hand out several partnership balance sheets before and after a new partner has
joined. One loan officer asks about the reason for a change in existing partner capital
accounts and the addition of goodwill to the balance sheet. How do you respond?

Answer: Partnerships are permitted to record goodwill when a new partner joins the
company. Estimated goodwill is determined by evaluating the new partner’s investment
and that partner’s share of the partnership’s total equity after the investment. If the
investment results in the new partner receiving less than his/her share of the partnership’s
equity, goodwill is said to exist in the current partners. As a result, this goodwill is
recorded and allocated to the current partners.

368. Three investors have asked for your assistance in planning the formation of a partnership.
After about two hours of discussion the group arrives at the topic of how to admit
additional partners in the future or retire existing partners. You explain that there are two
methods that can be used to account for these events: the bonus method and the goodwill
method. One of the partners listens to the explanation of the two methods and then asks
for you to summarize the criteria that may be used to determine which method this
partnership wants to use. Prepare a response to the partner’s request.

Answer: The difference that exists when comparing the bonus method and the goodwill
method is whether the partners wish to recognize goodwill on the balance sheet. The
goodwill method will result in greater total assets than the bonus method but the
 relationship that exists among the partners will be the same regardless of the method
applied.

369. Why would partners in an existing partnership agree to allocate an equity interest to a
new partner that is greater than the value of the identifiable net assets contributed by the
new partner?

Answer: The existing partners would be willing to allocate a capital account to a new
partner greater than the value of the identifiable new assets contributed because the new
partner is contributing unidentifiable assets to the partnership. These other assets may
include business expertise, a good reputation, or existing customers. The additional
assets contributed to the partnership result in the new partner having goodwill.

370. You are an analyst for a local bank. A question just arrived in your email from a new
loan officer. The loan officer is reviewing information from a small partnership
requesting a loan. The partnership indicates that one of the partners is withdrawing from
the partnership. The remaining partners send a current balance sheet and a pro forma
balance sheet after the withdrawal. The loan officer is confused because the withdrawing
partner’s capital account is deleted and all of the other partners’ capital accounts have
been reduced. Why might all of the other partners’ capital accounts be reduced?

Answer: There are two reasons why the remaining partners’ capital accounts could be
reduced. First, the partnership may have revalued assets to their market value. If the
market value were less than book value, the capital accounts would be reduced. The
second, and more likely, reason is that the remaining partners are going to pay a bonus to
the withdrawing partner. As a result, each of the remaining partners’ capital accounts
will be reduced by his/her proportion of the bonus paid.

371. Jennifer is confused with regard to the recognition of the withdrawal of a partner from
the company. The partnership agreement indicates that they will apply the bonus method
to recognize the withdrawal and that any bonus will be shared by the remaining partners
based on their profit and loss ratio. Jennifer was surprised when she is assigned 40
percent of the bonus paid even though she only has a 35 percent ownership interest in the
partnership. How do you respond?

Answer: The remaining partners, based on their profit and loss residual ratios, absorb the
bonus paid to the withdrawing partner. As a result, Jennifer’s 35 percent ownership
became 40 percent of the remaining equity after the existing partner was removed from
consideration.
 PARTNERSHIP OPERATIONS ENABLING ASSESSMENT
1. Luz, Vi and Minda are partners when the partnership earned a profit of P30,000. Their agreement provides the
following regarding the allocation of profit and losses:
a. 8% interest in partner’s ending capital in excess of P75,000
b. Salaries of P20,000 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 P60,000, P80,000 and P100,000 for partners Luz, Vi and Minda, respectively.
What is the amount of profit allocated for Minda, if each provision of the profit and loss agreement is satisfied to
whatever extent possible using the priority order shown above?
P2,000

2. Partners AA and BB have profit and loss agreement with the following provisions: salaries of P30,000 and P45,000
for AA and BB, respectively; a bonus to AA of 10% of net income after salaries and bonus, and interest of 10% on
average capital balances of P20,000 and P35,000 for AA and BB, respectively. One-third of any remaining profits will
be allocated to AA and the balance to BB.

● If the partnership has net income of P102,500, how much should be allocated to Partner AA?
P41,000

● If the partnership has net income of P102,500, how much should be allocated to Partner BB?
P61,500

● If the partnership had net income of P22,000, how much should be allocated to partner AA, assuming that
the provision of the profit and loss agreement are ranked by order of priority starting with salaries?
P13,200
P12,000
P8,800
P12,500

3. Hope & Faith Co. reports net income after 30% tax of P235,000 by the end of 2018. The partnership agreement
provides for division of profit or loss on the ratio of the partners’ capital balances. At the end of 2017, each partner
had a capital balance of P220,000. During 2018, Hope made additional investment of P50,000 on April 1 and
withdrew P70,000 of her capital on September 30. Faith, on the other hand, made additional investment of P80,000 on
October 1.

● The share of Hope in the net profit using the ratio of weighted average capital is _
P117,500

4. The partnership agreement of Rossi and Olson provides for salary allowances of P45,000 to Rossi and P35,000 to
Olson, with the remaining income or loss to be divided equally. During the year, Rossi and Olson each withdraw cash
equal to 80% of their salary allowances. If partnership net income is P100,000, Rossi’s equity in the partnership would
Increase more than Olson’s

5. Nancy and Betty enter into a partnership agreement where they decide to share profits according to the following
rules.
● Nancy and Berry will receive salaries of P1700 and P14500 respectively as the from allocation.
● The next allocation is based on 20% of each partner’s capital balances.
● Any remaining profit or loss is to be allocated completely to betty
The partnership net income for the first year is P50,000. Nancy’s capital balance is P83,000 and Betty's capital is
P11,000 at the end of the year. Calculate the share of profit/loss to be allocated to Betty.
P31,700
6. The most appropriate basis for dividing partnership net income when the partners do not plan to take an active role
in daily operation is
On a ratio based average capital balances

7. XYZ Partnership provided for the following in the distribution of profits and losses:
First: X is to receive 10% of net income up to P100,000 and 20% of the amount in excess thereof.
Then: Y and Z are each to receive a 5% of the remaining income in excess of P150,000 after X’s share.
Lastly: The balance is to be distributed equally to the three partners.

● If the partnership income is P250,000, what is the total share of X?

P108,000

8. Tamayo, Banson and Vidal, a partnership formed on january 1, 2018, had the following initial investments.

Tamayo 100,000

Banson 150,000

Vidal 225,000

The partnership agreement profits and losses are to be shared equally by the partners after consideration is made for
the following:
a. Salaries allowed to partners: P60,000 for Tamayo; P48,000 for Banson and P36,000 for Vidal.
b. Average partner’s capital balances during the year shall be allowed 10% interest.

Additional information:
A. On June 30,2018, Tamayo invested an additional P60,000.
B. Vidal withrew P70,000 from the partnership on September 30, 2018.
C. Share on the remaining profit was P3,000 for each partner.

● The average capital of Vidal is ________.

207500

● The partnership net profit for 2018 before salaries, interest and partner’s share on the remainder is
_______.
201750

● The average capital of Tamayo is ________.

130000

● Interest on average capital balances of the partners totals

48750

● Total Partnership Capital

666750

9. Mariano and Lucas entered into partnership on March 1, 2018, investing P125,000 and P75,000 respectively. It was
agreed that Mariano, the managing partner, was to receive a salary of P12,000 per year and also 10% bonus on the
profit after adjustment for the salary, the balance of the profit was to be divided in the ratio of the original capital. On
December 31, 2018, account balances are as follows:
 Cash 70,000 Accounts payable 60,000

Accounts receivable 67,000 Sales 233,000

Furniture and Fixtures 45,000 Mariano, Capital 125,000

Purchases 196,000 Lucas Capital 75,000

Sales returns & allowances 5,000 Mariano Drawing (20,000)

Operating expenses 60,000 Lucas Drawing (30,000)

Inventories on December 31, 2018 were merchandise, P73,000; Supplies P2,500. Prepaid insurance was P950 and
accrued liabilities totaled P1,550. Depreciation on Furniture & Fixtures is to be computed at 20% per year. Income tax
rate is 35%.

● The distribution of net profit to Mariano is _______.

20342

● The distribution of net profit to Lucas is _______.

5268

● After closing the net profit and drawing accounts, the capital of Lucas is _______.
50268

● After closing the net profit and drawing accounts, the capital of Mariano is _______.
125342

10. Sison, Torres and Velasco are partners in an accounting firm. Their capital account balances at year-end were:
Sison, P50,000; Torres, P110,000; Velasco, P50,000. They share profits and losses in a 4:4:2 ratio, after the following
terms;
a. Partners Velasco is to receive a bonus of 10% of net profit after bonus.
b. Interest of 10% shall be paid on the portion of a partner’s capital in excess of P100,000.
c. Salaries of P10,000 and P12,000 shall be paid to partners Sison and Velasco, respectively.

● Assuming a net profit of P22,000 for the year, the profit share of Sison was ________.
8800

● Assuming a net profit of P22,000 for the year, the profit share of Torres was ________.
(200)

● Assuming a net profit of P22,000 for the year, the profit share of Velasco was ________.
13400

● Assuming a net profit of P44,000 for the year, the profit share of Sison was ________.
16800

● Assuming a net profit of P44,000 for the year, the profit share of Torres was ________.
7800

● Assuming a net profit of P44,000 for the year, the profit share of Velasco was ________.
19400
11. Carlin and Maley have a partnership agreement which includes the following provisions regarding sharing net
income or net loss:
● A salary allowance of P120,000 to Carlin and P100,000 to Maley.
● An investment allowance of 10% on capital balances at the beginning of the year.
● A bonus of 20% Carlin
● The remainder to be divided 40% to Carlin and 60% to Maley.

The capital balance on January 1, 2018 for Carlin and Maley was P90,000 and P120,000, respectively. During 2018,
the Carlin and Maley partnership had sales of P2,000,000 cost of goods sold of P1,100,000 and operating expenses of
P400,000. Income tax rate is 30%.

● If bonus is computed based on net income before bonus, salary allowances, and interest on capital, the total
share of C in the partnership is __________.
P214,600

● If bonus is computed based on net income after bonus, salary allowances, and interest on capital, the total
share of C in the partnership is __________.
P183,500

12. Which one of the following would not be considered an expense of a partnership in determining income for the
period?
Salary allowance to partners

13. A partners share of net income is recognized in the accounts through

Closing entries

14. Jaime, Madrid and Soriano are partners sharing profits on a 5:3:2 ratio. On January 1, 2018, Matias was admitted
into the partnership with a 20% share in the profits. The old partners continue to participate in profits proportionate to
their original ratios. For the year 2018, the partnership books showed a net profit of P250,000. It was disclose
however, that the errors shown below were made:J
● Assuming that income tax rate is 35%, the share of Jaime in the corrected net profit is ________.
96100

● Assuming that income tax rate is 35%, the share of Madrid in the corrected net profit is ________.
57660

● Assuming that income tax rate is 35%, the share of Soriano in the corrected net profit is ________.
38440

● Assuming that income tax rate is 35%, the share of Matias in the corrected net profit is ________.
48050

● The new profit and loss ratio of Jaime is ________.

40%

● The new profit and loss ratio of Madrid is ________.

24%

● The new profit and loss ratio of Soriano is _______.

16%

15. The net income of the Rice and Wynn partnership is P120,000. The partnership agreement specifies that Rice and
Wynn have a salary allowance of P32,000 and P48,000 respectively. The partnership agreement also specifies an
interest allowance of 10% on capital balances at the beginning of the year. Each partner had a beginning capital
balance of P80,000. Any remaining net income or net loss is shared equally.

● What is Rice’s share of the P120,000 net income?

P52,000

● What is the balance of Wynn’s Capital account at the end of the year after net income has been distributed?
P148,000

16. The BLUE Company, a partnership, was formed on January 1, 2018 with four partners, Belen, Lorna, and Edna.
Capital contributions were as follows:

Belen 100,000

Lorna 50,000

Ursula 50,000

Edna 40,000

The partnership agreement provides that each partner shall receive 5% interest on the amount of his/her
capital contribution. In addition, Belen is to receive a salary of P10,000 and Lorna a salary of P6,000 per annum
which are to be charged as expenses of the business. The agreement further provides that Ursula shall receive a
minimum of P5,000 per annum from the partnership and Edna a minimum of P12,000 per annum, both including the
profits is to be distributed in the following proportion: Belen 30% Lorna 30% Ursula 20% Edna 20%.

● The amount that must be earned by the partnership during 2018, before any change for interest on capital or
partners salaries in order that Belen may receive an aggregate of P25,000 including interest, salary and
share of profits would be _________. (Disregard income tax. Round your final answer to the nearest peso.
Do not use peso sign, comma, and decimal.)
64667

● Using the amount that must be earned by the partnership during 2018, before any change for interest in capital
or partners salaries in order that Belen may receive an aggregate of P25,000, including interest, salary and
share of profits, the total earnings of Ursula would be _________. (Disregard income tax. Round your final
answer to the nearest peso. Do not use peso sign, comma, and decimal.)
9167

● Using the amount that must be earned by the partnership during 2018, before any change for interest in capital
or partners salaries in order that Belen may receive an aggregate of P25,000, including interest, salary and
share of profits, the total earnings of Lorna would be _________. (Disregard income tax. Round your final
answer to the nearest peso. Do not use peso sign, comma, and decimal.)
18500

17. On October 31, 2018, Zita and Jones formed a partnership by investing cash of P300,000 and P200,000,
respectively, The partners agreed to receive and annual salary allowance of P360,000 and to give Zita a bonus 20% of
the net income after partner’s salaries, the bonus being treated as an expense.

If the profits after salaries and bonuses are to be divided equally, and the profits on December 31, 2018 after
partner’s salaries but before bonus of Zita are P360,000, how much is the share of Zita in the profits?
P270,000
18. RK is trying to decide whether to accept a salary of P40,000 or a salary of P25,000 plus a bonus of 10% of net
income after salaries and bonus as a means of allocating profit among partners. Salaries traceable to the other partners
are estimated to be P100,000. What amount of income would be necessary so that RK would consider choices to be
equal?
P290,000

19. A, B, and C are capitalist partners while D is an industrial partner. The partnership reported a net loss of P100,000.
How much is the share of D in the reported net loss?
P-0-

20. A partner’s share of net income is recognized in the accounts through

Closing entries

21. If the partnership agreement does not specify how income is to be allocated, profits and losses should be allocated
In accordance with their capital contribution

22. Lori and Mike enter into a partnership and decide to share profits and losses as follows:
● The first allocation is a salary allowance with Lori receiving P12,000 and Mike receiving P25,000.
● The second allocation is 20% of the partners’ capital balances at year end. On December 31, 2019, the capital
balances for Lori and Mike are P86,000 and P344,000, respectively.
● Any remaining profit or loss is allocated equally.

For the year ending December 31, 2019, the partnership reported a net loss of P122,000. The journal entry to record
the loss allocation will _______.
Debit Lori, Capital for P93,300

23. The Smith and Jones partnership agreement stipulates that profits and losses will be shared equally after salary
allowances of P120,000 for Smith and P60,000 for Jones. At the beginning of the year, Smith’s Capital account had a
balance of P240,000, while Jones’ Capital account had a balance of P210,000. Net income for the year was P150,000
The balance of Jones’ Capital account at the end of the year after closing is
P255,000

24. David, Chris, and John formed a partnership on July 31, 2019. They decided to share profits equally, but inserted a
clause in the partnership agreement where any losses would be allocated in the ratio of 5:2:3, respectively. For the
year ended December 31, 2019, the firm earned a net income of P50,000. However, for the year ended December 31,
2020, the firm incurred a loss of P60,000. Assuming that John had an initial capital contribution of P43,000 and made
no withdrawals, what is the balance of John’s capital account as of december 30, 2020? (Assume that none of the
partners made any further contributions to their capital accounts. Do not round any percentage calculations. Round all
monetary calculations to the nearest peso)
P41,667
GENERAL RULE:
Checked - If 2 choices lang tas mali ung inattempt igreen mo na beybe
Wrong tas ung ipapalit nyo na answer gawing :gento;

1. Based on your knowledge of the nature of a partnership, its legal provisions and its accounting procedures, drag the appropriate answers to
the following statements.

Match each item to a choice:

This account is used to record regular cash taken by a
Partner, Drawing
partner against his/her share in the partnership prots

This statement shows nancial structure of the rm by

Statement of Financial
listing down its assets and obligations and the rights of the
Position
partners over the assets

Advances to the partnership that is payable in the future to

Loans due to Partner
a partner

Partners are considered as having rights over partnership

Joint Ownership
properties because of this characteristic..

A written arrangement embodying the nature of the partnership, the 2. A capitalist partner cannot be a limited partner. a. True
partners and their contributions, their duties, their prot and loss b. False
sharing ratio, the manner of withdrawing assets, the manner of Articles of
dissolving and liquidating Co-Partnership
 3. A decrease in the capital of one or more partners with a corresponding increase in the
capital of another partner(s), without cash being involved, is a transfer of interest called
bonus.
a. True
b. False

4. Mutual entity is characterized as partnership having a judicial personality which can

acquire, sell, or dispose properties and incur obligations
a. True
b. False

5. It is easier to change ownership in a corporation than in a partnership

a. True
b. False
GENERAL RULE:
Checked - If 2 choices lang tas mali ung inattempt igreen mo na beybe
Wrong tas ung ipapalit nyo na answer gawing :gento;

6. Based on your knowledge of the nature of a partnership, its legal provisions and its accounting procedures, drag the appropriate answers to
the following statements.

Match each item to a choice:

Investment in properties are recorded in the partnership
Market Value
books at this value

A partner who invests cash or properties Capitalist Partner

Partnership are taxable entities except for this type of

General Professional
partnership
Partnership

Acts of each partner when transacting business with

Mutual Agency
outsiders are binding to the partnership because of this
characteristic.
 Permanent investments and withdrawals are recorded in
Partner, Capital
this account.

Choices:
Joint ownership
Book Value
General Partner
Partner, Drawing
Limited Partnership

7. In an partnership, the income is taxed at the partnership level as well as at the personal level of the owners
a. True
b. False

8. The partners’ drawing account are shown in the statement of nancial position. a. True
b. False

9. The partnership by-laws is a written contract between partners that species the name, location, and nature of the business; the duties of
each partner; and the method of sharing prots and losses among the partners.
a. True
b. False
GENERAL RULE:
Checked - If 2 choices lang tas mali ung inattempt igreen mo na beybe
Wrong tas ung ipapalit nyo na answer gawing :gento;

10. Based on your knowledge of the nature of a partnership, its legal provisions and its accounting procedures, drag the appropriate answers
to the following statements.

Match each item to a choice.

A partner who invests skills or expertise. Industrial partner

This statement is prepared to summarize the changes in

Statement of Partners’ Equity
the partners’ capital for a particular period of time.

The interest of the partners over the net assets of the

 Partners’ Equity
partnership.

This partner cannot actively manage the partnership

Limited Partner
business.

Partners may be required to use personal funds to pay

Unlimited Liability
partnership debts in case partnership becomes insolvent.

Choices:
Goodwill Statement of Financial Position
Managing partner Bonus
General Partner

11. In a general partnership, if one partner cannot pay his or her part of the debts, the other partner or partners must pay with their personal
assets.
a. True
b. False

12. A decrease in the capital of one or more partners with a corresponding increase in the capital of another partner(s), without cash being
involved, is the transfer of interest called goodwill.
a. True
b. False

13. In a partnership, when a partner contributes a particular asset to the rm, he or she is considered to be the sole owner of the asset
a. True
b. False

14. Partnership has the ability to raise more capital than a corporation
a. True
b. False
GENERAL RULE:
Checked - If 2 choices lang tas mali ung inattempt igreen mo na beybe
Wrong tas ung ipapalit nyo na answer gawing :gento;

15. In a general partnership, the partners have unlimited liability for the debts of the business
a. True
b. False

16. In a general partnership, each partner has limited personal liability for the debts of the business.
a. True
b. False

17. A written partnership agreement is also known as the articles of partnership. a. True
b. False

18. Changes in the partner’s equity is shown in the income statement

a. True
b. False

19. A partnership has to le its partnership agreement and register is rm’s name with the National Bureau of Investigation
a. True
b. False

20. All forms of partnership are taxable entities

a. True
b. False

21. Capital contributions of the partner are shown in the statement of nancial position a. True
b. False

22. A general partner can also be an industrial partner

a. True
b. False

23. An industrial partner cannot be a limited partner

a. True
b. False

24. Prot share of each partner is shown in the Statement of Partner’s Equity
GENERAL RULE:
Checked - If 2 choices lang tas mali ung inattempt igreen mo na beybe
Wrong tas ung ipapalit nyo na answer gawing :gento;
a. True
b. False

25. The statement of partner’s equity shows the changes in partner’s capital account for a specic period of time.
a. True
b. False

26. The addition of a new partner to a rm does not dissolve the old partnership. a. True
b. False

27. An industrial partner can be a limited partner

a. True
b. False

28. An industrial partner cannot be a general partner

a. True
b. False

29. Partners have the right to transfer ownership at will

a. True
b. False

30. The partnership by-laws is a written contract between partners that species the name, location, and nature of the business; the duties of
each partner; and the method of sharing prots and losses among the partners.
a. True
b. False

31. A capitalist partner can be a limited partner.

c. True
d. False

32. Changes in the partner’s equity is shown in the statement of nancial position. c. True
d. False

33. The articles of co-partnership is a written contract between partners that specisied the name, location, and nature of the business, the
duties of each partner, and the method of sharing prots and losses among the partners.
GENERAL RULE:
Checked - If 2 choices lang tas mali ung inattempt igreen mo na beybe
Wrong tas ung ipapalit nyo na answer gawing :gento;
a. True
b. False
34. An asset received from a partner as a contribution is recorded at its historical cost A. True
B. False

35. Mutual Agency means that any partner can legally bind the other partners and the partnership to business contracts within the scope of
the business’s regular operations. A. True
B. False
36. In a partnership Statement of Financial Position, each partner’s assets, liabilities, and equity will be shown separately.
a. True
b. False
37. The nancial statements of a partnership are similar to the statements of a sole proprietorship
A. True
B. False
38. Changes in Partners’ equity is shown in the statement of nancial position A. True
B. False
39. The characteristic of unlimited liability is a disadvantage from the viewpoint of the partnership creditors.
a. True
b. False
40.
Andy and Ian
Andy and Ian formed a partnership on April 1, 2019. Andy contributes equipment to the business that originally cost P82,000 and on
which accumulated deprecia!on of P16,000 has been recorded. The current market value of the equipment is P74,000. The value of the
equipment recorded in the partnership journal is _________.

1 ( 74,000.00)

Rodriguez and Ying #1

Rodriguez and Ying started a partnership on July 1, 2019.
Rodriguez contributes P4100 cash, furniture with a current market value of P55,000, and computer equipment. The computer equipment
originally cost P48,000 in 2017 with recorded accumulated deprecia!on of P28,000. The current market value of the computer equipment
is P17,000.
a. Computer Equipment should be debited in the amount of ______.
b. Rodriguez, Capital should be credited in the amount of _______.
2 a ( 17,000.00) Rodriguez and Ying #1
b ( 76,100.00) Cash ( 4,100.00)
Furniture ( 55,000.00)
Computer equipment - FV ( 17,000.00)

Rodriguez, capital ( 76,100.00)

Rodriguez and Ying #2

Rodriguez and Ying started a partnership on July 2, 2019. Rodriguez contributes P4100 cash, furniture with a current market value of
P47,000, outstanding accounts payable of P16,000 and computer equipment originally cos!ng P48,000 with recorded accumulated
deprecia!on of P28,000, but with a current market value of P18,000.
a. Rodriguez Capital will be credited for _____.
b. Total asset investment of Rodriguez amounts to ______.

3 a ( 53,100.00) Rodriguez and Ying #2

b ( 69,100.00) Cash ( 4,100.00)
Furniture ( 47,000.00)
Accounts payable ( (16,000.00)
Computer equipment - FV ( 18,000.00)

Rodriguez, capital ( 53,100.00)

Total asset investment ( 69,100.00)

Rodriguez and Ying #3

Rodriguez and Ying started a partnership on July 1, 2019. Ying contributes P5,000 cash; accounts receivable recorded value of P50,000
with allowance for doub8ul accounts at P5,000; and a piece of land purchased at P200,000 with a9ached mortgage to a bank for P100,
000, but its current market value is at P400,000. The mortgage will be assumed by the partnership.
a. In the Partnership books, Accounts Receivable will be debited at an amount of ______.
b. In the Partnership books, Land will be debited at an amount of ______.
c. In the Partnership books, Ying, Capital will be credited for ______.

6 a ( 50,000.00) Rodriguez and Ying #3

b ( 400,000.00) Cash ( 5,000.00) c ( 350,000.00) Accounts receivable ( 50,000.00) Allowance for doub8ul accounts (
 (5,000.00)
Land - MV ( 400,000.00)
Mortgage assumed ( (100,000.00)

Ying, capital ( 350,000.00)

Tim and Michelle #1

Tim and Michelle have decided to form a partnership with a 60/40 partnership interest ra!o. Tim contributes P7500 cash and
merchandise inventory with a market value of P1500.
a. Tim, Capital will be credited in the amount of _____.
b. Michelle's investment should be _____.
c. A>er accoun!ng for the total investments of Tim and Michelle, the total assets of the partnership amounts to _____.
4 a ( 9,000.00) Tim and Michelle #1
b ( 6,000.00) Cash ( 7,500.00)
c ( 15,000.00) Merchandise inventory ( 1,500.00)

Tim, capital ( 9,000.00)

Tim, capital ( 9,000.00)

( 0.60)
Total capital ( 15,000.00)
( 0.40)

Michelle, capital ( 6,000.00)

Total assets ( 15,000.00)

Tim and Michelle #2

Tim and Michelle have decided to form a partnership with a 50/50 partnership interest ra!o. Tim contributes P7500 cash and
merchandise inventory with a market value of P1500. Michelle, on the other hand, invests cash amoun!ng to P6000. Assume bonus
method in answering the following ques!ons:
a. In recording Tim's cash and merchandise investments, Tim, Capital will be credited for _____.
b. In taking into e@ect bonus method to adhere to the agreed 50/50 interest ra!o, Tim, Capital will be ____ (debted or credited?) for
_____ (amount).
c. A>er recording the investments and transfer of interest, Michelle's capital amount to ____.
5 a ( 9,000.00) Tim and Michelle #2

b debited ( 1,500.00) Cash ( 7,500.00) c ( 7,500.00) Merchandise inventory ( 1,500.00) Tim, capital ( 9,000.00)

Tim, capital ( 9,000.00)

Michelle's cash investment ( 6,000.00)
Total agreed capital ( 15,000.00)
( 0.50)
Agreed individual capital ( 7,500.00) Michelle's

cash investment ( 6,000.00) Bonus ( 1,500.00)

Entry:
Tim, capital ( 1,500.00) Michelle, capital ( 1,500.00) Bonus to
Michelle
1 Partnership capital and drawing accounts are similar to corporate _______.
Answer: Paid-in capital, retained earnings, and dividend accounts

4 - The essence of partnership is that each partner must share in the profits or losses of the venture
- As long as the action is within the scope of the partnership, any partner can bind the partnership.
Answer: Both statements are true

5 - The essence of partnership is that each partner must share in the profits or losses of the venture
- A partnership is a legal entity separate and apart from its owners
Answer: Both statements are true

6 A firm has two partners: Jim and Bill. Jim owns 60% of the partnership and Bill owns 40%. In which of the following transactions will the partnership be held responsible for an individual partners' actions? Answer:
Bill signs a contract to buy furniture for official use in the partnership.

10 Which of the following is TRUE of a partnership?

Answer: Partnership firms have a limited life.

14 In comparison to a corporation, the owners of general partnership

have unlimited personal liability for the debts of the business

15 in a partnership, mutual agency means that

any partner can bind the business to a contract within the scope of its regular business operations

17 which one of the following would not be considered a disadvantage of the partnership form of organization?
ease of formation

18 A loan due from a partner is classified in the business statement of financial position as a/an
current assets
as a disclosure
current liability
partners' equity

19 I. One of the partners in a proposed partnership is a multi-millionaire. The stipiulation in the articles of partnership that this partner shall be excluded from sharing in the profits is void. II.
 Partnership may be established for charity
Only statement 1 is true

20 An advantage of the partnership as a form of business organization would be

partners do not pay income taxes on their share in partnership income
a partnership may be terminated by the death or withdrawal of a partner
a partnership is bound by the act of the partners
a partnership is created by mere agreement of the partners

21 The partners have the followng rights, except

transfer ownership at will

22 Which of the following is specified in the articles of partnership?

procedures for withdrawal of assets by the partners

24 If a partner's capital account is credited with the amount that he or she contributed in cash, which of the following financial statements will be affected?
the statement of partners' equity

25 Which of the following is TRUE of a partnership balance sheet?

Each partner's equity will be shown separately
26 1. A nominal partner actively participates in the management of the business.
2. An ostensible partner is unknown the public that he/she is a partner.
Both statements are false.

27 Tim and Michelle have decided to form a partnership with a 60/40 partnership interest ratio. Tim contributes P7500 cash and merchandise inventory with a market value of P1500. While
journalizing this transactions ________.
Tim, Capital will be credited for P9000.

28 1. There is no income tax imposed on a partnership.

2. Mutual agency means that each partner has the right to bind the partnership to contracts.
Only statement 2 is true.

29 Jack holds an ownership interest of 63% and Teresa holds an ownership interest of 37% in the J and T Partnership. This year, in order to further develop the business, Jack
contributes an additional P6800 and Teresa contributes an additional P3200 to the partnership. Which of the following is TRUE of this scenario? Individual contributions of P6800
by Jack and P3200 by Teresa will be recorded

30 Which of the following statements about partnership is incorrect?

Right over profits and right ovver assets represent claims of partners that are allocated based on partners' capital accounts.

31 1. All Partners in a General Partnership are personally liable for all debts incurred by the partnership
2. A limited partnership must have at least one general partner
Answer: Both statements are true

32 In the absence of a partnership agreement, the law says that income (and loss) should be allocated based on:
Answer: The ratio of Capital Investment

35 A partnership is a
business with two or more that is not organized as a corporation

37 Steve owns 64% and Mark owns 36% of a partnersgip business. They purchase equipment with suggested value of P9600. The current market value of the
equipment at the time of purchase was P9100. At the time of the balance sheet preparation, depreciation of P160 was recorded. Based on the information provided,
which of the following is TRUE of the partnershiip
the equipment will be debited at P9100 on the date of purchase

38 The partner's personal account which was collected by the partnership and credited to its accounts receivable is a violation of the
business entity concept

39 Bob is investing in a partnership with Jerry. Bob contributes equipment that originally cost P63,000, has book value of P30,000, and fair market value of P39,000. The
entry of the partnership makes to record Bob's intial conctribution includes a
debit to equipment for P39000
 41 1. An advantage of the partnership form of business is that each partners' potential loss is limited to the partners' investment in the partnership 2.
Ownership is easily transferred in a partnership
Both statements are false
Both statements are true
Only statement 1 is true
Only statement 2 is true

43 Partners' non-cash investments are valued at

market value

44 1.A partnership has limited life because any change in the relationship of the partners dissolves the partnership
2. In a limited partnership, the general partner's liabilityis limited to his investment
Only statement 1 is true

45 A characteristic describing a partnership as a judicial personality which can acquire, sell or dispose properties and incur obligations is called
Answer: Legal Entity

48 The Metro Fashion partnership owned by Mary and May is terminated when creditor claims exceed patnership asset by P40,000. Partner May is a millionaire and Mary has no personal asset Mary's partnership interest is 75% and May's is 25%. Creditors -May not
require Cane to use his personal assets to satisfy the P400,000 in claims
-May collect the entire P40,000 from May
-Must collect their claims 75% from Mary and 25% from May
-Must collect their claims equally from Mary and May

49 1. A limited partnership normally has one or more general partners whose liability is unlimited.
2. A partnership is a legal entity seperate and apart from its owners.
-Both Statements are false
-Both Statements are true
-Only statement 1 is true
-Only statement 2 is true

50 A firm has two partners, Jim and Bill. Jim owns 60% of the partnership and Bill owns 40%. In whch of the following transactions will the partnership be held responsible for an individual partners' actoins? Bill signs a
contract to buy furniture for official use in the partnership
JAMESON AND LARRY
Jameson and Larry are forming a partnership. Jameson will invest a truck with a book value of P100,000 and a fair market value of P140,000.
Larry will invest a building with a book value of P300,000 and a fair value of P420,000 with a mortgage of P150,000.
If it was agreed that both partners will have equal share in the assets, using the cash method, how much should be the additional cash investment of Jameson? Jameson
Truck 140000

Larry
Building 420000
mortgage -150000
270000
Additional Cash of Jameson 130000

Jameson and Larry are forming a partnership. Jameson will invest a truck with a book value of P100,000 and a fair market value of P140,000.
Larry will invest a building with a book value of P300,000 and a fair value of P420,000 with a mortgage of P150,000.
What amount should be recorded in Larry's capital account?
P270,000

EDWIN AND DARREN

Edwin and Darren have decided to form a partnership. Edwin contributes P80,000 cash and merchandise inventory with a current market value of P20,000. Darren contributes a parcel of Land which was acquired two years age at
P100,000 but with a current value of P130,000. If Darren is to make additional cash investment to have a 60% in the business, how much cash should he invest?
Answer: 20,000

Edwin and Darren have decided to form a partnership. Edwin contributes $80,000 cash and merchandise inventory with a current market value of $17,000. Darren contributes $2,400 cash and office furniture with a current market
value of $3,200. If the partners decide to have equal interest in the partnership and the total actual contributions is equal to total agreed capital, which statement is true?
There is revaluation of assets
Edwin, Capital will be credited by P97,000
There is bonus
Darren, Capital will be debited by P5,600

Edwin Darren Total

Cash 80,000.00 2,400.00
Merchandise 17,000.00
Office furniture 3,200.00
Actual capital 97,000.00 5,600.00 102,600.00
Agreed capital 51,300.00 51,300.00 102,600.00

Bonus (45,700.00) 45,700.00

Edwin and Darren have decided to form a partnership. Edwin contributes $80,000 cash and merchan-dise inventory with a current market value of $17,000. Darren contributes $2,400 cash and office furniturewith a current
market value of $3,200. When journalizing these transactions____
Answer: Office furniture will be debited for P3200

ALANA & ANSLEY

Alana & Ansley enter into a partnership agreement in which Alana will be given 60% interest in capital and profits. Alana contributes the following:

Land 500,000 ?
Building 5,000,000 fair value is 60% of its cost
Equipment 1,000,000 fair value is 75% of its cost

There is P1,000,000 mortgage on the building which the partners agreed to assume.
The partners agreed that the total partnership capitalization should be P6M
Land should be recorded in the amount of
Answer: 850,000

How much should be Ansley's agreed capitalization?

2,400,000

Alana & Ansley enter into a partnership agreement in which Alana will be given 60% interest in capital and profits. Alana contributes the following:

Land 500,000 ?
Building 5,000,000 fair value is 60% of its cost
Equipment 1,000,000 fair value is 75% of its cost

There is P1,000,000 mortgage on the building which the partners agreed to assume.
The partners agreed that the total partnership capitalization should be P6M
Alana, Capital should be credited for
3,600,000
3,250,000
2,750,000
3,750,000

RICA
RIca is a sole propiertor who invested her grocery where she invited Belle to form a new partnership business. The following are the assets and liabilities of the grocery. Cash P50,000
Merchandise 30,000 (book value)
20,000 (market value)
Fixed assets (P100,000 less Accumulated Depreciation P10,000) 90,000 (book value)
70% of cost (market value)
Accounts Payable 20,000
Accrued Expenses 7,000

Belle invested the following:

Cash 60,000
Land (mortgage with a balance of P50,000 plus accrued interest for 6 months at 18%) 200,000
500,000
Store furniture (costing P40,000 less accumulated depreciation of P10,000) 30,000

If the mortgage note plus interest is to be assumed by the partnership Belle, Capital should be credited for
Answer: 535,500
Rica's capital account should be credit for
Answer: 113,000

The total assets of the newly formed partnership would be

Answer: 730,000

The total liabilities of the newly formed partnership would be

P27,000
P81,500
P43,350
P77,000

PARTNER B
Partner B is investing in a partnership with Partner A. B contributes as part of his initial investment. Accounts Receivable of P60,000; an Allowance of Doubtful Accounts of P9,000; Furniture of P30,000 with
accumulated depreciation of P8,500; and P6,000 cash.
The partners agreed that Prepaid Expenses of P2,000 and accrued expenses of P1,800 have to be recognized.
The entry to partnership makes to record B's initial contribution includes a
Credit to B, Capital at P78,700 AR 60000
Furniture 30000
Cash 6000
ADA 9000
Acc Dep 8500
Capital 78500

Capital 1800
Expense 1800

Expense 2000
Capital 2000

Capital 78700

Partner B is investing in a partnership with partner A. B contributes as a part of his initial investment, Accounts Receivable of P60,000;
an allowance for doubtful accounts for P9,000; and P6,000 cash.
The entry that the partnership makes to record B's initial contribution includes a
credit to B, capital for P57,000

ANDREA
Andrea invested the following in partnership

Account Book Value Market Value

cash 10,000 10,000
accounts receivable 45,000
allowance for bad debts 5,000 40,000
merchandise inventory 120,000 110,000
furniture and fixture 75,000
accumulated depreciation 7,500 60,000

Accounts Receivable, Merchandise inventory, and Furniture and Fixtures will respectively be debited at the partnership books for: 45,000; 110,000;
57,500
45,000; 110,000; 60,000 AR MI F&F
40,000; 110,000; 60,000 45,000 110,000 60,000
50,000; 110,000; 75,000

Andrea invested the following in partnership

Account Book Value

cash 10,000
accounts receivable 50,000
allowance for bad debts 5,000
merchandise inventory 120,000
furniture and fixture 75,000
accumulated depreciation 7,500

If the Accounts Receivable has a net realizable value of P40,000 and there is an Accounts Payable amounting to P60,000. How much should be credited to Andrea, Capital Answer: P177,500

Andrea invested the following in partnership

Account Book Value

cash 10,000
accounts receivable 50,000
allowance for bad debts 5,000
merchandise inventory 120,000
furniture and fixture 75,000
accumulated depreciation 7,500

If the current value of the furniture and fixturees is P60,000 and that of the merchandise inventory is 110,000, Andrea should be credited for Answer: 225,000

HAROLD AND DWAYNE

Harold and Dwayne formed Hayne's Partnership, with Harold investing cash of PP150,000. If Dwayne is given 60% interest in assets and profits. how much is the
partnership total agreed capitalization?
375,000

Harold and Dwayne formed Hayne's Partnership, with Harold investing cash of P150,000.
How much should Dwayne invest for a 60% interest in assets and profits?
225,000

AIRAMAE AND AIMERY

Airamae and Aimery agreed to form AiAi Partnership. Airamae's business which amounted to P500,000 was audited and appraised at 75% of its book value.
If they agreed that Aimery should invest P325,000 cash and that each partner should be credited for an equal share based on total actual contributions, the bookkeeper should recognize Bonus for Aimery

Airamae and Aimery agreed to form AiAi Partnership. Airamae's business which amounted to P500,000 was audited and appraised at 75% of its book value. If they agreed that
Aimery should invest cash equal to 60% of Airamee's investment, Aimery should invest?
P225,000

Airamae and Aimery agreed to form AiAi Partnership. Airamae's business which amounted to P500,000 was audited and appraised at 75% of its book value. If they agreed that Aimery should invest P325,000 cash and
that each partner should be credited for an equal share based on total actual contributions, Airamae's capital credit should be Answer: P350,000

Airamae and Aimery agreed to form AiAi Partnership. Airamae's business which amounted to P500,000 was audited and appraised at 75% of its book value. If they agreed that
Aimery should invest cash equal to 60% of Airamee's investment, the total partnership capitalization would be
P600,000

CHUA AND WONG

Chua and Wong are forming a partnership. Chua will invest a building that currently is being used by another business owned by Chua.
The building has a market value of 900,000. Also the partnership will assume responsibility for a 300,000 note secured by a mortgage on that building. Wong will invest
500,000 cash. For the partnership, the amounts to be recorded for the building and for Chua's capital account are:

Building 600,000 and Chua, Capital 500,000 Building 900000

Building 900,000 and Chua, Capital 600,000 Mortgage 300000
Building 600,000 and Chua, Capital 600,000 Capital 600000
Building 900,000 and Chua, Capital 900,000

PARTNER FE
Partner Fe is investing in a partnership with Partner Ann. Fe contributes as part of the initial investment, Accounts Receivable of P80,000; an Allowance for Doubtful Accounts of P12,000. Accounts of P8,000 should
be written off. The entry that the partnership makes to record Fe's initial contribution includes a
credit to Fe, Capital for P68,000
credit to Allowance for Doubtful Accounts for P12,000
credit to Fe, Capital for P88,000
debit to Accounts Receivable for P80,000

11 Which of the following would not be considered an expense of a partnership in determining income for the period?
ANSWER: Salary allowance to partners

19 The most appropriate basis for dividing partnership net income when the partners do not plan to take an
ac!ve role in daily opera!ons is
On a ra0o based average capital balances

25 A partner's share of net income is recognized in the accounts through

closing entries
accrual entries
correc!ng entries
adjus!ng entries

R If the partnership agreement does not specify how income is to be allocated, proEts and losses should be allocated in
accordance with their capital contribu0on
z
RK is trying to decide whether to accept a salary of P40,000 or a salary of P25,000 plus a bonus of 10% of net income a>er salaries and
bonus as a means of alloca!ng pro> among partners. Salaries traceable to the other partners are es!mated to be
3
P100,000. What amount of income would be necessary so that RK would consider choices to be equal?
A P290,000 R
B P165,000
 C P305,000
D P265,000

Op!on 1 = 40,000 Checking

Op!on 2 = 25,000 + B B = 10% (265,000-100,000-B)
B = 16,500 - .1B X= net income a>er salaries and bonus
40,000 = 25,000 + B 1.1B = 16,500 10%X= bonus B = 15,000 B = 15,000
40000= 25000+ 10%X
B = 10% *(NI-S-B) Op!on 2: 25,000+15,000 = 40,000 (same as Op!on 1) 10%X= 40000-25000 B = 10% *(NI-125,000-B) 10%X= 15000 B = .1NI-12,500-.1B X=
150000
1.1B = .1NI - 12,500
NI a>er salaries and bonus 150000
Bonus 15,000.00 Salaries 125000 Mul!plied by 1.10 Bonus 15000 1.1B 16,500.00 Net income 290000 Add 12,500.00
.1 NI 29,000.00
Divided by 0.10
Net income 290,000.00 *idk why mali eto hahahha

18 Nancy and Be9y enter into a partnership agreement and where they decide to share proEts according to the
following rules:
*Nancy and Be9ty will receive salaries of P1700 and P14,500 respec!vely as the Erst alloca!on.
*The next alloca!on is based on 20% of each partner's capital balances.
*The partnership's net income for the Erst year is P50,000. Nancy's capital balance is P83,000 and Be9y's
capital balance is P11,000 at the end of the year. Calculate the proEt/loss to be allocated to
Be9y.
P16,100
P37,600
P31,700
P18,300

6 XYZ Partnership provided for the following in the distribu!on of proEts and losses:
First: X is to receive 10% of net income up to P100,000 and 20% of the amount in excess thereof.
Then: Y and Z are each to receive 5% of the remaining income in excess of P150,000 a>er X's share.
Lastly: The balance is to be distributed equally to the three partners.

If the partnership income is P250,000, what is the total share of X?

A P108,000 R (to try din sa kanila)
B P110,000
C P100,000
D P130,000

X Y Z Total
Bonus to X
First 100,000 10,000.00 10,000.00
Over 100,000 30,000.00 30,000.00
Bonus to Y and Z 3,000.00 3,000.00 6,000.00
Remainder 68,000.00 68,000.00 68,000.00 204,000.00
108,000.00 71,000.00 71,000.00 250,000.00

7
The Smith and Jones partnership agreement s!pulates that proEts and losses will be shared equally a>er salary allowances of P120,000 for Smith and
P60,000 for Jones. At the beginning of the year, Smith's Capital account had a balance of P240,000, while Jones, Capital account had a balance of
P210,000. Net Income for the year was P150,000. The balance of Jones' Capital account at the end of the year a>er closing is ANSWER: P255,000

Smith Jones Total

Salary 120,000.00 60,000.00 180,000.00
Remainder (15,000.00) (15,000.00) (30,000.00)
105,000.00 45,000.00 150,000.00

Jones' Capital, beg 210,000.00

Share in net income 45,000.00
Jones' Capital, end 255,000.00
8 A, B, and C are capitalist partners while D is an industrial partner. The partnership reported a net loss of P100,000.
How much is the share of D in the reported net loss?
ANSWER: P-0-

9 Lori and Mike enter into a partnership and decide to share proEts and losses as follows:
- The Erst alloca!on is a salary allowance with Lori receiving P12,000 and Mike receiving P25,000.
- The second alloca!on is 20% of the partners' capital balances at year end. On December 31, 2019,
the capital balances for Lori and Mike are P86,000 and P344,000, respec!vely.
- Any remaining proEt and loss is allocated equally.

For the year ending December 31, 2019, the partnership reported a net loss of P122,000.
The journal entry to record the loss alloca!on will
A debit Lori, Capital for P93,300 R
B debit Lori, Capital for P28,700
C debit Mike, Capital for P93,800
D credit Mike, Capital for 93,800

Ending capital 86,000.00 344,000.00

Lori Mike Total
Salary 12,000.00 25,000.00 37,000.00
Interest 17,200.00 68,800.00 86,000.00
Remainder (122,500.00) (122,500.00) (245,000.00)
(93,300.00) (28,700.00) (122,000.00)

Lori, drawing 93,300.00

Mike, drawing 28,700.00
Income summary 122,000.00
Allocaon of prot/loss

Lori, capital 93,300.00

Mike, capital 28,700.00
Lori, drawing 93,300.00
Mike, drawing 28,700.00
Closing entry

14
Partner AA and BB have proEt and loss agreement with the following provisions: salaries of P30,000 and P45,000 for AA nad BB, respec!vely ; a bonus to AA of 10% of Net Income a>er
salaries and bonus; and interest of 10% on average capital balances of P20,000 and P35,000 for AA and BB, respec!vely. One third of any remaining proEts will be allocated to AA and
balance to BB.
Partner AA and BB have proEt and loss agreement with the following provisions: salaries of P30,000 and P45,000 for AA nad BB, respec!vely ; a bonus to AA of 10% of Net
Income a>er salaries and bonus; and interest of 10% on average capital balances of P20,000 and P35,000 for AA and BB, respec!vely. One third of any remaining proEts will
be allocated to AA and balance to BB.

If the partnership had net income of P22,000, how much should be allocated to Partner AA, assuming that the provisions of the prot and loss agreement are ranked by order of priority starting with salaries? A P12,000
B P8,800
C P13,200
D P12,500 Ours

If the partnership has net income of P102,500, how much should be allocated to Partner A?
A 41,167
B 47,250
C 44,250
D 41,000

0.33 0.67 B= 10% (NI - S - B) 0.33 0.67 B= 10% (NI - S - B) AA BB Total B= 10% (22000-75000-B) AA BB Total B= 10% (102,500-75000-B) Salaries 30,000.00 45,000.00 75,000.00 Salaries 30,000.00 45,000.00 75,000.00 B = 2,750 - .1B Bonus 0.00 0.00 0.00
Bonus 2,500.00 0.00 2,500.00 1.1B = 2,750 Interest 2,000.00 3,500.00 5,500.00 Interest 2,000.00 3,500.00 5,500.00 B = 2,500 Remainder (19,500.00) (39,000.00) (58,500.00) Remainder 6,500.00 13,000.00 19,500.00 12,500.00 9,500.00 22,000.00
41,000.00 61,500.00 102,500.00

15
Hope & Faith Co. reports net income a>er 30% tax of P235,000 by the end of 2018. The partnership agreement provides for division of proEt or loss on the
ra!o of the partners' capital balances. At the end of 2017, each partner had capital balance of P220,000. During 2018, Hope made addi!onal investment of
P50,000 on April 1 and withdrew P70,000 of her capital on September 30. Faith, on the other hand, made addi!onal investment of P80,000 on October 1.
The share of Hope in the net proEt using the ra!o of the weighted average capital is
A P94,000
B P117,500
C P105,000
D P130,000

Hope Faith
Capital M.U Ave Cap Capital M.U Ave Cap
220,000.00 0.25 55,000.00 220,000.00 0.75 165,000.00
270,000.00 0.50 135,000.00 300,000.00 0.25 75,000.00
200,000.00 0.25 50,000.00 240,000.00
240,000.00

Hope Faith Total

Interest in P/L 0.5 0.5 1
Net Income 117500 117500 235000

ZITA AND JONES

On Oct 31, 2018, Zita and Jones formed a pship by inves!ng cash of 300,000 and 200,000, respec!vely. The partners agreed t to receve an annual
salary allowance of 360,000 and to give Zita a bonus of 20% of the net income a>er partners' salaries, the bonus being treated as an expense. If the proEts
a>er salaries and bonus are to be divided equally , and the proEts on Dec 31, 2018 a>er partners' salaries but before bonus of Zita are 360,000, how much is
the share of Zita in the proEt? NI-S=360,000
270,000.00 R NI-120,000 = 360,000
100,000.00 Bonus of Zita = 20% (360,000)
210,000.00 B = 72,000
120,000.00
100.00% 0.00% B= 20% (NI-S)
Zita Jones Total B= 20%(360000-60000)
Salaries 60,000.00 60,000.00 B= 20% (300000)
Bonus 60,000.00 0.00 60,000.00 B=60000
Remainder 150,000.00 150,000.00 300,000.00
Total 270,000.00 150,000.00 420,000.00

LUZ, VI AND MINDA

Luz, Vi and Minda are partners when the partnership earned a proEt of P30,000. Their agreement provides the following regarding
the alloca!on of proEts and losses:
a. 8% interest in partner's ending capital in excess of P75, 000.
b. Salaries of P20, 000 for Luz and P30, 000 for Vi.
c. Any balance is to be distributed 2:1:1 for Luz, Vi and Minda, respec!vely.
Assume ending capital balances of P60, 000, P80, 000, and P100, 000 for partners Luz, Vi, and Minsa, respec!vely. What is the amount
of proEt allocated for Minda, if each provision of the proEt and loss agreement is sa!sEed to whatever extent possible using the priority
order shown above?
P(3,600)
P(2,000)
P3,600
P2,000

0.50 0.25 0.25

Luz Vi Minda Total
Interest 400.00 2,000.00 2,400.00
Salaries 27,600.00
Remainder
ProEt/Loss 0.00 400.00 2,000.00 30,000.00

DAVID, CHRIS AND JOHN

David; Chris and John formed a pship on July 2019. They decided to share proEts equally, but inserted a clause in the pship agreement where any losses would be
 allocated in the ra!o of 5:2:3, respec!vely. For the year ended Dec 31, 2019, the Erm earned a net income of 50,000. However, for the year ended Dec 31, 2020, the Erm
incurred a loss of 60,000. Assuming that John had an ini!al cap contribu!on of 43,000 and made no withdrawals, what is the balance of John's capital account as of dec
31, 2020? (Assume that none of the partners made any further contribu!ons to their capital accounts. Do not round any percentage calcula!ons. round all monetary
calcula!ons to the nearest peso.)
59,667.00
41,667.00
43,000.00
44,333.00

Ini!al Cap 43,000.00

Share in 2019 income 16,666.67
Share in 2020 Loss -18,000.00
John' Capital 41,666.67

ROSSI AND OLSON

The partnership agreement of Rossi and Olson provides for salary allowances of P45,00010 Rossi and P35,000 to Olson,
with the remaining income or loss to be divided equally. During the year, Rossi and Olson each withdraw cash equal to 80%
of their salary allowances. If partnership net income is P100,000, Rossi's equity in the
partnership would
increase the same as Olson's
increase more than Olson's
decrease the same as Olson's
decrease more than Olson's
Rossi Olson Total
Salary 36000 28000 64000 Remainder 18000 18000 36000 Total
54000 46000 100000
12 The BLUE Company, a partnership, was formed on January 1, 2018 with four partners: Belen, Lorna, Ursula, and Edna. Capital contribu!ons were as follows:

Bellen 100,000
Lorna 50,000
Ursula 50,000
Edna 40,000

The partnership agreement provides that each partner shall receive 5% interest on the amount of his/her capital contribu!on. In addi!onal, Belen is to receive a
salary of P10,000 and Lorna a salary of P6,000 per annum which are to be charged as expense of the business. The agreement further provides that Ursula shall
receive a minimum of P5,000 per annum from the partnership and Edna a minimum of P12,000 per annum, both including amounts allowed as interest on capital
and their respec!ve share of proEts. The balance of the proEts is to be distributed in the following propor!on: Belen, 30%; Lorna, 30%; Ursula, 20%; and Edna,
20%.

1. The amount that must be earned by the partnership during 2018, before any charge for interest on capital or partners' salaries in order that Belen may
receive an aggregate of P25,000, including interest, salary and share of proEts would be

ANSWER: 64,667 64667

Total Earnings of Lorna would be 18500 22667

30% 30% 20% 20%

Belen Lorna Ursula Edna Total
Interest 5,000.00 2,500.00 2,500.00 2,000.00 12,000.00
 Salary (charged as expense) 10,000.00 6,000.00 0.00 3,333.33 19,333.33 *Bakit andito yung salaries? huhuhu Remainder 10,000.00
10,000.00 6,666.67 6,666.67 33,333.33
25,000.00 18,500.00 9,166.67 12,000.00 64,666.67
Salaries

Using the amount that must be earned by the partnership during 2018, before any change for interest in capital or partners salaries in order that Belen may
receive and aggregate of P25,000, including interest, salary and share of proEts, the total earnings of Ursula would be _________. (disregard income tax. Round
your Enal answer to the nearest peso. Do not use peso sign, comma, and decimal.)

ANSWER: 9167

The total earnings of Lorna would be 18500

16 Carlin and Maley have a partnership agreement which includes the following provisions regarding sharing net income or net loss *
a salary allowance of P120,000 to Carlin and P100,000 to Maley
* an interest allowance of 10% on capital balances at the beginning of the year
* a bonus of 20% carlin
* the remainder to be divided 40% to Carlin and 60% to Maley

The capital balance of January 1, 2018, for Carlin and Maley was P90,000 and P120,000 respec!vely
During 2018, the Carlin and Maley Partnership had sales of P2,000,000, cost of goods sold of P1,100,000
and opera!ng expenses of P400,000. Income tax rate is 30%.
If bonus is computed based on net income a@er bonus, salary allowancess, and interest on capital,
the total share of C in the partnership is ___________
P214,600
P180,000
P185,680
P183,500

40% 60% Let B= Bonus

Carlin Maley Total B= 20% (NI- B- S- I)
Salaries 120,000 100,000 220,000 B= 20% (350000- B- 220000- 21000) Interest 9,000 12,000 21,000 B= 20% (109000- B) Bonus
18167 18,167 B= 21800- 0.20B Remainder 36333 54500 90,833 1.20B= 21800 Total 183500 166,500 350,000 B= 18166.67

Sales 2,000,000
COGS -1,100,000
OPEX -400,000
 Net income 500,000
Income tax -150,000
Net distributable income 350,000

29 Carlin and Maley have a partnership agreement which includes the following provisions regarding sharing net income or net loss *
a salary allowance of P120,000 to Carlin and P100,000 to Maley
* an interest allowance of 10% on capital balances at the beginning of the year
* a bonus of 20% carlin
* the remainder to be divided 40% to Carlin and 60% to Maley

The capital balance of January 1, 2018, for Carlin and Maley was P90,000 and P120,000 respec!vely
During 2018, the Carlin and Maley Partnership had sales of P2,000,000, cost of goods sold of P1,100,000
and opera!ng expenses of P400,000. Income tax rate is 30%.
If bonus is computed based on net income before bonus, salary allowancess, and interest on capital,
the total share of C in the partnership is ___________
P185,680
P164,320
P214,600
P135,400

40% 60%
Carlin Maley Total
Salaries 120,000 100,000 220,000
Interest 9,000 12,000 21,000
Bonus 70000 70,000
Remainder 15600 23400 39,000
Total 214600 135,400 350,000
2 Jaime, Madrid, Soriano are partners sharing proEts on a 5:3:2 ra!o. On January 1, 2018, Ma!as was admi9ed into the partnership wiith a 20% share in the proEts.
The old partners con!nue to par!cipate in proEts propor!onate to their original ra!os.
For the year 2018, the partnership books showed a net proEt of P250,000. It was disclosed however, that the errors shown below were made:

Errors 2017 2018

Accrued expenses not recorded at year-end 12,000 Failure to record accrued expense (p.362) inventory overstated 31,000 Retained Earnings 12,000 Purchases not recorded, for which goods
have been received and inventoried 20,000 Expense 12,000 Income received in advance not adjusted 15,000
Unused supplies not take up at year-end 9,000 Failure to record deferred income (p.363) Retained Earnings 15,000
Income 15,000

Jaime Madrid Soriano Ma!as Total

Old ra!o 50% 30% 20% 0 100%
 New ra!o 40% 24% 16% 20% 100%

Net income
Unadjusted 250,000.00
2017 accrued expenses 12,000.00 *hindi ako maalam mag-adjust kung tama ba yung signs hahahhha
2017 unadjusted unearned income 15,000.00
2018 overstated inventory 31,000.00
2018 unrecorded purchases 20,000.00
2018 unused supplies 9,000.00
Adjusted 369,615.38
0.65
Adjusted net income, a>er tax 240,250.00

Partners' share in net income 96,100.00 57,660.00 38,440.00 48,050.00 240,250.00

0.00 0.00 9,610.00 (9,610.00)

26 The new proEt and loss ra!o of Madrid is 24%

R The new proEt and loss ra!o of Soriano is 16%

R The new proEt and loss ra!o of madrid iss 24%

The new proEt and loss ra!o of Jaime iss 40%

Assuming that income tax rate is 35%, the share of Sorianoin the corrected net proEt is 38440

Assuming that income tac rate is 35%, the share of Ma!as in the corrected net proEt is 29,380 48050

Assuming that income tax rate is 35%, the share of Jaime in the corrected net proEt is 58,760 96100

Assuming that income tax rate is 35%, the share of Madrid in the corrected net proEt is 32256 57660
4 Mariano and Lucas entered into partnership on March 1, 2018, inves!ng P125,000 and P75,000, respec!vely.
It was agreed that Mariano, the managing partner, was to receive a salary of P12,000 per year and also 10% bonus on the net proEt a>er adjustment for the salary.
The balance of the proEt was to be divided in the ra!o of their original capital. On Dec 31, 2018 account balance are the following

Cash 70,000.00 Accounts Payable 60,000.00

Accounts Receivable 67,000.00 Sales 233,000.00
Furniture & Fixtures 45,000.00 Mariano, Capital 125,000.00
Purchases 196,000.00 Lucas, Capital 75,000.00
Sales Returns & Allowances 5,000.00 Mariano, Drawing (20,000.00)
Opera0ng Expenses 60,000.00 Lucas, Drawing (30,000.00)

Inventories on December 31, 2018 were: Merchandise P73,000; Supplies P2,500; Prepaid Insurance was P950 and
accrued liabili!es totaled P1,550. Deprecia!on of furniture & Extures is to be computed at 20% per year. Income tax rate is 35%

Net income (loss), unadjusted 45,000.00

Sales 233,000.00 Ending inventory (73,000.00) *hindi ako maalam mag-adjust kung tama ba yung signs hahahhha Sales returns & allowances (5,000.00) Supplies, end (2,500.00)
Net sales 228,000.00 Prepaid insurance (950.00)
COGS (123,000.00) *purchases lang ba'to? Accrued liabili!es (1,550.00)
Gross proEt 105,000.00 Deprecia!on (9,000.00)
Opera!ng expenses(60,000.00) Net income (loss), adjusted (42,000.00)
Net income (loss) 45,000.00 0.65
Net income a>er tax(27,300.00)
Net income (loss), unadjusted 45,000.00
Ending inventory 73,000.00 *hindi ako maalam mag-adjust kung tama ba yung signs hahahhha Capital 125,000.00 75,000.00 200,000.00 Supplies, end 2,500.00 P&L Ra!o 62.50% 37.50%
 Prepaid insurance 950.00 Mariano Lucas Total Accrued liabili!es (1,550.00) Salary 30,000.00 30,000.00 Deprecia!on (9,000.00) Bonus 0.00 Net income (loss), adjusted 110,900.00 Remainder (35,812.50) (21,487.50)
(57,300.00) 0.65 (5,812.50) (21,487.50) (27,300.00)
Net income a>er tax37,600.00

Capital 125,000.00 75,000.00 200,000.00 B = 10% (NI-S)

P&L Ra!o 62.50% 37.50% B= 10% (37600-30000)
Mariano Lucas Total B= 10% (7600)
Salary 12,000.00 12,000.00 B=
Bonus 0.00
Remainder 8,506.25 5,103.75 13,610.00
20,506.25 5,103.75 25,610.00

R A>er closing the net proEt and drawing accounts, the capital of Lucas is 49,860 50268

A>er closing the net proEt and drawing accounts, the capital of Mariano is 139,540 125342

The distribu!on of net proEt to Mariano is 34,540.00 20342

The distribu!on of net proEt to Lucas is 4,860.00 5268 25610

Sales return and allowances -5,000.00 -5,000.00

Less: Cost of Sales
Beginning Inventory 0.00
Purchases 196,000.00
COGAS 196,000.00
Ending inventory -73,000.00 -123,000.00
Gross profit -128,000.00
Less: Expenses
Operating expenses -60,000.00
Sales 233,000.00
Supplies expense -2,500.00
Insurance expense -950
Accrued liabilities -1,550.00
Depreciation expense -9,000.00 159,000.00 Net income/loss before tax 31,000.00 Less: Tax
-10,850.00 Net income after tax 20,150.00

Mariano Lucas Total B = 10% (NI-S)

Salary 12,000.00 12,000.00 B= 10% (20,150 - 12000) Bonus 815.00 815.00 B= 10% (8,150) Remainder
4,584.38 2,750.63 7,335.00 B= 815 Profit/Loss 17,399.38 2,750.63 20,150.00
125000 62.50
Mariano Lucas Total 75000 37.50
Beginning capital 125,000.00 75,000.00 200,000.00 200,000.00 100.00 Net income/loss 17,399.38 2,750.63
20,150.00
Drawings -20,000.00 -30,000.00 -50,000.00
Ending capital 122,399.38 47,750.63 170,150.00
27 The net income of the Rice and Wynn partnership is P120,000. The partnership agreement speciEes that Rice and
Wynn have a salary allowance of P32,000 and P48,000 respec!vely. The partnership agreement also speciEes an
interest of 10% on capital balances at the beginning of the year.
Each partner had a beginning capital balance of P80,000. Any remaining net income or net loss is shared equally.
What is the balance of wynn's capital account at the end of the year a>er net income has been distributed?
P136,000
P128,000
P148,000
P140,000

R What is Rice's share of the P120,000 net income?

P40,000
P52,000
P32,000
P44,000
Sison, Torres and Velasco are partners, in an accoun!ng Erm. Their capital account balances at year-end were Sison, P50,000; P110,000; Velasco, P50,000. They
share profits and losses on a 4:4:2 ratio, after the following items:
a Partners Velasco is to receive a bonus of 10% of net proEt a>er bonus.
b Interest of 10% shall be paid on that por!on of a partner's capital in excess of P100,000
c Salaries of P10,000 and P12,000 shall be paid to partners Sison and Velasco, respec!vely.

1 Assuming a net proEt of P44,000 for the year, the proEt share of Torres was 7,800
(please do not use peso sign, comma, and decimal)

20 Assuming a net proEt of P44,000 for the year, the proEt share of Velasco was 19,400
(please do not use peso sign, comma, and decimal)

24 Assuming a net proEt of P44,000 for the year, the proEt share of Sison was 16800

28 Assuming a net proEt of P44,000 for the year, the proEt share of Torres was 7800

Ending capital 50,000.00 110,000.00 50,000.00 B = 10% (NI-B)

Ra!o 40% 40% 20% B = 10% (44,000 - B)
Sison Torres Velasco Total B = 4,400 - .1B
Bonus 4,000.00 4,000.00 1.1B = 4,400
Interest 1,000.00 1,000.00 B = 4000 Salaries 10,000.00 12,000.00 22,000.00
Remainder 6,800.00 6,800.00 3,400.00 17,000.00
16,800.00 7,800.00 19,400.00 44,000.00

23 Assuming a net proEt of P22,000 for the year, the proEt share of Velasco was 15,000 13,400 13,400.00

Ending capital 50,000.00 110,000.00 50,000.00 B = 10% (NI-B)

Ra!o 40% 40% 20% B = 10% (22,000 - B)
Sison Torres Velasco Total B = 2,200 - .1B
Bonus 2,000.00 2,000.00 1.1B = 2,200
Interest 1,000.00 1,000.00 B = 2000 Salaries 10,000.00 12,000.00 22,000.00
Remainder (1,200.00) (1,200.00) (600.00) (3,000.00)
8,800.00 (200.00) 13,400.00 22,000.00

OURS
R Assuming a net proEt of P22,000 for the year, the proEt share of Sison was 8,800.00 8,800.00
Tamayo, Benson, and Vidal, a partnership formed on January 1, 2018 had the following ini!al investment
Tamayo 100,000
Benson 150,000
Vidal 225,000

The partnership agreement stated that proEts and losses are to be shared equally by the partners a>er considera!on is made for the following
a. salaries allowed to partners: P60,000 for Tamayo, P48,000 for Benson, and P36,000 for Vidal
b. average partner's capital balances during the year shall be allowed 10% interest
 Addi!onal informa!on
a. On june 30, 2018 tamayo invested addi!onal 60,000
b. Vidal withdrew P70,000 from the partnership on September 30, 2018 *temporary withdrawal?
c. Share on the remaining proEt was P3,000 for each partner

10 The Average capital of Vidal is 207,500.00 207,500.00

13 The total partnership capital on December 31, 2018 is 666,750.00 23 666,750.00
21 The partnership net proEt for 2018 before salaries, interest and partner's share on remainder is 201,750.00 201,750.00
R The average capital of Tamayo is 130,000.00 130,000.00
Interest on average capital balances of the partners totals 48,750.00 48750

TAMAYO Capital Months Benson Capital Months Vidal Capital Months Date balance unchanged Date balance unchanged Date balance unchanged Jan. 1 100,000.00 6.00 600,000.00 Jan. 1 150,000.00 12.00 1,800,000.00 Jan. 1 225,000.00
9.00 2,025,000.00 June 30 160,000.00 6.00 960,000.00 June 30 0.00 Sep. 30 155,000.00 3.00 465,000.00 1,560,000.00 1,800,000.00 2,490,000.00
12.00 12.00 12.00
Average capital 130,000.00 Average capital 150,000.00 Average capital 207,500.00

Tamayo Benson Vidal Total

Salaries 60,000.00 48,000.00 36,000.00 144,000.00
Interest 13,000.00 15,000.00 20,750.00 48,750.00
Remainder 3,000.00 3,000.00 3,000.00 9,000.00
76,000.00 66,000.00 59,750.00 201,750.00

Tamayo Benson Vidal Total

Beg. capital 100,000.00 150,000.00 225,000.00
Share in proEt 76,000.00 66,000.00 59,750.00
Addt'l investments 60,000.00
Drawings (70,000.00)
Ending capital 236,000.00 216,000.00 214,750.00 666,750.00
1. Which of the following does not change the partnership ownership? marriage of a partner
2. The new partner’s capital credit exceeds his/her asset contribution to the partnership when bonus is given to this new partner
true
3. A partner may withdraw or retire from the partnership by
Any of these
4. The remaining partners' capital balance will increase when the amount of settlement to a retiring partner is more than the retiring partner's
capital balance
False
5. Partner A retires from ABC Partnership and receives P 100.00 as full settlement of her capital account with a balance of P 120.00.
Immediately before the retirement of A, the partnership net assets is P 1,000.00, equal to fair value. If Partner's A capital balance was paid by
the partnership, the partnership net assets after A's retirement would be P 880.
False
6. C is admitted in the partnership of A and B is investing P 120,000 for an interest of P 150,000. Assuming that the net assets of the
partnership prior to C's admission are fairly valued, this transaction would result in
A decrease in the capital balance of A and B
7. Ralph acquires 20% in Southern Partnership by contributing non-cash assets. This transaction will be recorded in the partnership books as
a transfer within equity. False
8. Partner A retires from ABC Partnership and receives P 100.00 as full settlement of her capital account with a balance of P 120.00.
Immediately before the retirement of A, the partnership net assets is P 1,000.00, equal to fair value. If Partner A's capital balance was paid by
Partner B, the partnership net assets after A's retirement would still be P 1,000.00
True
9. The net assets of AB Partnership consist of P 10.00 capital balance of A and P 10.00 capital balance of B. The net assets approximate fair
value. Partners A and B have equal interests in the partnership. If C invests in the partnership for a 20% interest, the interest of A after C's
admission will be decreased to 30%
False
10. The total assets of a partnership will most likely increase when a new partner is admitted by investing directly to the partnership
True
11. The admission of a new partner requires the consent of the majority of the partners False
12. When a new partner enters an existing partnership by purchase of interest, the cash paid to the old partner for the partnership interest
acquired is always equal to the new's partner's capital balance
False
13. The net assets of AB Partnership consist of P 10.00 capital balance of A and P 10.00 capital balance of B. The net assets approximate fair
value. Partners A and B have equal interests in the partnership. If C invests P 10.00 in the partnership for a ⅓ interest, the entry to record C's
admission will be a debit to Cash and a credit to C's capital account
True
14. A bonus to the old partners from a new partner increases the old partners' capital accounts
True
15. The total assets of the partnership remains unchanged when a new partner purchases an interest directly from an existing partner
True
16. A change in partnership ownership liquidates the partnership
False
17. Pocholo, an incoming partner, acquires 10% interest in Southern Partnership by acquiring half of the interest of Levi, an existing partner.
This transaction will most likely require a debit in the partnership books for the cash payment of Pocholo False
18. The net assets of AB Partnership consist of P 10.00 capital balance of A and P 10.00 capital balance of B. The net assets approximate fair
value. Partners A and B have equal interests in the partnership. If C invests in the partnership for a ⅓ interest, C shall invest P 10.00
True
19. The withdrawal of a partner legally dissolve the partnership
True
20. A bonus to the new partner is normally shared by the existing partners using their profit or loss ratio
True
21. The insanity of a partner causes dissolution of a partnership
True
22. The total assets of a partnership most likely increases when an incoming partner purchases the interest from an existing partner
False
23. The payment to a retiring partner at less than book value results in a loss to the other partners, which must be shared according to their
profit or loss ratio
False
24. When the net assets of the partnership are fairly valued and the amount invested by the incoming partner is equal to the interest acquired,
it is implied that there is No bonus to either new or old partners
25. Payment to a retiring partner of an amount in excess of his/her capital balance may indicate that some partnership assets are undervalued
True
NO COMMA NO DECIMAL NO PERCENT
QUESTION 1

Mike and Tess are partners with capital balances of P 70,000 and P 50,000, respectively. They share profits and losses in the ratio of 3:1, respectively. Victor is to be admitted in
the partnership for a cash contribution of P 60,000 for 1/2 interest partnership capital and in the future profits and losses

1. If Victor would be given a capital credit of P 90,000, Mike's capital would be charged by 22,500.00
QUESTION 2
The partnership of A and B provides for equal sharing of profits and losses. Prior to the admission of C, the capital accounts are A, P 150,000 and B, P 210,000. C invests P180,000 for a P150,000 interest.

1. B, Capital admission after the admission of C is 225,000.00

QUESTION 3

Tess and Shirley who share profits and losses equally, have capital balances of p 170,000 and P 200,000, respectively. They agree to admit Gen for a 1/3 interest in capital and
profits for her investment of P 200,000. Partnership assets are not to be revalued.

1. The total bonus to Tess and Shirley is 10,000.00

QUESTION 4
Partners Nitz, Pat, and Candy share profits and losses 50:30:20, respectively. The statement of financial position at July 31, 2020 shows the following balances:

Cash 40,000.00 Accounts payable 100,000.00

Other assets 360,000.00 Nitz, capital 74,000.00
Pat, capital 130,000.00
Candy, capital 96,000.00
TOTAL 400,000.00 TOTAL 400,000.00

The carrying value of assets and liabilities are equal to their fair values. Emmie is to be admitted as a new partner with a 20% capital interest and 20% share of profits and losses
in exchange for a cash contribution. No bonus is to be effected.

1. Emmie's contribution should be 75,000.00

QUESTION 5
Presented below is the condensed statement of financial position of the partnership of Gan, Witt, and Windy. The partners share profits and losses in the ratio of 6:3:1, respectively.

Cash 85,000.00 Accounts payable 80,000.00

Other assets 415,000.00 Gen, capital 252,000.00 6
Witt, capital 126,000.00 3 9
Windy, capital 42,000.00 1
TOTAL 500,000.00 TOTAL 500,000.00 10

Treat independently each of the following questions relative to Windy's retirement from the partnership.
4 out of 6 6 out of 6
1. If Windy is to receive P 60,000 as cash settlement of her interest and the partnership assets are fairly valued, the decrease in Gen's capital as a result of Windy's withdrawal is 12,000.00 12,000.00

2. If Windy is to receive P 60,000 as settlement for her interest. Assume that any difference between this amount and the carrying value of her capital indicates that some assets have fair values in excess of carrying values. The credit to Witt, capital as a result of 54,000.00 54,000.00
asset revaluation is

3. Gan and Witt buy 1/4 and 3/4, respectively, of Windy's interest for P 7,500 and p 22,500. This indicates that assets are overvalued by 12,000.00 120,000.00 4. Gan and Witt buy 1/3 and 2/3, respectively, of Windy's interest for P 10,00 and P 20,000. Gan, capital immediately after Windy's retirement is
266,000.00 266,000.00 5. Windy is to receive P 33,000 as cash settlement. All assets and liabilities are fairly valued. The capital balance of Witt immediately after the withdrawal of Windy is 129,000.00 129,000.00 6. Allowance for bad debts for P 4,000 and equipment impairment loss of P 8,000 would be
recognized. The partnership would pay an amount to Windy equal to her adjusted capital. Cash settlement to Windy is 40,800.00

No. No.
1 Windy, capital 42,000.00 4 Gan Witt Windy
Gen, capital 12,000.00 252,000.00 126,000.00 42,000.00
Witt, capital 6,000.00 14,000.00 28,000.00 (42,000.00)
Cash 60,000.00 266,000.00 154,000.00 0.00

2 Windy, capital (after revaluation) 60,000.00 5 Windy, capital 42,000.00

Cash 60,000.00 Gan, capital 6,000.00 9,000.00
Witt, capital 3,000.00
Windy, capital (after revaluation) 60,000.00 Cash 33,000.00
Windy, capital (before revaluation) (42,000.00)
18,000.00 Witt, capital - beg. 126,000.00
Percentage share in revaluation 10.00% Share in *bonus? hahah 3,000.00
Total reveluation 180,000.00 Witt, capital - after withdrawal 129,000.00
Percentage share of Witt 30.00%
Share of Witt in revaluation 54,000.00 6 Gan Witt Windy
Unadjusted 252,000.00 126,000.00 42,000.00
3 Windy, capital 42,000.00 Allow. for BD (400.00) (4,000.00)
Windy, capital - after revaluation (30,000.00) Impairment loss (800.00) (8,000.00)
Overvaluation 12,000.00 Adjusted 40,800.00

QUESTION 6

X, Y, and Z are partners sharing profits in the ratio of 3:3:2, respectively. On July 31, their capital balances are as follows: X, P 280,000, Y, P 200,000, and Z, P 160,000. They
agree to admit W on the following conditions:
CC AC Difference (Goodwill)
a. W is to pay X P 200,000 for 1/2 of X's interest X 200,000.00 290,000.00 90,000.00
b. W is to invest P 160,000 in the partnership Y 260,000.00 350,000.00 90,000.00
c. Some assets of the partnership are undervalued by P 160,000 Z 200,000.00 260,000.00 60,000.00
d. W's interest is to be 25% W 300,000.00 300,000.00
1 out of 2 2 out of 2 960,000.00 1,200,000.00 240,000.00
1. The total partnership capital immediately after the admission of W is 1,200,000.00 960,000.00 960,000
2. The capital balance of X immediately after the admission of W is 290,000.00 200,000.00 222,500 a. X's Capital 140,000.00
W's capital 140,000.00
X 280,000 37.50%
Y 200,000 37.50% b Cash 160,000.00
Z 160,000 25.00% W's Capital 160,000.00
Total 640,000 100%
c Assets 160,000.00
X's Capital 60,000.00
Y's Capital 60,000.00
Z's Capital 40,000.00

d Goodwill 240,000.00
X's Capital 90,000.00
Y's Capital 90,000.00
pst Z's Capital 60,000.00

QUESTION 7
Sophia purchased 1/2 of Jay's interest and share in profit in the JC Partnership by paying Jay P180,000. Immediately before Sophia's admission, the capital balances of Jay and Chris were
P240,000 and P400,000 respectively. Jay and Chris were sharing profits in the ratio of 2:3, respectively.
3 out of 3
1. The capital balance of Sophia immediately after her admission is 120,000.00
2. In the new profit and loss ratio, Chris would have (percent) 30
3. In the new profit and loss ratio, Jay would have (percent) 20

40.00% 60.00%
Jay Chris Sophia Total
240,000.00 400,000.00
Transfer of equity (120,000.00) 120,000.00
Capital 120,000.00 400,000.00 120,000.00 640,000.00

Jay Chris Sophia

20% 30.00% 50.00%

QUESTION 8
Partners Ellie, Ollie, and Millie agreed to sell to Tillie 1/4 of their respective capital and profit and loss interest for a total cash payment of P160,000.
The capital balances and the respective percentage interests in profits and losses immediately before the sale to Tillie are

Partner P/L Capital Balance

Ellie 50.00% 320,000.00
Ollie 30.00% 180,000.00
Millie 20.00% 60,000.00
1 out of 2 1 out of 2 2 out of 2
1. The capital balance of Ollie immediately after Tillie's admission is 135,000.00 135,000.00 135,000.00
2. From the sale of portion of his interest sold to Tillie, Ellie would receive 10,000.00 80,000.00 90,000.00

50% 30% 20%

Ellie Ollie Millie Tillie
Old capital 320,000.00 180,000.00 60,000.00
Transfer (80,000.00) (45,000.00) (15,000.00) 140,000.00
New capital 240,000.00 135,000.00 45,000.00 140,000.00

Cash payment 160,000.00

Interest acquired (140,000.00)
Gain on old partners 20,000.00

Ellie Ollie Millie

Share in payment 80,000.00 48,000.00 32,000.00 160,000.00

QUESTION 9
Luke and Mark, who share profits and losses equally, agree to take John into the partnership for a 40% share in capital and profits.
Luke and Mark retain 30% interest each. Luke and Mark have capital balances of P100,000 and P140,000, respectively before the
admission of John. John pays P120,000 directly to Luke and Mark for his 40% interest. All assets of the partnership, except land,
are fairly valued.
1. Land is undervalued by 60,000.00
2. The capital balance of Mark immediately after the admission of John is 102,000.00

QUESTION 10
Egay and Egoe who share profits and losses equally have capital balances of P200,000 and P240,000, respectively. They admit Engyl for a
1/3 interest in partnership capital and profits for an investment of P260,000.

1. The net assets are undervalued by 80,000.00

Quiz Accounting

1. The statement of financial position of the partnership A, B and C shows: Cash, P22,400; Other Assets, P212,000; Liabilities,
P38,400; A, Capital (50%) P76,000; B, Capital (25%) P64,000; and C, Capital (25%) P56,000.

If C received P10,000 from the first cash distribution, how much was the total cash distributed to partners?
 P20,000
 P18,000
 P44,000
 P28,000

2. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk Partnership. The partner’s capital
balances are P300,000 and P190,000, respectively.
If on final settlement of partner’s claims Beans received P99,000, how much did Jack receive?
 P89,000
 P261,000
 None
 P234,000
3. The statement of financial position of the partnership A,B and C shows: Cash, P22,400; Other Assets, P212,000; Liabilities,
P38,400; A, Capital (50%) P76,000; B, Capital (25%) P64,000; and C, Capital (25%) P56,000.

If A received a total of P10,000 from partnership liquidation, how much was the proceeds from the sale of all non-cash assets?
 Answer not determinable
 P127,000
 P85,000
 P64,000
4. The statement of financial position of the partnership A,B and C shows: Cash, P22,400; Other Assets, P212,000; Liabilities,
P38,400; A, Capital (50%) P76,000; B, Capital (25%) P64,000; and C, Capital (25%) P56,000.

If B received a total of P31,000 from partnership liquidation, how much was the loss on realization?
 P85,000
 Answer not determinable
 P127,000
 P64,000

5. Jurado, Katindig, Lazaro, and Marcelo are partners sharing earnings in the ratio of 3:4:6:8. The balance of their capital accounts
on December 31, 2018 are as follows:
Jurado P1,000
Katindig 25,000
Lazaro 25,000
Marcelo 9,000

The partners decided to liquidate, and they accordingly convert the non-cash assets into P23,200 of cash. After paying the
liabilities amounting to P3,000, they have P22,200 to divide. Assume that a debit balance in any of partner’s capital is uncollectible.
The book value of non-cash assets amounted to:
 P63,000
 P45,400
 P25,200
 P61,000

6. Jurado, Katindig, Lazaro, and Marcelo are partners sharing earnings in the ratio of 3:4:6:8. The balance of their capital accounts
on December 31, 2018 are as follows:
Jurado P1,000
Katindig 25,000
Lazaro 25,000
Marcelo 9,000

The partners decided to liquidate, and they accordingly convert the non-cash assets into P23,200 of cash. After paying the
liabilities amounting to P3,000, they have P22,200 to divide. Assume
that a debit balance in any of partner’s capital is uncollectible. The share of Jurado in the loss upon conversion of the non-cash
assets into cash was:
 P5,400
 .P5,257
 P1,000
 P4,792

7. In a cash priority program for use in installment liquidation, the partner with the highest loss absorption balance is the most
vulnerable partner. The amount of cash to be distributed to partners in installment liquidation can be determined by preparing a
cash priority program.
 Both statements are true.
 Only statement 2 is true
 Only statement 1 is true
 Both statement are false

8. Partners Roger, Sergio and Tito, who share profit and loss in the ratio of 3:5:2, respectively have decided to liquidate their
partnership. The Statement of Financial Position of the partnership at the time of liquidation is shown below:
Assets Liabilities and Capital
Cash P120,000 Accounts Payable P93,000
Other Assets 360,000 Loan from Sergio 30,000
Roger, Capital 108,000
Sergio, Capital 120,000
_____ Tito, Capital 129,000
P480,000 P480,000
The partners desire to prepare an installment distribution schedule showing how cash would be distributed to partners as assets
are realized. In the schedule of maximum absorbable loss, the maximum absorbable loss for each partner would be
 Roger, P360,000; Sergio, P240,000; Tito, P645,000
 Roger, P300,000; Sergio, P600,000; Tito, P225,000
 Roger, P360,000; Sergio, P300,000; Tito, P645,000
 Roger, P450,000; Sergio, P525,000; Tito, P375,000

9. A, B and C decided to liquidate their partnership business. The financial position of the partnership shows: A, Capital (30%)
P210,000; B, Capital (20%) P150,000; C, Capital (50%)
P210,000. Upon liquidation, all of the partnership’s assets are sold and sufficient cash is realized to pay all liabilities except one for
P30,000. All partners are solvent except C.
How much is the additional contribution required of B?
 P24,000
 P0
 P6,000
 P18,000

10. The Statement of Financial Position for the partnership of Eclavo, Eclara, and Elorda, who share profits and losses in the ratio
4:5:1, is as follows:
Cash P100,000 Accounts Payable P300,000
Inventory 720,000 Eclavo, Capital 320,000
Eclara, Capital 90,000
_____ Elorda, Capital 110,000
P820,000 P820,000

Assuming Eclara is an insolvent partner, and the inventory is sold for P360,000, how much should Eclavo receive upon liquidation
of the partnership?
 P46,000
 P90,000
 None
 P104,000

11. Jurado, Katindig, Lazaro, and Marcelo are partners sharing earnings in the ratio of 3:4:6:8. The balance of their capital
accounts on December 31, 2018 are as follows:
Jurado P1,000
Katindig 25,000
Lazaro 25,000
Marcelo 9,000

The partners decided to liquidate, and they accordingly convert the non-cash assets into P23,200 of cash. After paying the
liabilities amounting to P3,000, they have P22,200 to divide. Assume that a debit balance in any of partner’s capital is uncollectible.
When the P22,200 was divided, Lazaro got
 P8,320
 P14,200
 P6,342
 P10,800

12. The following is the priority sequence in which liquidation proceeds will be distributed for a partnership:

 Partnership drawings, partnership liabilities, partnership loans, partnership capital balances

 Partnership liabilities, partnership capital balances, partnership loans
 Partnership liabilities, partnership loans, partnership drawings, partnership capital balances
 Partnership liabilities, partnership loans, partnership capital balances

13. Partners Roger, Sergio and Tito, who share profit and loss in the ratio of 3:5:2, respectively have decided to liquidate their
partnership. The Statement of Financial Position of the partnership at the time of liquidation is shown below:
Assets Liabilities and Capital
Cash P120,000 Accounts Payable P93,000
Other Assets 360,000 Loan from Sergio 30,000
Roger, Capital 108,000
Sergio, Capital 120,000
_____ Tito, Capital 129,000
P480,000 P480,000

The partners desire to prepare an installment distribution schedule showing how cash would be distributed to partners as assets
are realized. If Roger has received P30,000, how much would Sergio had received?
 P30,000
 P77,000
 None
 P20,000

14. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk Partnership. The partner’s capital
balances are P300,000 and P190,000, respectively.
If all partnership assets and liabilities are realized and settled at their carrying amounts, how much would Beans receive from the
liquidation?
 P190,000
 P120,000
 P300,000
 Answer not determinable

15. Partners Roger, Sergio and Tito, who share profit and loss in the ratio of 3:5:2, respectively have decided to liquidate their
partnership. The Statement of Financial Position of the partnership at the time of liquidation is shown below:
Assets Liabilities and Capital
Cash P120,000 Accounts Payable P93,000
Other Assets 360,000 Loan from Sergio 30,000
Roger, Capital 108,000
Sergio, Capital 120,000
_____ Tito, Capital 129,000
P480,000 P480,000

The partners desire to prepare an installment distribution schedule showing how cash would be distributed to partners as assets
are realized. The schedule of possible losses on capital balances would indicate that the first cash distributed after the payment of
outside creditors would be distributed to
 Sergio, in the amount of P60,000
 Tito, in the amount of P30,000
 Roger, in the amount of P48,000
 Tito, in the amount of P57,000
16. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk Partnership. The partner’s capital
balances are P300,000 and P190,000, respectively.
Before the realization of non-cash assets, the partnership has a zero balance in its cash account and a P200,000 balance in its
liabilities. If on final settlement of partners’ claims Jack received P261,000, how much was the net proceeds from the sale of the
non-cash assets?
 P290,000
 P0
 P360,000
 P560,000

17. The Statement of Financial Position for the partnership of Eclavo, Eclara, and Elorda, who share profits and losses in the ratio
4:5:1, is as follows:
Cash P100,000 Accounts Payable P300,000
Inventory 720,000 Eclavo, Capital 320,000
Eclara, Capital 90,000
_____ Elorda, Capital 110,000
P820,000 P820,000

Assuming Elorda is a limited partner, and the inventory is sold for P360,000, how much should she receive upon liquidation of the
partnership?
 P74,000
 P56,000
 P65,000
 P110,000
18. An entry is not required in the liquidation of a partnership to record the
 Distribution of cash to partners
 Payment of cash to creditors
 Sale of non-cash assets where proceeds are greater than the book value  Allocation of a capital deficiency to partners with
credit balances when the deficient partner is solvent
19. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk Partnership. The partner’s capital
balances are P300,000 and P190,000, respectively.
The partnership has total liabilities of P200,000. If all partnership assets are realized for P500,000, how much would Jack receive
from the liquidation?
 P300,000
 P133,000
 P243,000
 P57,000

20. Partners Roger, Sergio and Tito, who share profit and loss in the ratio of 3:5:2, respectively have decided to liquidate their
partnership. The Statement of Financial Position of the partnership at the time of liquidation is shown below:
Assets Liabilities and Capital
Cash P120,000 Accounts Payable P93,000
Other Assets 360,000 Loan from Sergio 30,000
Roger, Capital 108,000
Sergio, Capital 120,000
_____ Tito, Capital 129,000
P480,000 P480,000

The partners desire to prepare an installment distribution schedule showing how cash would be distributed to partners as assets
are realized. Assuming that the first sale of other assets having book value of P150,000 realized P45,000 and all available cash is
distributed, the partners would receive
 Roger, P9,000; Sergio, P0; Tito, P63,000
 Roger, P63,000; Sergio, P0; Tito P9,000
 Roger, P0; Sergio, P18,000; Tito, P54,000
 Roger, P24,000; Sergio, P24,000; Tito, P24,000

21. ABC Partnership is liquidated and the non-cash assets are considered worthless. A and C are general partners while B is a
limited partner. The creditors will look to whose partner’s personal assets for settlement of their claims?
 The personal assets of Partner B
 The personal assets are not available for partnership debts
 The personal assets of Partners A and C
 The personal assets of all partners
22. The Statement of Financial Position for the partnership of Eclavo, Eclara, and Elorda, who share profits and losses in the ratio
4:5:1, is as follows:
Cash P100,000 Accounts Payable P300,000
Inventory 720,000 Eclavo, Capital 320,000
Eclara, Capital 90,000
_____ Elorda, Capital 110,000
P820,000 P820,000

If the inventory is sold for P600,000, how much should Eclavo receive upon liquidation of the partnership?
 P200,000
 P320,000
 P96,000
 P272,000

23. In lump-sum liquidation, a capital deficiency resulting from division of loss from realization must be eliminated before making
any payment to partners. Any resulting capital deficiency of an insolvent partner is eliminated by charging the capital accounts of
the remaining partners.
 Both statements are false
 Only statement 1 is true
 Only statement 2 is true
 Both statements are true

24. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk Partnership. The partner’s capital
balances are P300,000 and P190,000, respectively.

If all partnership assets are realized and all liabilities are settled, the partnership has remaining cash of P120,000, how much
would Beans receive from the liquidation?
 P99,000
 P189,000
 P120,000
 None
25. As of December 31, the books of AME Partnership showed capital balances of: A – P40,000; M – P25,000; E – P5,000. The
partners’ profit and loss ratio was 3:2:1, respectively. The partners decided to dissolve and liquidate. They sold all the non-cash
assets for P37,000 cash. After
settlement of all liabilities amounting to P12,000, they still have P28,000 cash left for distribution.

Assuming that any partner’s capital debit balance is uncollectible, the share of A in the P28,000 cash for distribution would be
 P8,000
 P40,000
 P19,000
 P17,800

26. The statement of financial position of the partnership A, B and C shows: Cash, P22,400; Other Assets, P212,000; Liabilities,
P38,400; A, Capital (50%) P76,000; B, Capital (25%) P64,000; and C, Capital (25%) P56,000.

The partners realized P56,000 from the first installment sale of non-cash assets with total carrying amount of P120,000. How much
did B receive from the partial liquidation?
 P24,000
 P16,000
 P0
 P25,000
27. The order of partnership liquidation process is
 Pay liabilities, sell assets, disburse cash to partners
 Sell assets, pay liabilities, disburse cash to partners
 Disburse cash to partners, pay liabilities, sell assets
 Sell assets, disburse cash to partners, pay liabilities
28. A, B and C decided to liquidate their partnership business. The financial position of the partnership shows: A, Capital (30%)
P210,000; B, Capital (20%) P150,000; C, Capital (50%) P210,000. Upon liquidation, all of the partnership’s assets are sold and
sufficient cash is realized to pay all liabilities except one for P30,000. All partners are solvent except C.
By what amount would the capital of A change?
 P0
 P24,000 increase
 P234,000 decrease
 P180,000 decrease

29. As of December 31, the books of AME Partnership showed capital balances of: A – P40,000; M – P25,000; E – P5,000. The
partners’ profit and loss ratio was 3:2:1, respectively. The partners decided to dissolve and liquidate. They sold all the non-cash
assets for P37,000 cash. After settlement of all liabilities amounting to P12,000, they still have P28,000 cash left for distribution.
The loss on the realization of the non-cash assets was
 P44,000
 P40,000
 P45,000
 P42,000

30. Partner Morgan is personally insolvent, owing P600,000. Personal assets will only bring P200,000 when liquidated. At the
same time, Morgan has a credit balance in the partnership of P120,000. The capital amounts of the other partners total a credit
balance of P250,000. Under the doctrine of marshalling of assets, how much the personal creditors of Morgan can collect?
 P320,000
 P570,000
 P120,000
 P200,000
Chapter 1 - Partnership

MULTIPLE CHOICE QUESTIONS

PROB. 1-1 (AICPA)

Which of the following is not a characteristic of most partnership?

a. Limited liability
b. Limited life
c. Mutual agency
d. Ease of formation

PROB. 1-2 (AICPA)

Which of the following is not a characteristic of the proprietary theory that influences
accounting for partnerships?

a. Partners' salaries are viewed as a distribution of income rather than a

component of net income.
b. A partnership is not viewed as separate entity, distinct, taxable entity.
c. A partnership is characterized by limited liability.
d. Changes in the ownership structure of a partnership result in the dissolution of
the partnership.

PROB. 1-3 (AICPA)

Which of the following statements is correct with respect to a limited partnership?

a. A limited partner may not be an unsecured creditor of the limited partnership.

b. A general partner may not also be limited partner at the same time.
c. A general partner may be a secured creditor of the limited partnership.
d. A limited partnership can be formed with limited liability for all partners.

PROB. 1-4 (AICPA)

An advantage of the partnership as a form of business organization would be

a. Partners do not pay income taxes on their share in partnership income.

b. A partnership is bound by the act of the partners.
c. A partnership is created by mere agreements of the partners.
d. A partnership may be terminated by the death or withdrawal of a partner.

PROB. 1-5 (AICPA)

When property other than cash is invested in a partnership, at what amount should
the noncash property be credited to the contributing partner's capital account?

a. Fair value at the date of contribution.

b. Contributing partner's original cost.
c. Assessed valuation for property tax purposes.
 d. Contributing partner's tax basis.

PROB. 1-6 (Adapted)

A and B formed a partnership, each contributing non-cash assets into the partnership.
Partner A contributed inventory with a current market value in excess of its carrying
amount. Partner B contributed fixed asset with a carrying amount in excess of its
current market value. At what amount should the partnership record each of the
assets contributed?

Inventory Fixed Asset

a. Carrying amount Market value
b. Market value Carrying amount
c. Carrying amount Carrying amount
d. Market value Market value

PROB. 1-7 (Adapted)

Partnership capital and drawings accounts are similar to the corporate

a. Paid in capital, retained earnings, and dividends accounts.

b. Retained earnings account
c. Paid in capital and retained earnings accounts.
d. Preferred and common stock accounts

PROB. 1-8 (Adapted)

On April 30, 2016, Al, Ben, and Ces formed a partnership by combining their separate
business proprietorships. Al contributed cash of P50,000. Ben contributed property
with a P36,000 carrying amount, a P40,000 original cost, and P80,000 fair value. The
partnership accepted responsibility for the P35,000 mortgage attached to the
property. Ces contributed equipment with a P30,000 carrying amount, a P75,000
original cost, and P55,000 fair value. The partnership agreement specifies that
profits and losses are to be shared equally but is silent regarding capital contributions.
Which partner has the largest capital account balance at April 30, 2016?

a. Al
b. Ben
c. Ces
d. All capital balances are equal

PROB. 1-9 (Adapted)

Al, Sharif, and Booba formed a partnership. Al will contribute cash of P50,000 and his
store equipment that originally cost P60,000 with a second-hand value of P25,000.
Sharif will contribute P80,000 in cash. Booba, whose family sells computers, will
contribute P25,000 cash and a brand new computer that cost his family's computer
dealership P50,000 but with a regular selling price of P60,000. 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

PROB. 1-10 (Adapted)

On January l, 2016, Atta and Boy agreed to form a partnership contributing their
respective assets and equities subject to adjustments. On that date, the following

Atta Boy
Cash 28,000 62,000
Accounts receivable 200,000 600,000
Inventories 120,000 200,000
Land 600,000
Building 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

The following adjustments were agreed upon:

Accounts receivable of P20,000 and P40,000 are uncollectible in A's and B's
respective books.
Inventories of
Intangible assets are to be written off in both books.
What will be the capital balances of the partners after adjustments?

Atta Boy
a. 592,000 750,000
b. 600,000 700,000
c. 592,000 756,300
d. 600,000 750,000

PROB. 1-11 (Adapted)

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, P 120,000,
Merchandise inventory, P180,000, and Accounts payable, P62,000. It was agreed
that for purposes of establishing Mary's interest, the following adjustments be made:
l.) 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?

a. 176,000
b. 190,000
c. 95,000
 d. 113,980

PROB 1-12 (AICPA)

Roberts and Smith drafted a partnership agreement that lists the following assets
contributed at the partnership's formation:

Contributed by
Roberts Smith
Cash P 20,000 P 30,000
Inventory 15,000
Building 40,000
Furniture & equipment 15,000

The building is subject to a mortgage of P 10,000, which the partnership has

assumed. The partnership agreement also specifies that profits and losses are to be
distributed evenly. What amounts should be recorded as capital for Roberts and
Smith at the formation of the partnership?

Roberts Smith
a. 35,000 85,000
b. 35,000 75,000
c. 55,000 55,000
d. 60,000 60,000

PROB. 1-13 (AICPA)

May 1, 2016, Cobb and Mott formed a partnership and agreed to share profits and
losses in the ratio of 3:7, respectively. Cobb contributed a parcel of land that cost him
P 10,000. Mott contributed P40,000 cash. The land was sold for P18,000 on May 1,
2016, immediately after formation of the partnership. What amount should be
recorded in Cobb's capital account on formation of the partnership?

a. 18,000
b. 17,400
c. 15,000
d. 10,000

PROB. 1-14 (AICPA)

The Grey and Redd Partnership was formed on January 2, 2016, 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 originally contributed assets costing P30,000 with fair value of
P60,000 on January 2, 2016, and Redd contributed P20,000 cash. Drawings by the
partners during 2016 totaled P3,000 by Grey and P9,000 by Redd. The partnership
net income in 2016 was P25,000.

a. Under the goodwill method, what is Redd's initial capital balance in the
partnership?
 a. 20,000
b. 25,000
c. 40,000
d. 60,000

b.Under the bonus method, what is the amount of bonus?

a. 20,000 bonus to Grey
b. 20,000 bongs to Redd
c. 40,000 bonus to Grey
d. 40,000 bonus to Redd

PROB. 1-15 (AICPA)

Abel and Carr formed a partnership and agreed to divide initial capital equally, even
though Abel contributed P 100,000 and Carr contributed P84,000 in identifiable
assets. Under the bonus approach to adjust the capital accounts, Carr's unidentifiable
asset should be debited for

a. 46,000
b. 16,000
c. 8,000
d. 0

PROB . 1- 16 (Adapted)

On April 30, 20165 Alex, Benjie, and Cesar formed a partnership by combining their
separate business proprietorships. Alex contributed cash of P500,000. Benjie
contributed property with a P360,000 carrying amount, a P400,000 original cost, and
P800,000 fair market value. The partnership accepted responsibility for the P350,000
mortgage attached to the property. Cesar contributed equipment with a P300,000
carrying amount, a P750,000 original cost, and P550,000 fair value. The partnership
agreement specifies that profits and losses are to be shared equally but is silent
regarding capital contributions.

What are the capital balances of the partners at April 30, 2016?
Alex Benjie Cesar
a.500,000 800,000 550,000

b.500,000 450,000 550,000

c.500,000 360,000 300,000

d.500,000 400,000 750,000

PROB. 1 - 17 (Adapted)

On January 2, 2016, Abel, Cain, and Josuah formed a partnership. Abel contributed
cash of P100,000 and a delivery equipment that originally costs him P 120,000, but
with a second hand value of P50,000. Cain contributed P 160,000 in cash. Josuah,
whose family sells office equipment, contributed P50,000 in cash and office
equipment that cost his family's dealership P 100,000 but with a regular selling price
of P120,000. In 2016, the partnership reported net income of P120,000.
On December 31, 2016, what would be the capital balance of the partners?

Abel Cain Josuah

a. 257,500 200,000 192,500
b. 190,000 200,000 210,000
c. 260,000 200,000 190,000
d. 187,500 200,000 212,500

PROB. 1-18 (AICPA)

The Flat and Iron partnership agreement provides for Flat to receive a 20% bonus on
profits before bonus. Remaining profits and losses are divided between Flat and Iron
in the ratio of 2:3, respectively. Which partner has a greater advantage when the
partnership has a profit or when it has a loss?

Profit Loss
a. Flat Iron
b. Flat Flat
c. Iron Flat
d. Iron Iron

PROB. 1-19 (Adapted)

Partners A and B share profits and losses equally after each has been credited in all
circumstances with annual salary allowances of P30,000 and P24,000, respectively.
Based on this agreement, in which of the following circumstances will Partner A
benefit by P6,000 more than PartnerB?

a. Only if the partnership has net income ofP54,000 or more for the year.
b. Only if the partnership does not incur a loss for the year.
c. In all earnings or loss situation.
d. Only if the partnership has earnings of at least P6,000 for the year

PROB. 1-20 (AICPA)

Downs, Frey, and Vick formed the DFV general partnership to act as manufacturer's
representatives. The partners agreed Downs would receive 40% of any partnership
profits and Frey and Vick would each receive 30% of such profits. It was also agreed
that the partnership would not terminate for 5 years, After the fourth year, the partners
agreed to terminate the partnership. At that time, the partners capital accounts were
as follows: Downs, P20,000; Frey, P 15,000; and Vick P10,000. There also were
undistributed losses of P30,000. Vick's share of the undistributed losses will be

a. 0
b. 1,000
c. 9,000
d. 10,000

PROB. 1-21 (AICPA)

The partnership agreement of Reid and Simm provides that interest at 10% per year
is to be credited to each partner on the basis of weighted-average capital balances. A
summary of Simm's capital account for the year-ended December 31, 2016, is as
follows:

Balance, January 1 P140,000

Additional Investment, July 1 40,000
Withdrawal, August 1 15,000
Balance, December 31 165,000
What amount of interest should be credited to Simm's capital account for 2016?

a. 15,250
b. 15,375
c. 16,500
d. 17,250

PROB. 1-22 (AICPA)

Partner Ae first contributed P50,000 of capital into existing partnership on March 1,

2016. On June l, 2016, said partner contributed another P20,000. On September l,
2016, he withdrew P 15,000 from the partnership. Withdrawal in excess of P 10,000
are charged to the partner's capital accounts. What is the annual weighted average
capital balance of Partner Ae?

a. 32,500
b. 51,667
c. 60,000
d. 48,333

PROB. 1-23 (Adapted)

If the partnership agreement does not specify how income is to be allocated, profit
and loss should be allocated

a. Equally.
b. In proportion to the weighted average of capital invested during the period.
c. Equitably so that partners are compensated for the time and effort expended
on behalf of the partnership.
d. In accordance with their capital contribution.

PROB. 1-24 (Adapted)

Which of the following is not a component of the formula used to distribute income?

a. Salary allocation to those partners working.

b. After all other allocation, the remainder divided according to the profit and loss
sharing ratio.
c. Interest on the average capital investments
d. Interest on notes to partners.

PROB. 1-25 (Adapted)

Which of the following is not considered a legitimate expense of a partnership?

 a. Interest paid to partners based on the amount of invested capital.
b. Depreciation on assets contributed to the partnership by partners.
c. Salaries for management hired to run the business.
d. Supplies used in the partners' offices.

PROB. 1-26 (AICPA)

The fact that salaries paid to partners are not a component of partnership income is
indicative of
a. 30 12 18 5 A departure from generally accepted accounting principles.
b. Being characteristic of the entity theory.
c. Being characteristic of the proprietary theory.
d. Why partnerships are characterized by unlimited liability.
e.
PROB. 1-27 (AICPA)

The ABC Partnership reports net income of P60,000. If Partners A, B, and C have
income ratio of 50%, 30%, and 20%, respectively. What is the share of Partner C
from the net income of the partnership, if he was given a capital ratio of 25%?

a. 30,000
b. 12,000
c. 18,000
d. 5,000

PROB. 1-28 (RPCPA)

In the calendar year 2016, the partnership of A and B realized a net profit of
P240,000. The capital accounts of the partners show the following postings:

A, capital B, capital
Debit Credit Debit Credit
Jan 1 P 120,000 P 80,000
May 1 P 20,000 P 10,000
July 1 20,000
Aug 1 10,000
Oct 1 10,000 5,000

If the profits are to be divided based on average capital, the share of A and B,
respectively are:

a. 129,600 110,400
b. 144,000 96,000
c. 136,800 103,200
d. 136,543 103,457

a. 121,500 118,500
b. 124,000 116,000
c. 123,000 117,000
 d. 122,625 117,375 If 20% interest
based on capital at the end of the year is allowed and given and the balance of the
240,000 profit is divided equally, the total share of A and B, respectively are:

PROB. 1-29 (AICPA)

During 2016, Young and Zinc maintained average capital balances in their
partnership of P 160,000 and P 100,000, respectively. The partners receive 10%
interest on average capital balances, and residual profit or loss is divided equally.
Partnership profit before interest was P4,000. By what amount should Zinc's capital
account change for the year?

a. 1,000 decrease
b. 2,000 increase
c. 11,000 decrease
d. 12,000 increase

PROB. 1-30 (AICPA)

Red and White formed a partnership in 2016. The partnership agreement provides for
annual salary allowances ofP55,000 for Red and P45,000 for White. The partners
share profits equally and losses in a 60/40 ratio. The partnership had earnings of
P80,000 for 2016 before any allowance to partners. What amount of these earnings
should be credited to each partner's capital account?

Red White
a. 40,000 40,000
b. 43,000 37,000
c. 44,000 36,000
d. 45,000 35,000

PROB 1-31 (AICPA)

Fox, Greg, and Howe are partners with average capital balances during 2016 of P
120,000, P60,000, and P40,000, respectively. Partners receive 10% interest on their
average capital balances. After deducting salaries of P30,000 to Fox and P20,000 to
Howe, the residual profit and loss is divided equally. In 2016, the partnership
sustained a P33,000 loss before interest and salaries to partners. By what amount
should Fox's capital account change?

a. 7,000 increase
b. 11,000 decrease,
c. 35,000 decrease
d. 42,000 increase
PROB. 1-32 (Adapted)
If a partnership has net income of P44,000 and Partner X is to be allocated bonus of
of income after the bonus. What is the amount of bonus Partner X will receive?
a. 3,000
b. 3,300
c. 4,000
d. 4,400

PROB. 1-33 (AICPA)

The partnership agreement of Donn, Eddy, and Farr provides for annual distribution
of profit and loss in the following sequence:

Donn, the managing partner, receives a bonus of 10% of profit.

Each partner receives 6% interest on average capital investment.
Residual profit or loss is divided equally.

Average capital investments for 2016 were:

Donn P80,000
Eddy 50,000
Farr 30,000

What portion of the P 100,000 partnership profit for 2016 should be allocated to Farr?

a. 28,600
b. 29,800
c. 35,133
d. 41,600

PROB. 1-34 (Adapted)

The Articles of Partnership of Adam and Eve the following provisions were stipulated:

a. Annual salary of P60,000 each.

b. Bonus to Adam of 20% of the net income after partners' salaries, the bonus
being treated as an expense.
c. Balance to be divided equally.

The partnership reported a net income of P360,000 after partners' salaries but before
bonus. How much is the share of Eve in the profit?

a. 60,000
b. 90,000
c. 150,000
d. 210,000

PROB. 1-35 (Adapted)

Partners AA and BB have profit and loss agreement with the following provisions:
salaries of P30,000 and P45,000 for AA and BB, respectively; bonus to AA of 10% of
net income after salaries and bonus; and interest of on average capital balances of
P20,000 and P35,000 for AA and BB, respectively. One-third of any remaining profits
will be allocated to AA and the balance to BB. If the partnership had net income of P
102,500, how much should be allocated to Partner AA?

a. 44,250
b. 47,500
c. 41,000
d. 41,167

PROB. 1-36 (Adapted)

Partners AA and BB have profit and loss agreement with the following provisions:
salaries of P30,000 and P45,000 for AA and BB, respectively; a bonus to AA of 10%
of net income after salaries and bonus; and interest of 10% on average capital
balances of P20,000 and P35,000 for AA and respectively. One-third of any
remaining profits will be allocated to AA and the balance to BB. If the partnership had
net income of P22,000, how much should be allocated to Partner AA, assuming that
the provisions of the profit and .10ss agreement are ranked by order of priority
starting with salaries?

a. 13,200
b. 12,500
c. 12,000
d. 8,800

PROB. 1-37 (Adapted)

Luz, Vi, and Minda are partners when the partnership earned a profit of P30,000.
Their agreement provides the following regarding the allocation of profits and losses:

a. 8% interest on partners' ending capital in excess of P75,000.

b. Salaries of P20,000 for Luz and P30,000 for Vi.
c. Any balance is to be distributed 2:1:1 for Luz, Vi, and Minda, respectively.

Assume ending capital balances of P60,000, P80,000, and P 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 loss 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

PROB. 1-38 (Adapted)

XYZ Partnership provided for the following in their distribution of profits and losses:
First: X to receive 10% of net income up to P 100,000 and 20% of the amount in
excess thereof.
Then: Y and Z are each to receive 5% of the remaining income in excess of PI 50,000
after X's share.
Finally: The balance is to be distributed equally to the three partners.

If the partnership earned a net income of P250,000, what is the total share of Partner
X?

a. 100,000
b. 108,000
c. 110,000
d. 130,000

PROB 1-39 (AICPA)

Hanz, Ivy, Jasper, and Kelly own a publishing company that they operate as a
partnership. Their agreement includes the following:

Hanz will receive a salary of P20,000 and a bonus of 3% of income after all the
bonuses.
Ivy will receive a salary of P10,000 and a bonus of 2% of income after all the
bonuses.
All partners are to receive the following: Hanz- P5,000; Ivy-P4,500; Jasper-
P2,000; and Kelly P4,700, representing 10% interest on their capital
balances.
Any remaining profits are to be divided equally among the partners.

a. How would net loss of P40,000 would be allocated among the partners?
Hanz Ivy Jasper Kelly
a. 3,261.75 (7,169.25) (18,181.25) (17,911.25)
b. 3,450.00 (7,050.00) (19,550.00) (16,850.00)
c. 4,116.75 (6,764.25) (20,026.25) (17,326.25)
d. 45,000.00 4,500.00 (8,000.00) (5,300.00)

b. Assuming a profit of P40,000, how would this amount be distributed to them

given the following order of priority: Interest on invested capital, then bonuses,
then salary, and then according to profit and loss percentage?

Hanz Ivy Jasper Kelly

a. 23,261.75 12,830.75 1,818.75 2,088.75
b. 20,867.00 12,433.00 2,000.00 4,700.00
c. 20,740.00 12,560.00 2,000.00 4,700.00
d. 18,038.00 12,562.00 2,000.00 4,700.00

PROB. 1-40 (Adapted)

On October 31, 2016, Zita and Jones formed a partnership by investing cash of
P300,000 and 200,000 and respectively. The partners agreed to receive an annual
salary allowance of P360,000, and to give Zita a bonus of 20% of the net income after
 laries, the bonus being treated as an expense. If the profits after salaries
and bonus are to be divided equally, and the profits on December 31,2016 after
partners' salaries but before bonus of Zita is P360,000, how much is the share of Zita
in the profit?

a. 100,000
b. 120,000
c. 210,000
d. 270,000

PROB. 1-41 (AICPA)

Maxwell is trying to decide whether to accept a salary of P40,000 or salary of P25,000

plus a bonus of 10% of net income after salaries and bonus as a means of allocating
profit among partners. Salaries traceable to the other partners are estimated to be P
100,000. What amount of income would be necessary so that Maxwell would consider
choices to be equal?

a. 165,000
b. 290,000
c. 265,000
d. 305,000

PROB. 1-42 (AICPA)

A partnership has the following accounting amounts:

Sales P 700,000
Cost of goods sold 400,000
Operating expenses 100,000
Salary allocations to partners 130,000
20,000
Interest paid to banks 80,000
Partners' drawings

What is the partnership net income (loss)?

a. 200,000
b. 180,000
c. 50,000
d. (30,000)

PROB. 1-43 (Adapted)

Alder, Benson, and Carl are capitalist partners and Denver, an industrial partner. The
partnership reported a net loss of P100,000. How much is the share of Denver in the
reported net loss?

a. 0
b. 10,000
c. 25,000
d. 100,000

PROB. 1-44 (Adapted)

If a new partner acquires a partnership interest directly from the partners rather than
from the partnership itself,

a. No entry is required.
b. The partnership assets should be revalued.
c. The existing partners' capital accounts should be reduced and the new
partner's account increased.
d. The partnership has undergone a quasi-reorganization.

PROB. 1-45 (AICPA)

Which of the following results in dissolution of a partnership?

a. The contribution of additional assets to the partnership by an existing partner.

b. The receipt of a draw by an existing partner.
c. The winding up of the partnership and the distribution of remaining assets to
the partners.
d. The withdrawal of a partner from a partnership

PROB. 1-46 (AICPA)

When a new partner is admitt

may be adjusted for

a.
b. His or her share of previously unrecorded intangible assets traceable to the
original partners.
c. His or her share of previously unrecorded intangible assets to the incoming
partner.
d. None of the above.

PROB. 1-47 (AICPA)

Which of the following best characterizes the bonus method of recording a new
partner's investment in a partnership?

a. Net assets of the previous partnership are not revalued.

b. The new partner's initial capital balance is equal to his or her investment.
c. Assuming that recorded assets are properly valued, the book value of the new
partnership is equal to the book value of the previous partnership and the
investment of the new partner.
d. The bonus always results in an increase to the previous partners' capital
balances.

PROB. 1-48 (AICPA)

If goodwill is traceable to the previous partners, it is

a. Allocated among the previous partners according to their interest in capital.

b. Allocated among the previous partners only if there are not other assets to be
revalued.
 c. Allocated among the previous partners according to their original profit and
loss sharing percentages.
d. Not possible for goodwill to also be traceable to the incoming partner.

PROB. 1-49 (Adapted)

The goodwill and the bonus methods are two means of adjusting for differences
between the net book value and the fair market value of partnership when new
partners are admitted. Which of the following statements about these methods is
correct?

a. The bonus method does not revalue assets to market values.

b. The bonus method revalues assets to market values.
c. Both methods result in the same balances in the partner capital accounts.
d. Both methods result in the same total value of partner capital account, but the
individual capital account vary.

PROB. 1-50 (AICPA)

Blau and Rubi are partners who share profits and losses in the ratio of 6:4,
respectively. On May l, 2016, 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 P40,000. The new partnership began with total capital of P
150,000. Immediately after Lind's admission, Blau's capital should be

a. 50,000
b. 54,000
c. 56,667
d. 60,000

PROB. 1-51 (AICPA)

Partnership A has an existing capital of P70,000. Two partner currently own the
partnership and split profits 50/50. A new partner is to be admitted and will contribute
net assets with a fair value of P90,000. For no goodwill or bonus (depending on
whichever method is used) to be recognized, what is the interest in the partnership
granted the new partner?

a. 33.33%
b. 50.00%
c. 56.25%
d. 75.00%

PROB. 1- 52 (AICPA)

Dunn and Grey are partners with capital account balances of P60,000 and P90,000,
respectively. They agree to admit Zorn as a partner with one-third interest in capital
and profits, for an investment of P 100,000, after revaluing the assets of Dunn and
Grey. Goodwill to the original partner should be

a. 0
b. 33,333
c. 50,000
d. 66,667

PROB. 1-53 (RPCPA)

Mitz, Marc, and Mart are partners sharing profits in the ratio of 5:3:2, respectively. As
of December 31, 2016, their capital balances were P95,000 for Mitz, P80,000 for
Marc, and P60,000 for Mart. On January l, 2017, the partners admitted Vince as a
new partner and according to their agreement, Vince will contribute P80,000 in cash
to the partnership and also pay PIO,000 for 15% of Marc's share. Vince will be given
a 20% share in profits, while the original partner share will be proportionately the
same as before. After the admission of Vince, the total capital will be P330,000 and
Vince's capital will be P70,000.

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

PROB. 1 - 54 (AICPA)

Ranken purchases 50% of Lark's capital interest in the K and L partnership for
P22,000. If the capital balances of Kim and Lark are P40,000 and P30,000,
respectively, Ranken's capital balance following the purchase is
a. 22,000
b. 35,000
c. 20,000
d. 15,000

PROB. 1- 55 (Adapted)

The following information pertains to ABC Partnership of Amor, Bing, and Cora:
Amor, capital (20%) P 200,000
Bing, capital (30%) 200,000
Cora, capital (50%) 300,000
On this date, the partners agreed to admit Dolly into the partnership. Assuming Dolly
purchased fifty percent of the partners capital and pays P500,000 to the old partners,
how would this amount be distributed to them?
 a. 100,000 150,000 250,000
b. 130,000 145,000 225,000
c. 166,667 166,667 166,666
d. 150,000 150,000 200,000

PROB. 1-56 (AICPA)

The following balance sheet is presented for the partnership of A, B, and C, who
share profits and losses in the respectively ratio of 5:3:2.
Assets Liabilities and Capital
Cash 120,000 Liabilities 280,000
Other assets A, capital 560,000
B, capital 320,000
C, capital 40,000
Total 1,200,000 Total 1,200,000

Assume that the assets and liabilities are fairly valued on the balance sheet, and the
partnership decided to admit D as a new partner with a one-fifth interest and no
goodwill or bonus is to be recorded. How much should D contribute in cash or other
assets?

a. 147,200
b. 184,000
c. 230,000
d. 240,000

PROB. 1-57 (RPCPA)

A, B, and C are partners, who share profits and losses in the ratio of 5:3:2,
respectively. They agree to sell D 25% of their respective capital and profits and
losses ratio for a total payment directly to the partners in the amount of
P140,000.They agree that goodwill of P60,000 is to be recorded prior to the
admission of D The condensed balance sheet of the ABC Partnership is as follows:

Cash P 60,000 Liabilities P 100,000

Noncash assets 540,000 A, capital 250,000
B, capital 150,000
C, capital 100,000
Total P600,000 Total P600,000

The capitals of A, B, and C, respectively after payment and admission of D are:

a. 187,500 112,500 75,000

b. 210,000 126,000 84,000
c. 280,000 168,000 112,000
d. 250,000 150,000 100,000
 PROB. 1 - 58 (Adapted)

Fernando and Jose are partners with capital balances of P30,000 and
P70,000, respectively. Fernando has a 30% interest in profits and losses. All
assets of the partnership are at fair market value except equipment with book
value of P300,000 and fair market value of P320,000. At this time, the
partnership has decided to admit Rosa and Linda as new partners. Rosa
contributes cash of P55,000 for a 20% interest in capital and a 30% interest
in profits and losses. Linda contributes cash of P 10,000 and an equipment
with a fair market value of P50,000 for a 25% interest in capital and a 35%
interest in profits and losses. Linda is also bringing special expertise and
clients contact into the new partnership.

a. Using the bonus method, what is the amount of bonus?

a. 24,750
b. 18,250
c. 14,000
d. 7,500

b. Using the goodwill method, what is the amount of goodwill traceable to the
original partners?
a. 60,000
b. 40,000
c. 31,250
d. 28,750

PROB. 1-59 (Adapted)

The capital balances in DEA Partnership are: D, capital P60,000; E, capital P50,000;
and A, capital P40,000 and income ratios are: 5:3:2, respectively. The DEAR
Partnership is formed by admitting R to the firm with cash investment of P60,000 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

PROB. 1-60 (AICPA)

Assets, net of liabilities P320,000

Eddy, capital (50%) P160,000
On Fox, capital (30%) 96,000 June 30,
2016, Grimm, capital (20%) 64,000 the
P320,000 condensed
balance sheet for
the
partnership of Eddy, Fox, and Grimm together with their respective profit and loss
sharing percentage, was as follows:

a. Eddy decided to retire from the partnership and by mutual ageement is to be

paid P180,000 out of partnership funds for his interest. Total goodwill implicit in
the agreement is to be recorded. After Eddy's retirement, what are the capital
balances of the other partners?

Fox Grimm
a. 84,000 56,000
b. 102,000 68,000
c. 108,000 72,000
d. 120,000 80,000

b. Assume instead that Eddy remains in the partnership and that Hamm is
admitted as a new partner with a 25% interest in the capital of the new
partnership for a cash payment of P 140,000. Total goodwill implicit in the
transaction is to be recorded. Immediately after admission of Hamm, Eddy's
capital account balance should be

a. 280,000
b. 210,000
c. 160,000
d. 140,000

PROB. 1-61 (Adapted)

In May 2016, Imelda, a partner of an accounting firm, decided to withdraw when the
partners' capital balances were: Mikee, P600,000; Raul, P600,000; and Imelda,
P400,000. It was agreed that Imelda is to take the partnership's fully depreciated
computer with a second hand value of P24,000 that cost the partnership P36,000. If
profits and losses are shared equally, what would be the capital balances of the
remaining partners after the retirement of Imelda?

Mikee Raul
a. 600,000 600,000
b. 592,000 592,000
c. 608,000 608,000
d. 612,000 612,000

PROB. 1-62 (AICPA)

The following condensed balance sheet is presented for the partnership of Alfa and
Beda, who share profits and losses in the ratio of 60:40, respectively:

Cash 45,000
Other assets 625,000
Beda, loan 30,000
700,000
a. The assets and liabilities are fairly
valued on the Accounts payable 120,000 balance sheet. Alfa
and Beda Alfa, capital 348,000 decide to admit Capp
as a new Beda, capital 232,000 partner with a 20%
interest. No 700,000 goodwill or bonus is to
be recorded. What amount should Capp contribute in cash or other assets?
a. 110,000
b. 116,000
c. 140,000
d. 145,000

b. Instead of admitting a new partner, Alfa and Beda decide to liquidate the
partnership. If the other assets are sold for P500,000, what amount of the
available cash should be distributed to Alfa?

a. 255,000
b. 273,000
c. 327,000
d. 348,000

PROB. 1-63 (Adapted)

Penny, Naty, and Mary are partners and share profits and losses equally. Each has a
capital balancer of P1,800,000. Naty retires from the partnership and receives
P1,500,000 Taking the partnership assets to be fairly stated, the entry to record
Naty's retirement is

a. Naty, capital 1,800,000 (dr)

Goodwill 300,000 (cr)
 Cash 1,500,000 (cr)

b. Naty, capital 1,800,000 (dr)

Partnership assets 300,000 (cr)
Cash 1,500,000 (cr)

c. Naty, capital 1,500,000 (dr)

Cash 1,500,000 (cr)

d. Naty, capital 1,800,000 (dr)

Mary, capital 150,000 (cr)
Penny, capital 150,000 (cr)
Cash 1,500,000 (cr)

PROB. 1-64 (AICPA)

On June 30, 2016, the balance sheet for the partnership of Coll, Maduro, and Prieto,
together with their respective profit and loss ratios, were as follows:

Assets, at cost 180,000

Coll, loan 9,000

Coll, capital (20%) 42,000
Maduro, capital (20%) 39,000
Prieto, capital (60%) 90,000
Total 180,000
Coll decided to retire from the partnership. By mutual agreement, the assets are to be
adjusted to their fair value ofP216,000 at June 30, 2016. It was agreed that the
partnership would pay Coll P61,200 cash for Coll's partnership interest, including
Coll's loan which is to be repaid in full. No goodwill is to be recorded.
After Coll's retirement, what is the balance of Maduro's capital account?

a. 36,450
b. 39,000
c. 45,450
d. 46,200

PROB. 1- 65 (Adapted)

On October 31, 2016, Morris retired from the partnership of Morris, Philip, and Marl.
Morris received P55,000 representing final settlement of his interest in the amount
ofP50,000. Under the bonus method,

a. P5,000 was recorded as goodwill.

b. P5,000 was recorded as expense.
c. Charged P5,000 against the capital balances of Philip and Marl.
d. P55,000 was recorded as bonus.

PROB. 1 - 66 (Adapted)
Peter, Queen, and Roy are partners with capital balances of P300,000, P300,000,
and P200,000, respectively; and sharing profits and losses equally. Roy is to retire
and it is agreed that he is to take certain office equipment with second hand value of
P50,000 and a note for his interest. The office equipment carried in the books at
P65,000 but brand new would cost Roy's acquisition of the office equipment would
result in

a. Reduction in capital of P5,000 each for Peter, Queen, and Roy.

b. Reduction in capital of P7,5000 each for Peter, Queen, and Roy.
c. Reduction in capital of P15,000 for Roy.
d. Reduction in capital of P55,000 for Roy.

PROB. 1-67 (RPCPA)

N, X, and Y are sharing profits and losses in the ratio of 4:3:3 respectively.
The condensed balance sheet of NXY Partnership as of December 31, 2016
is:

Cash P 50,000 Liabilities P 40,000

Other assets 130,000 N, capital 60,000
X, capital 40,000
Y, capital 40,000
Total P 180,000 Total P 180,000

a. All the partners agree to admit Z as a 1/5 partner in the partnership without
any goodwill or bonus. Z shall contribute assets amounting to

a. 28,000
b. 10,000
c. 35,000
d. 60,000
b. The NXY Partnership is dissolved and liquidated by installments. The first
realization of P40,000 cash is on the sale of other assets with book value of
P80,000. After payment of the liabilities, the cash available is distributed to
N, X, and Y, respectively as follows:

a. 36,000 27,000 27,000

b. 44,000 28,000 28,000
c. 16,000 12,000 12,000
d. 24,000 13,000 13,000

PROB. 1-68 (AICPA)

 Gerber, Williams, and George are partners with present capital balances of
P50,000, P60,000, and P20,000, respectively. The partners share profit and
losses according to the following percentages: 60% for Gerber, 20% for
Williams, and 20% for George. Larsen is to joint the partnership upon
contributing P60,000 to the partnership in exchange for a 25% interest in capital
and a 20% interest in profits and losses. The existing assets of the original
partnership are undervalued by P22,000. The original partners will share the
balance of profits and losses in proportion to their original percentages. What
would be the capital balances of the old partners in the new partnership using
the goodwill method?

Gerber Williams George

a. 63,200 64,400 24,400
b. 93,200 74,400 34,400
c. 76,800 65,600 25,600
d. 80,000 70,000 30,000

PROB. 1-69 (AICPA)

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.

PROB. 1-70 (Adapted)

In accounting for the lump-sum liquidation of a partnership, cash payments to partners

after all non-partner creditors' claims have been satisfied, but before the final cash
distribution, should be according to

a. The partners' relative profit and loss sharing ratio.

b. The final balances in partner capital accounts.
c. The partners' relative share of the gain or loss on liquidation.
d. Safe payment computations.

PROB. 1-71 (Adapted)

In a partnership liquidation, the final cash payment to the partners should be made in
accordance with the

a. Partner's profit and loss sharing ratio.

b. Balances of partners' capital accounts.
c. Ratio of the capital contributions by partners.
d. Safe payment computations.
PROB. 1-72 (AICPA)

The doctrine of marshaling of assets

a. Is applicable only if the partnership is insolvent.

b. Allows partners to first contribute personal assets to unsatisfied partnership
creditors.
c. Is applicable if either the partnership is insolvent or individual partners are
insolvent.
d. Amount owed to personal creditors and to the partnership for debit capital
balances are shared proportionately from the personal assets of the partners.

PROB. 1-73 (AICPA)

Cohen, Butler, and Davis are partners in a partnership and share profits and losses
50%, 30%, and 20%, respectively. The partners have agreed to liquidate the
partnership and anticipate that liquidation expenses will total P14,000. Prior to the
liquidation, the partnership balance sheet reflects the following book

Cash 21,000
Non-cash assets 248,000
Notes payable to Davis 32,000
Other liabilities 154,000
Cohen, capital 60,000
Butler, capital (deficit) (10,000)
Davis, capital 33,000

Assuming that the actual liquidation expenses are P 14,000 and that non-cash assets
are sold for P218,000, how would the assets be distributed to partners if Butler has
net personal assets ofP8,500?

Cohen Butler Davis

a. 15,500 - -
b. 21,429 - 49,571
c. 30,650 - 53,260
d. 27,500 - 52,000

PROB. 1-74 (AICPA)

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 P400,000
Liabilities P150,000
Axel, capital 40,000
Barr, capital 180,000
Cain, capital 30,000
Total P400,000

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

a. 0
b. 40,000
c. 60,000
d. 70,000

PROB. 1-75 (Adapted)

Because of very unprofitable operations, partners Nal, Lou, and Gee decided to
dissolve the partnership when their capital balances and profit and loss ratio were:

Nal, capital (30%) P175,000

Lou, capital (20%) 125,000
Gee, capital (50%) 175,000
Total P475,000

Upon liquidation, all of the partnership's assets are sold and sufficient cash is realized
to pay all liabilities except one for P2S,000. Gee is personally insolvent but the others
are capable of meeting any indebtedness of the firms By what amount would the
capital of Nal change?

a. 7,500 decrease
b. 150,000 decrease
c. 195,000 decrease
d. No change

PROB. 1-76 (RPCPA)

Peter and John, who share profits and losses equally, decided to liquidate their
partnership when their net assets amounted to P260,000, and capital balances of PI
70,000 and P90,000, respectively. If the noncash assets were sold for amount equal
to its book value, what amount of cash should Peter and John received?

Peter John
a. 130,000 130,000
b. 170,000 90,000
c. 180,000 80,000
d. 195,000 65,000

PROB. 1-77 (Adapted)

Sammy and Michael are partners of SM Partnership sharing profits and losses
equally. They decided to terminate the partnership when their capital balances are:
Sammy, P750,000; Michael, P500,000. At this time, the partlership owes Michael
P200,000, as evidenced by a promissory note. Upon liquidation, cash of P300,000
becomes available for distribution to the partners. In the final cash distribution, what
would be the respective share of Sammy and Michael?
 Sammy Michael
a. 150,000 150,000
b. 175,000 125,000
c. 200,000 100,000
d. 275,000 25,000

PROB. 1-78 (AICPA)

The following condensed balance sheet is presented for the partnership of Smith and
Jones, who share profits and losses in the ratio of 60:40, respectively:
Other assets P 450,000

Smith, loan 20,000

P470,000

Accounts payable 120,000

Smith, capital 195,000
Jones, capital 155,000
P470,000

The partners decided to liquidate the partnership, If the other assets are sold for
P385,000, what amount of the available cash should be distributed to Smith?
a. 136,000
b. 156,000
c. 159,000
d. 195,000

PROB. 1-79 (RPCPA)

The condensed balance sheet of Alex, Jay, and John as of March 31, 2016 follows:

Cash P 28,000 Liabilities P 48,000

Other assets 265,000 Alex, capital 95,000
Jay, capital 80,000
Total P293,000 Total P293,000

The income and loss ratio is 50:25:25, respectively. The partners voted to dissolve
their partnership and liquidate by selling other assets in installments. P70,000 was
realized on the first cash sale of other assets with a book value of P150,000. After
settlement with creditors, all cash available was distributed to the partners. How much
cash was received by John?
a. 10,500
b. 20,000
c. 21,250
d. 32,500
PROB. 1 - 80 (Adapted)

On December 31, 2016, the partners of MNP Partnership decided to liquidate their
business. Immediately before liquidation, the following condensed balance sheet was
prepared:

Cash P 50,000 Liabilities 370,000

Noncash assets 900,000 Nieva, loan 80,000
Perez, loan 25.000
Munoz, capital (50%) 312,500
Nieva, capital (30%) 107,500
Perez, capital (20%) 50,000
Total P950,000 Total P950,000

The noncash assets were sold for P400,000. Assuming Perez is the only solvent
partners, what amount of additional cash will be invested by Perez? (rounded to the
nearest peso)

a. 37,143
b. 25,000
c. 5,000
d. 0

PROB. 1-81 (Adapted)

After incurring losses resulting from very unprofitable operations, the Goh Kong Wei
Partnership decided to liquidate when the partners' capital balances were:

Goh, capital (40%) P80,000

Kong, capital (40%) 130,000
Wei, capital (20%) 96,000

The non-cash assets were sold in installment. Available cash were distributed to
partners in every sale of non-cash assets. After the second sale of non-cash assets,
the partners received the same amount of cash in the distribution. And from the third
sale of non-cash assets, cash available for distribution amounts to P28,000, and
unsold non-cash assets has a book value of P 12,500. Using cash priority program,
what amount did Wei received in the third installment of cash?

a. 11,600
b. 8,000
c. 5,600
d. 0

PROB. 1-82 (AICPA)

Partners Able, Baker, and Chapman, who share profit and loss equally, have the
following personal assets, personal liabilities, and partnership capital balances:
 Able Baker Chapman
Personal assets P 30,000 P 80,000 P 60,000
Personal liabilities 25,000 50,000 72,000
Capital balances 50,000 (32,000) 70,000

After applying the doctrine of marshalling of assets, the capital balances of Able,
Baker, and Chapman, respectively, would be

a. 50,000 (2,000) 58,000

b. 48,000 0 58,000
c. 49,000 0 57,000
d. 34,000 0 54,000

PROB. 1-83 (Adapted)

Partner Morgan is personally insolvent, owing P600,000. Personal assets will only
bring P200,000 when liquidated. At the same time, Morgan has a credit capital
balance in the partnership of P 120,000. The capital amounts of the other partners
total a credit balance of P250,000. Under the doctrine of marshalling of assets, how
much the personal creditors of Morgan can collect?

a. 120,000
b. 200,000
c. 320,000
d. 570,000

PROB. 1-84 (RPCPA)

As of December 31, the books of AME Partnership showed capital balances of A -

P40,000; M - P25,000; and E - P5,000. The partners' profit and loss ratio was 3:2:1,
respectively. The partners decided to dissolve and liquidate. They sold all the non-
cash assets for P37,000 cash. After settlement of all liabilities amounting to P 12,000,
they still have P28,000 cash left for distribution.

a. The loss on the realization of the non-cash assets was

a. 40,000
b. 42,000
c. 44,000
d. 45,000

b. Assuming that any partner's capital debit balance is uncollectible, the share of
A in the P28,000 cash for distribution would be
a. 19,000
b. 18,000
c. 17,800
d. 40,000

PROB. 1- 85 (RPCPA)

The balance sheet of the partnership of Salve, Galo, and Norma, who share in the
profits and losses in the ratio of 5:3:2, respectively is as follows:
 Assets Liabilities and Capital
Cash 30,000 Liabilities 50,000
Other assets 320,000 Salve, capital 80,000
Galo, capital 115,000
Norma, capital 105,000
Total 350,000 Total 350,000

The partnership is liquidated by installment. The first sale of non-cash assets with a
book value of P 150,000 realizes P 100,000. How should the remaining cash be
distributed?

Salve Galo Norma

a. 50,000 30,000 20,000
b. 40,000 24,000 16,000
c. 0 31,000 49,000
d. 0 48,000 32,000

PROB. 1-86 (RPCPA)

The following balance sheet is presented for the partnership of A, B, and C, who
share profits and losses in the respectively ratio of 5:3:2.

Assets Liabilities and Capital

Cash 120,000 Liabilities 280,000
Other assets A, capital 560,000
B, capital 320,000
C, capital 40,000
Total 1,200,000 Total 1,200,000

Assume that the three partners decided to liquidate the partnership. If the other
assets are sold for P800,000, how should the available cash be distributed to each
partner?

A B C
a. 280,000 320,000 40,000
b. 324,000 236,000 16,000
C. 410,000 230,000 0
d. 412,000 228,000 0

PROB. 1 - 87 (Adapted)
In the liquidation of a partnership it is necessary to (1.) distribute cash to the partners;
(2.) sell non-cash assets; (3.) allocate any gain or loss on realization to the partners;
and (4.) pay liabilities. These steps should be performed in the following order:

a. (2),(3),(4),(1)
b. (2),(3),(1),(4)
c. (3),(2),(1),(4)
d. (3),(2),(4),(1)

PROB. 1-88 (AICPA)

Partners Almond, Barney, and Colors have capital balances of P20,000, P50,000,
and P90,000, 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

PROB. 1 - 89 (AICPA)

The ABC Partnership has assets with book value of P240,000 and a market value of
PI 95,000, outside liabilities of P70,000, loans payable to Partner Able of P20,000,
and capital balances for Partners Able, Baker, and Chapman of P70,000, P30,000,
and P50,000, respectively. The partners share profits and losses equally.

a. How would the first P 100,000 of available assets be distributed?

a. P70,000 to outside liabilities, P20,000 to Able, and the balance equally

among partners.
b. P70,000 to outside liabilities, and P30,000 to Able.
c. P70,000 to outside liabilities, P25,000 to Able, and P5,000 to Chapman.
d. P40,000 to Able, P20,000 to Chapman, and the balance equally among
partners.

b. If all outside creditors and loans to partners had been paid. How would the
balance of the assets be distributed assuming Chapman had already received
assets with a value of P30,000?

a. Each of the partners would received P25,000.

b. Each of the partners would received P40,000.
c. Able: P70,000, Baker: P30,000, Chapman: P20,000
d. Able: P55,000, Baker: P15,000, Chapman: P5,000.

PROB. 1-90 (RPCPA)

Roy Debit Credit and Gil are
Cash P 45,000 partners
Accounts Receivable (net) 60,000 sharing
Inventory 90,000 profits and
Fixed Assets (net) 174,000 losses in the
ratio Liabilities P 60,000 of 1:2,
Roy, Capital 94,800 respectively.
On Gil, Capital 214,200 July l, 2016,
they P 369,000 P369,000 decided to
form the R&G
Corporation by transferring the assets and liabilities of
the partnership to the corporation in exchange for the latter's stock. The following is
the post-closing trial balance of the partnership.

It was agreed that adjustments be made to the following assets to be transferred to

the corporation:

Accounts receivable P40,000

Inventory 68,000
Fixed assets 180,600

The R&G Corporation was authorized to issue P 100 par preferred stock and PIO par
common stock. Roy and Gil agreed to receive for their equity in the partnership 720
shares of the common stock each, plus even multiples of 10 shares of preferred stock
for their remaining interests.

a. The total number of shares of preferred and common stocks issued by

the corporation in exchange for the assets and liabilities of the
partnership are:

Preferred Common
a. 2,540 shares 1,500 shares
b. 2,592 shares 1,440 shares
c .2,642 shares 1,440 shares
d. 2.642 shares 1,550 shares
 b. The distribution of the stocks to Roy and Gil would be:

Roy Gil
Preferred Common Preferred Common
785 shares 720 shares 1,384 shares 720 shares
773 shares 750 shares 1,843 shares 750 shares
758 shares 720 shares 1,834 shares 720 shares
738 shares 720 shares 1,758 shares 720 shares

PROB. 1 - 91 (AICPA)

Current Assets P 250,000 The condensed

balance sheet of
Equipment (net) 30,000 Adams & Gray, a
Total assets P 280,000 partnership, at
December 31,
2016, follows:
Liabilities P20,000
Adams, capital 160,000
Gray, capital 100,000
Total liabilities and capital P 280,000

On December 3 1, 2016, the fair values of the assets and liabilities were appraised at
P240,000 and P20,000, respectively, by an independent appraiser. On January 2,
2017, the partnership was incorporated and 1,000 shares of P5 par value common
stock were issued. Immediately after the incorporation, what amount should the new
corporation report as additional paid in capital?

a. 275,000
b. 260,000
c. 215,000
d. 0

SOLUTIONS AND EXPLANATIONS

PROB. 1-1 Suggested answer (a) Limited liability

In a partnership, each partner is personally and individually liable for all partnership
liabilities. In other words, the liability of the partners in a partnership is unlimited.

PROB. 1-2 Suggested answer (c) A partnership is characterized by limited liability

Partnerships have been affected by the proprietary theory, which looks at the entity
through the eyes of the owners. Characteristics of a partnership that emphasizes that
the entity is viewed as the individual owners include the following:

a. Salaries to partners are viewed as distributions of income rather than a

component of income;
b. Unlimited liability of general partners extends beyond the entity to the
individual partners;
c. Income of the partnership is not taxed at the partnership level but rather than,
is included as part of the partners ' individual taxable income;
d. An original partnership is dissolved upon admission or withdrawal of a partner.

PROB. 1-3 Suggested answer (c) A general partner may be a secured creditor of the
limited partnership

A general partner has a voice in management and has unlimited personal liability.
Anyone, including a secured creditor of the limited partnership, may be a general
partner if he/she takes on these responsibilities.

PROB. 1-4 Suggested answer (c) A partnership is created by mere agreements of the
partners

A partnership is easily formed and is relatively free from governmental regulations

and restrictions. Decisions can be made quickly on substantive matters affecting the
firm, whereas in a corporation, formal meetings with the board of directors are often
needed.

PROB 1-5 Suggested answer (a) Fair value at the date of contribution

Where a new legal entity exists, noncash assets are permitted to be recorded at its
fair market value; thus, the capital account should be credited for the current fair
value of the assets at the date of the contribution.

PROB 1-6 Suggested answer (d) Market value, Market value

Non-cash assets contributed into the partnership should be recorded at its current fair
value.

PROB. 1-7 Suggested answer (a)

Partnership capital accounts are similar to corporate paid in capital and retained
earnings; while partnership drawing accounts are similar to corporate dividends
accounts.

PROB. 1-8 Suggested answer: (c) Ces

Al capital 50,000
 Ben capital (80,000 - 35,000) 45,000
Ces capital 55,000

At the date of the formation of the partnership, all assets contributed by the partners
are recorded in the books of the partnership at their fair values, and all liabilities
assumed by the partnership are recorded at their present values.

PROB. 1-9 Suggested answer (a) 75,000, 80,000, 85,000

Al Sharif Booba
Cash contribution 50,000 80,000 25,000
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 values. In this case, the fair market value is the cash selling price of
the computer and the second hand value of the store
equipment.

PROB. 1-10 Suggested answer: (a) 592,000 750,000

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) ( 3,000)
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).

PROB. 1-11 Suggested answer: (b) 190,000

Mary capital before adjustments 264,000

Allowance for doubtful accounts (3% x 120,000) (
3,600)
Merchandise inventory 25,000
Prepaid expenses 3,600
Accrued liabilities ( 4,000)
Mary capital after adjustments 285,000

Total partnership capital (285,000/3/5) 475,000

 Multiply by Jane interest 2/5____
Cash to be invested by Jane
190,000

Again, 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)

In this case where Jane will have an interest of 2/5, Mary should have an interest of
3/5. Since no goodwill or bonus was mentioned in the problem, the adjusted capital of
Mary represents her 3/5 interest, which will be used as basis to determine the total
partnership capital.

PROB. 1-12 Suggested answer (b) 35,000 75,000

Roberts Smith
Cash P 20,000 P 30,000
Inventory 15,000
Building (net of P10,000 mortgage ) 30,000
Furniture & equipment 15,000
P 35,000 P 75,000

Generally, individual capital accounts should be credited for the fair market value, at
the date of contribution, of the assets contributed by that partner. The partner's capital
credit is based upon the net assets contributed by the particular partner, thus the
liabilities assumed by the partnership reduced the fair market value of the building
invested.
PROB. 1-13 Suggested answer: (a)18,000

Contributed Agreed Increase

Capital Capital Decrease)
Grey 60,000 60,000
Redd 20,000 60,000 40,000
Total 80,000 120,000 40,000
80,000 120,000 40,000
The importance of proper valuation of assets invested by partners cannot be
overemphasized. In order to achieve equity, assets invested by partners should be
reported at their fair market value. Fair value is determined by making reference to
the following: cash transactions of the same or similar assets, quoted market prices,
and independent appraisals.
PROB. 1 -14
a. Suggested answer (d) 60,000
The partnership agreement provides for equal initial capital. Thus under the goodwill
method, the capital credit for Redd should be the same as the contribution of Grey,
thereby increasing the total agreed capital to P120,000, which is P40,000 more than
the total contributed capital (goodwill).
b. Suggested answer (b) 20, 000 bonus to Redd

Contributed Agreed Increase

Capital Capital (Decrease)
Grey 60,000 40,000 (20,000)
Redd 20,000 40,000 20,000
Total 80,000 80,000

The partnership agreement provides for equal initial capital. Thus under the bonus
method, the capital credit for Redd should be the same as the contribution of Grey,
resulting to P20, 000 bonus from Grey to Redd.

PROB. 1-15 Suggested answer: (d) 0

Under the bonus method, assets are not revalued, instead, adjustments are made to
partnership capital accounts; consequently, unidentifiable assets are not recognized.
PROB. 1-16 Suggested answer: (b) 500,000 450,000 550,000

Alex Benjie Cesar

Contributions @ fair value P500,000 P800,OOO P550,000
Less liabilities assumed - 350,000 -_____
Capital balance, 4/30/06 P500,000 P450,000 P550,000

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,

as a credit to par

PROB 1-17 Suggested answer (d) 187,500 200,000 212,500

Abel Cain Josuah

Cash contributed P 100,000 P 160,000 P 50,000
Noncash contributed 50,000 120,000
Capital balances beginning 150,000 160,000 170,000
Capital beginning Distribution of
net income:

(150/480 x 120,000) 37,500

(160/480 x 120,000) 40,000
(170/480 x 120,000) 42,500
Capital balances, 12/31/16 P187,500 P200,000 P212,500

Noncash assets contributed by partners to form a partnership should be recorded at

its fair value. Profits and losses are divided in accordance with the agreement of the
partners, normally, the profit and loss ratio. In the absence of any agreement, profits
and losses are divided in accordance with the partners ' contributed capital.
PROB 1-18 Suggested answer (b) Flat Flat

Profit (Flat) Loss (Flat)

Bonus 20% Bonus 0

Balance (2/5 x 80%) 32% P & L (2/5 x 100%) 40%

Total advantage 52% Total advantage 40%

In case of profit Flat has 52%, an advantage, and in case of loss, its only 40%, also
an advantage
PROB. 1-19 Suggested answer (c) In all earnings or loss situation

When agreement provides for salaries without qualification, salary distribution must
be made even though profit is inadequate to cover salaries or there is a loss. In this
case, Partner A will benefit by P6, 000 in all situations, whether there is a profit or
loss.

PROB. 1-20 Suggested answer (c) 9, 000

Vick's share of undistributed losses (30% x 30,000) 9,000

If the partners agree to distribute profits based on profit sharing ratio but
are silent on loss sharing, partnership losses will be divided based on the agreed
profit sharing proportions.

PROB. 1-21 Suggested answer: (b) 15,375

Date Balance Months Unchanged Total

January 1 P140,000 6 P 840,000
July 1 180,000 1 180,000
August 1 165,000 5 825,000
 Total 12 P 1,845,000
Weighted average capital (1,845,000/ 12months) P153,750
Interest rate 10%
Interest to be credited to Simm P 15,375

When partners wish to distribute profits in terms of relative investments, the use of
average capitals, which provides for the recognition of capital changes during the
period, normally offers the most equitable method. From the data given above,
partner 's investments were expressed in terms of peso month. Under this method
(peso-day, peso-month), withdrawals and investments made during the first half of
the month should be treated as if they were made on the first day of the month, while
withdrawals and investments made during the later half of the month should be
treated as if they were made on the first day of the following month.

PROB. 1-22 Suggested answer (b) 51, 667

Date Balances Months Total

Unchanged
March 1 P 50,000
3 P 150,000
June 1 70,000 3 210,000
September 1 65,000 4 260,000
Total 12 P 620,000

Annual weighted average capital (P620,000/ 12) P 51,667

The partnership agreement should provide how invested capital is to be determined.

Since each partner's equity is a combination of capital and drawing account balances,
partner's drawings may be offset against their respective capital accounts for
purposes of allocating income based on invested capital. However, the agreement
may also provide that only withdrawals more than a certain limit are to be viewed as
offset against capital balances. Thus, only P5,000 excess of P10,000 limit is viewed
as deduction from the capital balance.

PROB. 1-23 Suggested answer (d) In accordance with capital contribution

The ratio in which partnership profits and losses are divided is known as profit and
loss ratio. Profits and losses are divided in accordance with the agreement of the
partners. In the absence of any agreement, profits and losses are divided in
accordance with the partners ' contributed capital.

PROB. 1-24 Suggested answer (d) lnterest on notes to partners

The division of partnership income should be based on an analysis of th correlation

between capital and labor committed to the firm by individual partners and the income
that subsequently is generated. As a result, profits might be divided in one or more of
the following ways: 1.) according ratio; 2.) according to the capital investments of the
partners; and according to the labor (or service) rendered by the partners. Interest on
notes to partners is a legitimate expense of a partnership

PROB. 1-25 Suggested answer: (a) Interest paid to partners based on the amount of
invested capital

Again, the division of partnership income should be based on an analysis of the

correlation between capital and labor committed to the firm by individual partners and
the income that subsequently is generated and therefore includes interest paid to
partners based on the amount of their invested capital.

PROB. 1-26 Suggested answer: (c) Being characteristics of the proprietary theory

Partnerships have been affected by the proprietary theory, which looks at the entity
through the eyes of the owners. Characteristics of a partnership that emphasizes that
the entity is viewed as the individual owners include the following:

a. Salaries to partners are viewed as distributions of income rather than a component

of income;
b. Unlimited liability of general partners extends beyond the entity to the individual
partners;
c. Income of the partnership is not taxed at the partnership level but rather than, is

d. An original partnership is dissolved upon dismissal or withdrawal of a partner.

PROB. 1-28

a. Suggested answer: (d) 136,543 103,457

A, capital:
Date Balances Months Unchanged Total
January 1 P120,000 4 P480,000
May 1 100,000 3 300,000
Aug. 1 110,000 2 220,000
Oct. 1 100,000 3 300,000
Total 12 P1,300,000

Average capital A = P1,300,000/12= P108,333

B, capital:
Date Balances Months Unchanged Total
January 1 P80,000 4 P320,000
May 1 70,000 2 140,000
July 1 90,000 3 270,000
Oct. 1 85,000 3 255,000
Total 12 P985,000

Average capital A = P985,000/12= P82,083

A P240,000 x (108,333/190417) P136,543

B 240,000 x (82,083/190,417) 103,457
Total P240,000

Again, under this method (peso-day, peso-month), withdrawals and investments made
under during the first half of the month should be treated as if they were made on the
first day of the month, while withdrawals and investments made during the latter half of
the month should be treated as if they were made on the first day of the following month.

b. Suggested answer: (a) 121,500 118,500

A B Total
Interest on ending capital
(100,000 x 20%) P20,000
(85,000 x 20%) P17,000 P37,000
Balance (equally) 101,500 101,500 203,000
Total P121,500 P118,500 P240,000

The capital contributions to be considered as the basis for the distribution of profits and
losses should be based on the original capital contribution, on the capitals at the
beginning of each period, on the capitals at the end of each period, or on the average
capitals during the period.
PROB. 1-29 Suggested answer: (a) 1,000 decrease

Young Zinc Total

10% interest on ave. capital:
(10% x 160,000) P16,000
(10% x 100,000) P10,000 P26,000
Balance (equally) (11,000) (11,000) (22,000)
Total P5,000 (P1,000) P4,000

The partnership profit before interest was P4,000, however, it resulted to a loss of
P22,000 after interest. Thus, the capital balance of Zinc decreases by P1,000.

PROB. 1-30 Suggested answer: (b) 43,000 37,000

Red White Total

Salary allowances 55,000 45,000 100,000
Loss after allowances (60:40) (12,000) (8,000) (20,000)
Earnings credited to partners 43,000 37,000 80,000

The earnings before allowances of P80,000 is reduced by the salary allowances in total
amount of P100,000 which resulted to a loss after allowances of P20,000, because
credits to partners capital accounts are based on earnings after allowances (e.g.
interest, salary, and bonus). It should be pointed out that per partnership agreement
profits should be shared equally and losses in a 60/40 ratio, thus the loss of P20,000
was shared at 60/40 ratio.

PROB. 1-31 Suggested answer: (a) 7,000 increase

Fox Greg Howe

Total
10% interest on
average capital 12,000 6,000 4,000 22,000
Salaries 30,000. 20,000 50,000
Bal. (equally) (35,000) (35,000) (35,000) (105,000)
Total inc. (dec) 7,000 (29,000) (11,000) (33,000)
Again, when the partnership agreement provides without specification that interest is
to be allowed on investment, interest must be allowed even though operations have
resulted in earnings that are less than the allowable interest or in a loss.

And when agreement also provides for salaries without qualification, salary distribution
must be made even though profit is inadequate to cover salaries or there is a loss.
Interest and salary allowances allocated to partners increase their capital balances as

capital accounts. The resulting loss in the total amount of P105,000 after the interest
and salary allowances was allocated among partners equally based on their
agreement, that profit and loss is divided equally.

PROB. 1-32 Suggested answer: (c) 4,000

Net income before bonus 44,000

Less net income after bonus 40,000
Bonus (10%) 4,000

Note that the provision for bonus is 10% of income AFTER the bonus, thus the bonus
is the difference between the net income before and after the bonus.

PROB. 1-33 Suggested answer: (a) 28,600

Donn Eddy Farr

Total
10% bonus to Donn 10,000 10,000
6% interest on
average capital 4,800 3,000 1,800 9,600
Balance (equally) 26,800 26,800 26,800
80,400
Total 41,800 29,800 28,600
100,000

In some instances, a managing partner is allowed a bonus that is to be based on the

earnings of the business. The bonus is commonly stated as a percentage of profits, but
the agreement should indicate whether the percentage is to be applied to the profit
determined before deduction of the bonus or after deduction of the bonus. Based on
 assumed to be
applied to the profit before deduction of the bonus.

PROB. 1-34 Suggested answer: (d) 210,000

Adam Eve Total

Salaries 60,000 60,000 120,000
Bonus to Adam:
NY before bonus P360,000
-NY after bonus
(360,000/120%) 300,000. 60,000 60,000
Balance (equally) 300,000 150,000 150,000 300,000
Total 270,000 210,000 480,000

It should be pointed out that it was clearly mentioned in the problem that the P360,000
net income is after salaries but before bonus, therefore, the net income before
salaries and bonus should be P480,000 (120,000+360,000).

PROB. 1-35 Suggested answer: (c) 41,000

AA BB Total
Salaries 30,000 45,000 75,000
Bonus (after bonus)
NY before Bonus 27,500
NY after Bonus
(27,500/110%) 25,000 2,500 2,500
10% interest 2,000 3,500 5,500
Balance (1/3:2/3) 6,500 13,000 19,500
Total 41,000 61,500 102,500

One of the alternatives in profit allocations if the net income is not sufficient is to
completely satisfy all provisions of the profit and loss agreement and use the profit and
loss ratios to absorb any deficiency or additional loss caused by such action.

PROB 1-36 Suggested answer (d) 8,800

 AA BB Total
Salaries (30:45) 8,800 13,200 22,000

Another alternative in profit allocation if the net income is not sufficient is to satisfy each
of the provision to whatever extent it is possible. In other words, the allocation of
salaries would be satisfied to whatever extent possible before the allocation of interest
is begun. If the provision of the profit and loss agreement are ranked by order of priority
starting with salaries, and the total salaries amounted to P75,000, therefore the net
income of P22,000, which is insufficient, will be distributed between AA and BB based
on the degree of salary claims.

PROB. 1-37 Suggested answer: (d) 2,000

Luz Vi Minda Total

Interest
8% x 80,000-75,000 400
8% x 100,000-75,000 2,000 2,400
Salary (20:30) 11,040 16,560
27,600
Total 11,040 16,960 2,000
30,000

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.

PROB. 1-38 Suggested answer (b) 108,000

X Y Z Total
10% of P100,000 to X 10,000
10,000
20% of excess to X
(20% x 150,000) 30,000 30,000
5% of remaining in excess
to Y and Z
(5% x 210,000-150,000) 3,000 3,000 6,000
Balance, equally 68,000 68,000 68,000
204,000
Total 108,000 71,000 71,000
250,000

Note that the distribution of profit is based on the agreement of the partners.

PROB. 1-39

a. Suggested answer: (b) 3,450 (7,050) (19,550) (16,850)

Hanz Ivy Jasper
Kelly Total
Salaries 20,000 10,000
30,000
Interest 5,000 4,500 2,000 4,700
16,200
Balance (equally) (21,550) (21,550) (21,550) (21,550)
(86,200)
Total 3,450 (7,050) (19,550) (16,850)
(40,000)

Based on the information provided in the problem, the profit and loss ratios are used to
absorb any deficiency or any additional loss.

b. Suggested answer: (c) 20,750 12,560 2,000 4,700

Hanz Ivy Jasper

Kelly Total
Interest 5,000 4,500 2,000 4,700
16,200
Bonus (3:2) 1,143 762
1,905
Salaries (20:10) 14,597 7,298
21,895
Total 20,740 12,560 2,000
4,700 40,000

Net income before bonuses 40,000

Net income after bonuses (40,000/105%) 38,095
Bonuses 1,905

If each of the provision of the profit and loss agreement are satisfied to whatever
extent it is possible based on the given order of priority, at such provision (salaries)
the remaining amount (21,895) shall be allocated using the degree of the claims.

PROB. 1-40 Suggested answer: (d) 270,000

Zita Jones Total

Salaries (360,000 x 2/12) 60,000 60,000 120,000
Bonus 60,000 60,000
Balance (equally) 150,000 150,000 300,000
Total 270,000 210,000 480,000

Net income before bonus 360,000

Net income after bonus (360,000/120%) 300,000
Bonus 60,000

Note that based on the given information, the net income after salaries is P360,000
(300,000+60,000), which is equivalent to P480,000 net income before salaries, bonus
and distribution of balance using profit and loss ratio (equally).

PROB. 1-41 Suggested answer: (b) 290,000

Amount of bonus needed to equalize (40,000-25,000) 15,000

Net income after bonus and salaries (15,000/10%) 150,000

Multiply by 110%
Net income before bonus and salaries 165,000
Add salaries (100,000+25,000) 125,000
Net income before bonus and salaries 290,000

Since the question being asked is the amount of income necessary to equalize, the
appropriate approach is to determine the amount of the difference between the two
alternatives, which is P15,000 bonus. At this point, the net income could be determined
by working back, as shown above.

PROB. 1-42 Suggested answer: (b) 180,000

Sales 700,000
Less cost of goods sold 400,000
Gross profit 300,000
Less operating expenses 100,000
Operating profit 200,000
Less interest paid to banks 20,000
Net income 180,000

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
computation of net income.

PROB. 1-43 Suggested answer: (a) 0

In case there is an industrial partner, and there is no profit and loss sharing agreement,
an industrial partner shall not be liable for the losses. As to profit, the share of an
industrial partner shall be that which is just and equitable under the circumstances. In
order for an industrial partner be liable for the losses, there should be an expressed
stipulation to that effect.

PROB. 1-44

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

but does not record the transfer of any asset or consideration.

PROB. 1-45 Suggested answer: (d) Withdrawal of a partner from a partnership.

Dissolution is the change in the relation od the partners caused by any partner ceasing
to be associated in the carrying on as distinguished from the winding up of the business.
Generally, a partnership is dissolved upon the death, withdrawal, admission, or
bankruptcy of an individual partner (owner).

PROB. 1-46 Suggested answer: (b) His or her share of previously unrecorded
intangible assets traceable to the original partner.

Accounting change in the ownership of a partnership is influenced heavily by the legal

concept of dissolution. When there is a change in the ownership structure, the original
partnership is dissolved and most often a new partnership is created. This dissolution
and subsequent creation of a partnership indicate that a new legal entity has been
created and accounting should measure properly the initial contributions of capital
being made to the new partnership.

PROB. 1-47 Suggested answer: (c) Assuming that recorded assets are properly
valued, the book value of the new partnership is equal to the book value of the
previous partnership and the investment of the new partner.

Under the bonus method, total contributed capital of the old and new partnership is
equal to the total agreed capital (total capital of the new partnership).

PROB. 1-48 Suggested answer: (c) Allocated among the previous partners according
to their original profit and loss sharing percentages.

Unrecorded goodwill also may be identifiable. If there are no differences between the

pay more than the proportionate book value of the new entity indicates that goodwill

sold prior to the admission of the partner, the realized profit would have been allocated
to the old partners. Therefore, the goodwill is recorded and allocated to the old partners
according to their profit and loss ratio.
PROB. 1-49 Suggested answer: (a) The bonus method does not revalue assets to
market values.

When an incoming partner's contribution is different from that indicated by the book
values of th3 original partnership, the admission of the partner typically is recorded by
either the bonus method or th3 goodwill method. Both methods permit the assumption
that there is unrecorded goodwill to be recognized. However, the use of either method
does not prevent the recognition of differences between the book value and fair market
value of recorded net assets.

The bonus method strictly follows the principle that net assets should be recorded at
historical cost and simply readjusts capital accounts and makes no changes in existing
assets accounts. While, the goodwill method emphasizes the legal significance of a
change in the ownership structure of a partnership and revalues assets to adjust the
total value of partnership capital.

PROB. 1-50 Suggested answer: (b) 54,000

Contributed Capital Agreed Capital Increase

(Decrease)
Old partners P110,000 P100,000 (P10,000)
New partners 40,000 (1/3) 50,000 10,000
Total P150,000 P150,000 -

P60,000
Less share in bonus to Lind (10,000 x 60%) 6,000
P54,000

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 capitals 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.
PROB. 1-51 Suggested answer: (c) 56.25%

Capital contributed by the new partner 90,000

Divide by total contributions (70,000+90,000) 160,000
New Partner's interest 56.25%

Since no goodwill or bonus to b3 recognized, the capital contribution is equal to the

capital credited to partners.

PROB. 1-52 Suggested answer: (c) 50,000

Contributed Capital Agreed Capital Increase

(Decrease)
Old partners P150,000 P200,000 P50,000
New partner 100,000 (1/3) 100,000 -
Total P250,000 P300,000 P50,000

When a partnership has operated with considerable success, the partners may admit

allowed as a bonus to the old partners, or (b) partnership goodwill shall be established
and credited to the old partners. When the total agreed capital is more than the
contributed capital, there is goodwill. Since the combined capitals of the old partners
was increased to P200,000, the increase in capital of P50,000 should be recognized
as goodwill and distributed to them using their original profit and loss ratio.

PROB. 1-53

a. Suggested answer: (b) 15,000

Contributed Capital Agreed Capital Increase

(Decrease)
Old partners
[235,000-(15%x 80,000)] 223,000 260,000 37,000
New partner
[80,000+(15%x 80,000)] 92,000 70,000
(22,000)
Total 315,000 330,000 15,000
Again, when the total agreed capital is more than the contributed capital, there is
goodwill and this amount of P15,000 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

b. Suggested answer: (c) 79,100

80,000
Interest purchased by Vince (15% x 80,000) (12,000)
Share in goodwill (30% x 15,000) 4,500
Share in bonus (30% x 22,000) 6,600
79,100

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

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

PROB. 1-54 Suggested answer: (d) 15,000

15,000

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

but does not record the transfer of any asset or consideration.

PROB. 1-55 Suggested answer: (b) 130,000 145,000 225,000

 Amor Bing Cora
Interest purchased (1/2) 100,000 100,000 150,000
Excess payment (150,000) P&L 30,000 45,000
75,000
Total 130,000 145,000 225,000

A new partner may be admitted to the partnership by acquiring all or part of the capital
interest of one or more existing partners in exchange for some consideration. The
partnership records the redistribution of capital interest by transferring all or a portion

transfer of any asset. Any difference between the amounts paid by the new partner,
which is not recorded in the books of the partnership, is allocated to the selling partners
based on their profit or loss ratio.

PROB. 1-56 Suggested answer: (c) 230,000

Total capital of the old partnership (560,000+320,000+40,000) 920,000

Divide by profit and loss (old partnership) 4/5
Total capital of the new partnership 1,150,000
Multiply by profit and loss of D 1/5
Required contribution by D 230,000

market

would be expected to be equal to the portion of the equity that the new partner is
acquiring.

PROB. 1-57 Suggested answer: (b) 210,000 126,000 84,000

A B C
Capital balances P250,000 P150,000 P100,000
Share in goodwill 5:3:2 30,000 18,000 12,000
Adjusted capital balances 280,000 168,000 112,000
¼ interest purchased (70,000) (42,000) (28,000)
Capital balances after D P210,000 P126,000 P84,000
Again, when an incoming partner purchases a portion or all of the interest of one or
more of the original partners, this may be regarded as a transfer from the capital
account/s of the seller/s to that of the buyer, and any amount paid for the purchase
should not be recorded in the books of the partnership, therefore, the partnership
assets remained the same. The one-fourth interest purchased by D was based on the
adjusted capitals of the old partners (after goodwill) because of the stipulation in the
problem that goodwill is to be recorded prior to the admission of D.

PROB. 1-58

a. Suggested answer: (b) 18,250

Contributed Capital Agreed Capital Increase

(Decrease)
Old partners P100,000 P118,250 P18,250
New partners 115,000 (45%) 96,750 (18,250)
Total P215,000 P215,000 -

The goodwill and bonus method are two means of adjusting for differences between
the net book value and the fair market value of partnership when new partners are
admitted. The goodwill method revalues assets to market value; while the bonus
method does not revalue assets to market value. Further, under the bonus method, the
total contributed capital is equal to the agreed capital.

b. Suggested answer: (c) 31,250

Contributed Capital Agreed Capital Increase

(Decrease)
Old partners P100,000 P151,250 P51,250
New partners 115,000 (45%) 123,750 8,750
Total P215,000 P275,000 P60,000

Total increase in capital 60,000

Less undervalued equipment (320,000-300,000) 20,000
Balance 40,000
Goodwill to Linda 8,750
Goodwill to original partners 31,250
Again, when there is a difference between the book value and fair market value of the
partnership when new partners are admitted, the goodwill method revalues assets to
market value. Ordinarily, to determine the new capital of the partnership, contributed
capital of the new partner may be divided by his interest in capital. In this case, where
Linda will be provided with goodwill for bringing her expertise and clients contact to the
partnership, the capital of Rosa was used instead, because it serves as concrete basis
with no goodwill involved, in determining the new capital of the partnership. Thus, the
new capital of the partnership is P275,000 (55,000/20%).

PROB. 1-59 Suggested answer: (d) 1,500

Contributed Capital Agreed Capital Increase

(Decrease)
Old partners 150,000 157,500 7,500
New partner 60,000 52,500 25% (7,500)
Total 210,000 210,000 -

Bonus to A (7,500 x 20%) 1,500

Under the bonus method of admitting a new partner into the partnership, the total
contributed capital (including that of the new partner) is equal to the new partnership
capital. Accordingly, any bonus to the old partners shall be allocated using their old
profit and loss ratio.

PROB. 1-60

a. Suggested answer: (c) 108,000 72,000

Goodwill to be paid to Eddy (P180,000-160,000) P20,000

50%
Total goodwill P40,000

Fox Grimm
Capital balance before goodwill P96,000 P64,000
Goodwill: (40,000x30%) 12,000
(40,000x20%) 8,000
Capital balance after goodwill P108,000 P72,000
Since the problem identified that total goodwill implicit in the agreement is to be
recorded, the excess of the amount received by Eddy over his capital balance
represents his share in the total goodwill to be recognized. Accordingly, Fox and Grimm
will share in the total goodwill based on their respective profit and loss percentage.

b. Suggested answer: (b) 210,000

Contributed Capital Agreed Capital Increase

(Decrease)
Old partners P320,000 P420,000 P100,000
New partner 140,000 (25%) 140,000 -
Total P460,000 P560,000 P100,000

P160,000
Share in goodwill (50% x 100,000) 50,000
l after goodwill P210,000

Again, goodwill is the excess of total agreed capital over the contributed capital. In this
case, the amount of P100,000 represents goodwill to old partners, which will be divided
based on their respective profit and loss ratio.

PROB. 1-61 Suggested answer: (c) 608,000 608,000

Mikee Raul

Capital balance before withdrawal 600,000 600,000

Distribution of gain on realization (24,000/3) 8,000 8,000
Capital balances after withdrawal 608,000 608,000

When a partner withdraws, he may receive an amount equal, more than or less than
his interest. The interest of the withdrawing partner is measured by his capital balances
adjusted by the distribution of profit or loss from operations, and changes in valuation
of all assets and liabilities. Thus, their capital balances will be increased by their
respective share in the realization of noncash asset with a fair value different from its
book value at the date of withdrawal.

PROB. 1-62

a. Suggested answer: (d) 145,000

Total capital [(348,000+232,000)/80%] 725,000
x 20%
Cash or other assets to be contributed by Capp 145,000

It should be pointed out that the problem clearly state that no bonus or goodwill is to be
recognized, thus the total capital of the old partners was used as the basis in computing
the total capital of the partnership.

b. Suggested answer: (b) 273,000

Alfa Beda
Capital balances 348,000 232,000
Beda, loan (30,000)
Total interest 348,000 202,000
Loss on realization (625,000-500,000) 6:4 (75,000) (50,000)
Cash to be distributed 273,000 152,000

Beda, loan account was appropriately presented as an asset (receivable of the

partnership from Beda), therefore it will reduce the capital balance od Beda. And loss

is distributed bases on the capital balances of the partners after any adjustments. It
should be pointed out that the total amount of cash to be distributed between partners

PROB. 1-63 Suggested answer: (d)

Note that the capital balance of the retiring partner is P1,800,000 and was paid
P1,500,000, this situation will result to the recognition of bonus to the remaining
partners from the retiring partner. Thus the difference of P300,000 was allocated to the
remaining partner based on their profit and loss agreement (equally) by crediting their
respective capital account.

PROB. 1-64 Suggested answer: (c) 45,450

Coll Maduro Prieto

Capital balances before
Retirement of Coll P42,000 P39,000 P90,000
Coll, loan 9,000
Adjustments of assets 2:2:6
(216,000-180,000) 7,200 7200 21,600
Total interest 58,200 46,200 111,600
Less payment to Coll 61,200
Balance (3,000) 46,200 111,600
Bonus to Coll 2:6 3,000 (750) (2,250)
Capital balances after
Retirement of Coll P0 P45,450 P109,350

Again, when partner withdraws from a partnership, adjustment of assets its fair market
should be made. Total interest of the withdrawing partner must be determined and be
compared with the amount paid. Since the problem stated that the withdrawing partner
is selling his interest to the partnership and no goodwill is to be recorded, the resulting
difference between the total interest and the amount paid represents the bonus
provided by the remaining partners to the withdrawing partner.

PROB. 1-65 Suggested answer: (c)

Under the bonus method, the excess of the amount paid by the partnership to the
retiring partner shall be absorbed by the remaining partners based on their existing
profit and loss ratio.

PROB. 1-66 Suggested answer: (d) Reduction in capital of P55,000 for Roy.

Peter Queen Roy

Second hand value taken 50,000

Loss on realization
(65,000-50,000) (equally) 5,000 5,000 5,000
Total reduction in capital 5,000 5,000 55,000

PROB. 1-67

a. Suggested answer: (c) 35,000

Total partnership capital (140,000/ 4/5) 175,000
Multiply by 1/5
Assets to be contributed by Z 35,000

Again, if there is no bonus or goodwill to be recognized, total partnership capital may

be computed using the capital accounts of the old partners as the base, as shown
above.

b. Suggested answer: (d) 24,000 13,000 13,000

N X Y
Capital balances P60,000 P40,000 P40,000
Loss on realization
(80,000-40,000) 4:3:3 (16,000) (12,000) (12,000)
Possible loss
(130,000-80,000) 4:3:3 (20,000) (15,000) (15,000)
Cash distribution P24,000 P13,000 P13,000

In installment liquidation, to insure an equitable distribution of cash to the partners,

considerable care is required. Usually, the statement of liquidation is supported by the
Schedule of Safe Payments, wherein each installment of cash is distributed as if no
more cash is forthcoming. Thus, cash is distributed to a partner only if he has an excess
credit balance in his partnership interest after absorption of his share of the maximum
possible loss that may occur, which consists of the assumed realizable value of the
remaining noncash assets, cash withheld for payment of anticipated liquidation
expenses and unrecorded liabilities that may arise, and any additional loss that may
also accrue to the partners when a debit balance in any of the capital accounts results
from the allocations of possible loss. Should the liquidation extend over a long period
of time, these calculations may become frequent such that it may be desirable to
prepare in advance an installment distribution plan, known as Cash Priority Program.

PROB. 1-68 Suggested answer: (d) 80,000 60,000 20,000 130,000

Gerber Williams George Total

Capital contributions 50,000 60,000 20,000

130,000
Asset revaluation 13,200 4,400 4,400 22,000
Total 63,200 64,400 24,400
152,000
Goodwill to old partners 16,800 5,600 5,600
28,000
Total capital 80,000 70,000 30,000
180,000

Contributed Capital Agreed Capital Increase

(Decrease)
Old partners 152,000 180,000 28,000
New partner 60,000 60,000 25% -
Total 212,000 240,000 28,000

Again, under the goodwill method total contributed capital is less than the total agreed
capital.

PROB. 1-69 Suggested answer: (b)

In the event of liquidation, subject to any agreement to the contrary, the following
sequence of payments should be observed:

1. Amounts owed to creditors other than partners;

2. Amounts owed to partners other than for capital and pro
the partnership);
3. Amounts owed to partners as capital;

accounts.

PROB. 1-70 Suggested answer: (d) Safe payment computations

A lump-sum liquidation is one in which all of the assets are sold in bulk and all of the

partners. Because assets are sold in bulk, there is a tendency to realize greater losses
than if the assets were sold over a period of time. Therefore, payments to partners
should be distributed safely.
PROB. 1-71

The four basic steps to partnership liquidation are:

1. Net income or loss up

capital accounts based on their P&L ratio.
2. The gain or loss realized from the sale of noncash assets should be allocated to

3. Cred
be paid.
4. Remaining cash is distributed to partners in accordance with the balance in their
capital accounts, and not the P&L ratio.

PROB. 1-72 Suggested answer: (c)

The provisions that call for the contribution of personal assets to a liquidating
partnership illustrate the characteristics of unlimited liability. However, such personal
liability depends on the legal doctrine of marshaling of assets. This doctrine, which is
applied when the partnership and/or one or more of the partners are insolvent, states
that:

a. Partnership assets are first available for the payment of partnership debts. Any
only to

b. Personal assets of a partner are applied against personal debts, ranked in the order
of priority as follows: 1.) Amounts owed to personal creditors; 2.) Amounts owed to
partnership creditors; and 3.) Amounts owed to partners by way of contribution.

PROB. 1-73 Suggested answer: (d) 27,500 0 52,000

Cohen Butler Davis

Total
Capital balances 60,000 (10,000) 33,000
83,000
Notes payable to Davis 32,000
32,000
Actual liquidation exps. (7,000) (4,200) (2,800)
 (14,000)
Loss on realization
(248,000-218,000) (15,000) (9,000) (6,000)
(30,000)
-B 8,500 8,500
Balances 38,000 (14,700) 56,200
79,500
Absorption - Butler (10,500) 14,700 (4,200) -

Cash payments 27,500 - 52,000

79,500

accounts. The liability of partners in a partnership is unlimited, thus, the creditors of the
partnerships may go after the partners to the extent of their personal assets. However,
it should be noted that under the doctrine of marshaling of assets, personal assets
should be applied first to personal obligations and any excess shall be applied to the
unliquidated partnership obligation.

PROB. 1-74 Suggested answer: (a) 0

Axel Barr Cain

Capital balances
Before liquidation P40,000 P180,000 P30,000
Loss on realization 4:3:3
(200,000-300,000) 40,000 30,000 30,000
Capital balances
After liquidation P0 P150,000 P0

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.

PROB. 1-75 Suggested answer: (c) 195,000 decrease

 Nal Lou Gee
Capital balances
Before liquidation P175,000 P125,000 P175,000
Distribution of loss 3:2:5
(P475,000+25,000) (150,000) (100,000) (250,000)
Balances 25,000 25,000 (75,000)
Absorption of Gee (3:2) (45,000) (30,000) 75,000
Capital balances (P20,000) (P5,000) -

Distribution of loss P150,000

Absorption of Gee 45,000
Decrease in capital of Nal P195,000

Note that upon liquidation, all of the

realized to pay all claims except one for P25,000, therefore, the partnership incurred
loss from realization, which will eventually reduce the capital balances of the partners.
In addition, the deficiency of an insolvent partner is simply eliminated by absorption,
thus increasing the decrease in capital account of Nal to P195,000, as shown above.
Incidentally, since Nal and Lou are solvent, additional cash of P20,000 and P5,000,
respectively will be invested by them.

PROB. 1-76 Suggested answer: (b) 170,000 90,000

Given that noncash assets were sold for an amount equal to its book value, therefore,
no gain or loss was realized from the sale of noncash assets. Thus, the partners will
receive an amount equal to their respective capital balances before liquidation.

PROB. 1-77 Suggested answer: (b) 175,000 125,000

Total capital of the partnership (750,000+500,000) 1,250,000

Add liability (Notes payable) 200,000
Total assets 1,450,000
Less available cash 300,000
Loss on realization 1,150,000

Sammy Michael
Capital balances before liquidation 750,000 500,000
Notes payable to Michael 200,000
Total interest 750,000 700,000
Loss on realization (equally) (1,150,000) 575,000 575,000
Capital balances after cash distribution 175,000 125,000

Loss on realization is the difference between the total assets (equal to the total capital
and liabilities) and the amount realized from its sale.

PROB. 1-78 Suggested answer: (a) 136,000

Smith Jones
Capital balances P195,000 P155,000
Smith, loan (Dr) (20,000)
Total interest 175,000 155,000
Loss on realization (60:40)
(450,000-385,000) (39,000) (26,000)
Cash available for partners P136,000 P129,000

Again, since all assets are distributed at one point in time rather than installments, this
represents simple liquidation or total liquidation. The loan account was presented as
an asset of the partnership; therefore, it is a receivable on the part of the partnership,
and eventually, reduces the capital balance of the partner concerned.

PROB. 1-79 Suggested answer: (b) 20,000

Alex Jay John

Capital balances P95,000 P80,000 P70,000
Loss on realization
(150,000-70,000) 2:1:1 (40,000) (20,000) (20,000)
Possible loss
(265,000-150,000) 2:1:1 (57,500) (28,750) (28,750)
Balances (2,500) 31,250 21,250
Absorption of Alex 1:1 2,500 (1,250) (1,250)
Cash distribution P0 P30,000 P20,000

Again, in installment liquidation, to insure an equitable distribution of cash to the

partners, considerable care is required. Usually, the statement of liquidation is
supported by the Schedule of Safe Payments, wherein each installment of cash is
distributed as if no more cash is forthcoming.

Thus, cash is distributed to a partner only if he has an excess credit balance in his
partnership interest after absorption of his share of the maximum possible loss that may
occur, which consists of the assumed unrealizable value of the remaining noncash
assets, ash withheld for payment of anticipated liquidation expenses and unrecorded
liabilities that may arise, and any additional loss that may also accrue to the partners
when a debit balance in any of the capital accounts results from the allocations of
possible loss.

PROB. 1-80 Suggested answer: (b) 25,000

Munoz Nieva Perez

Capital balances
Before liquidation 312,500 107,500 50,000
Loan balances 80,000 25,000
Total interest 312,500 187,500 75,000
Loss on realization (5:3:2)
(900,000-400,000) (250,000) (150,000) (100,000)
Balances (deficiency) 62,500 37,500 (25,000)

The loan balances were presented in the liability section of the condensed balance
sheet, thus, these should be treated as obligations of the partnership and eventually
increase the interests of the partners. Since Perez is the only solvent partner, while
other partners incur no deficiency, Perez will invest additional cash equal to his own
deficiency.

PROB. 1-81 Suggested answer: (c) 5,600

When the liquidation period extend over a long period of time, calculations of safe
payments to partners may become frequent and bothersome such that it may be
desirable to prepare in advance an installment distribution plan, called Cash Priority
Program. This program, which is an alternative to Schedule of Safe Payments, permits
the partners to determine how cash should be safely distributed when it becomes
available. Using this program, the first priority of payments should be provided to the
partner with the highest loss absorption balance. The amount to be paid could be
determined by multiplying the excess loss absorption balance of partner over another
by his profit and loss percentage. The process should be continually done until the loss
absorption balances of the partners are equal, in which case, distribution of available
cash should be made according to their profit and loss percentage.

Since there are three partners in the form (Goh, Kong, and Wei), in the third priority
program of payments, the amounts to be received by Wei is P5,600 (P28,000 x 20%),
because at this point, their loss absorption balances are equal.

PROB. 1-82 Suggested answer: (c) 49,000 0 57,000

Able Baker Chapman

Capital balances 50,000 (32,000) 70,000

Personal assets applied
to capital deficiency
(80,000-50,000) 30,000
Capital balances applied
to personal liabilities
(72,000-60,000) (12,000)
Balances 50,000 (2,000) 58,000
Absorption of Baker (1,000) 2,000 (1,000)
Balances after applying
the doctrine of
marshaling of assets 49,000 0 57,000

The doctrine of marshaling of assets is applied when the partnership and/or one or
more of the partners are insolvent. It provides that partnership assets are first available

the extent of his interest. While, personal assets are applied against personal debts,
any excess is applied to partnership creditors, then to partner's debit capital balance.

PROB. 1-83 Suggested answer: (c) 320,000

Personal assets 200,000
Add capital credit balances 120,000
Total amount due to personal creditors 320,000

Note that the capital accounts of Morgan and other partners have credit balances;
therefore, the partnership has no deficient partner. Accordingly, there is no possible
absorption that will reduce the capital of Morgan, thus the personal creditors of Morgan
can collect, not only his personal assets but to the extent of his entire capital balance.

PROB. 1-84

a. Suggested answer: (b) 42,000

Total capital before liquidation (40,000+25,000+5,000) 70,000

Less: Cash left for distribution 28,000
Loss on realization of the noncash assets 42,000

Upon payment to partners in the event of liquidation, the amount of cash available for

b. Suggested answer: (c) 17,800

A M E
Capital balances before liquidation 40,000 25,000
5,000
Loss on realization (3:2:1) (42,000) (21,000) (14,000) (7,000)
Balances 19,000 11,000
(2,000)
Absorption of E (3:2) (1,200) (800)
2,000
Cash payment to A and M 17,800 10,200 -

In the event of liquidation, all liquidation expenses and gains or losses from conversion
of partnership assets must be allocated to the partners before assets actually are
distributed to the individual partners. Failure to consider these factors may result in the
premature distribution of assets to a partner. Furthermore, generally accepted
accounting principles states that partners should contribute assets to the partnership
to the extent of their debit balances. However, if such contribution is not possible
because of special personal or legal considerations, the debit balance will be viewed

ratio.

PROB. 1-85 Suggested answer: (c) 0 31,000 49,000

Salve Galo Norma

Capital balances before liquidation 80,000 115,000

105,000
Loss on realization (50,000) (5:3:2) (25,000) (15,000) (10,000)
Balances 55,000 100,000 95,000
Less: Possible loss (170,000) (5:3:2) (85,000) (51,000) (34,000)
Balances (30,000) 49,000 61,000
Absorption of Salve (3:2) 30,000 (18,000) (12,000)
Safe payment to partners - 31,000
49,000

To avoid the problem associated with premature payments, installment payments may
be made to partners only after anticipating all liabilities, possible losses, and liquidation
expenses. The allocation of the assumed loss is allocated among the partners
according to their profit and loss ratio. The allocation of the assume loss could produce
treated as being
uncollectible. Therefore, the assumed debt capital balances are allocated to those
partners with credit balances according to their profit and loss ratio.

PROB. 1-86 Suggested answer: (c) 410,00 230,000 0

A B C
Capital balances before liquidation 560,000 320,000 40,000
Loss on realization (280,000) (5:3:2) (140,000) (84,000) (56,000)
Balances 420,000 236,000 (16,000)
Absorption of C (5:3) (10,000) (6,000)
16,000
Payment to A and B 410,000 230,000 -
Again, generally accepted accounting principle states that partners should contribute
assets to the partnership to the extent of their debit balances. However, if such
contribution is not possible because of special personal or legal considerations, the
debit balance will be viewed as a realization loss and allocated according to the

PROB. 1-87 Suggested answer: (a) 2, 3, 4, 1

Unlike a dissolution where the partnership continues its business purpose, liquidation
results in the partnership's ending or terminating its business. The process of liquidation
consist the conversion of partnership assets into a distributable form and the
distribution of these assets to creditors and owners. All liquidation expenses and gains
or losses from conversion of partnership assets also must be allocated to the partners
before assets actually are distributed to the individual partners. Failure to consider
these factors may result in the premature or incorrect distribution of assets to a partner.

PROB. 1-88 Suggested answer: (c) 40,000

Almond Barney Colors

Total interest 20,000 50,000
90,000
Divide by P&L 20% 40% 40%
Loss absorption balance 100,000 125,000 225,000
Priority 1 - Colors (100,000)
Balances 100,000 125,000 125,000
Priority 2 - Colors & Barney (25,000) (25,000)
Balances (P&L) 100,000 100,000 100,000

therefore, it is the partner under priority no. 1 (Colors). Colors

shall receive, under priority no. 1, P40,000 (100,000 x 40%)

PROB. 1-89

a. Suggested answer: (b) P70,000 outside liabilities, P30,000 Able

 Able Baker Chapman

Total interest 90,000 30,000

50,000
Divide by P&L (equally) 1/3 1/3 1/3
Loss absorption balance 270,000 90,000 150,000
Priority 1 - Able (120,000)
Balance 150,000 90,000 150,000
Priority 2 - Able & Chapman (60,000) (60,000)
Balance 90,000 90,000 90,000
Priority 3 - P&L

Payments by priority: Able Baker

Chapman
Priority 1 (120,000 x 1/3) 40,000
Priority 2 (60,000 x 1/3) 20,000 20,000

Cash Liability Able

Baker Chapman
Total 100,000
Liability (70,000) 70,000
Balance 30,000
Loan - A (20,000) 20,000
Balance 10,000
Priority 2 (10,000) 10,000
Total 70,000 30,000

The Partnership Law provides, that in the event of partnership liquidation, available
cash shall be distributed in the following order: first: to outside creditors, second: to

b. Suggested answer: (d) Able: 55,000, Baker: 15,000, Chapman: 5,000

Able Baker Chapman

Total interest (excluding loan) 70,000 30,000
50,000
Divide by P&L (equally) 1/3 1/3 1/3
Loss absorption balance 210,000 90,000 150,000
Priority 1 - Able (60,000)
Balance 150,000 90,000 150,000
Priority 2 - Able & Chapman (60,000) (60,000)
Balance 90,000 90,000 90,000
Priority 3 - P&L

Payments by priority: Able Baker

Chapman
Priority 1 (60,000 x 1/3) 20,000
Priority 2 (60,000 x 1/3) 20,000 20,000

Cash Able Baker

Chapman
MV of assets 195,000
Liabilities (70,000)
Able, loan (20,000)
Balance 105,000
Priority 1 (20,000) 20,000
Balance 85,000
Priority 2 (40,000) 20,000 20,000
Balance 45,000
Priority 3 (45,000) 15,000 15,000 15,000
Total 55,000 15,000 35,000
Less: Asset taken
by Chapman 30,000
Balance 55,000 15,000 5,000

PROB. 1-90

a. Suggested answer: (b) 2,592 1,440

Roy Gil Total

Capital before adjustment P94,800 P214,200 P309,000
Accounts receivable (6,667) (13,333) (20,000)
Inventory (7,333) (14,667) (22,000)
Fixed Assets 2,200 4,400 6,600
Total stock to be issued 83,000 190,600 273,600
Common stock (720 x 10) 7,200 7,200 14,400
Preferred stock P100 par P75,800 P183,400 P259,200

Shares to be issued: Roy Gil Total

Common stock 720 720 1440
Preferred stock 758 1,834 2,592

In order to secure the advantages found in the corporate form of business organization,
the partners may decide to incorporate. Upon incorporation, the corporation will act to
acquire the net assets of the partnership in exchange for its stock. The stock received
by the partnership is distributed to the partners in settlement of their equities. The
corporation therefore takes over the assets and assumes the liabilities of the
partnership; the partnership is dissolved and the partners now become stockholders in
the newly formed corporation. The allocated common shares and preferred shares
were computed by dividing the amount of each stock by its respective par value, as
shown above.

b. Suggested answer: (c) 758 720 1,834 720

PROB. 1-90

a. Suggested answer: (c) 215,000

Net assets at fair value (P240,000-20,000) P220,000

Less par value of stock issued (1,000 x 5) 5,000
Additional paid in capital P215,000

The incorporation of a partnership results in the formation of a new accounting (and

legal) entity. This means that the partnership must adjust its records up to the date of

market value of the partnership assets and the present value of partnership liabilities.
In addition, when capital stock were issued, capital stock account should be credited at
par or stated value, any excess over par or stated value must be credited to additional
paid in capital.
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Self Test Chapter 3

Multiple Choice Theories
1. If existing partners acquire the equity of a withdrawing partner, in what manner do they divide the
equity?
a. In any manner they choose
b. Equally
c. Proportionate to their residual pro@t and loss ratios
d. Existing partners are not permitted to acquire the equity of a withdrawing partner
2. Which of the following must exist to create the potential for a retiring partner to have a bonus
recognized at the date of withdrawal?
a. The retiring partner must be paid more than the book value of his equity
b. The existing partners must decide to not admit a new partner to the partnership
c. The retiring partner’s equity must be acquired by the partnership
d. All of the above are necessary for a bonus to be recognized
3. In what manner do the remaining partners share in the bonus paid to a withdrawing partner?
a. In proportion to their residual pro@t and loss ratios
b. Equally
c. In proportion to their capital account balances
d. The partner with the greatest capital account is assigned the bonus
4. Which of the following statements is true with regard to a withdrawing partner?
a. A bonus must be paid to the retiring partner
b. A bonus may be paid to the retiring partner
c. A bonus must be paid to the retiring partner or to the remaining partners
d. Recognizing a bonus is not appropriate when a partner retires
5. What change occurs to continuing partners’ capital accounts when a withdrawing partner is
assigned goodwill at the date of withdrawal?
a. Continuing partners’ capital accounts decease by their pro@t and loss ratio proportion of the
goodwill assigned to the withdrawing partner
b. Continuing partners’ capital accounts increase
c. Continuing partners’ capital accounts do not change
d. Goodwill cannot be recognized with regard to withdrawing partners
6. What amount of goodwill can be recognized at the date a partner withdraws from a partnership?
a. The withdrawing partner’s portion of goodwill
b. The continuing partners’ portion of goodwill
c. Goodwill may not be recognized at the date a partner withdraws
d. Either the withdrawing partner’s portion of goodwill or the goodwill attributable to the entire
partnership
7. What portion of the partnership’s assets must be revalued when a partner withdraws from the
partnership?
a. The withdrawing partner’s share must be revalued
b. All of the partnership’s assets must be revalued
c. Any or all of the partnership’s assets may be revalued but none have to be revalued
d. Partnership assets may not be revalued when a partner withdraws
8. If existing partners acquire the equity of a withdrawing partner, in what manner do they divide the
equity?
a. In any manner they choose
b. Equally
c. Proportionate to their residual pro@t and loss ratios
d. Existing partners are not permitted to acquire the equity of a withdrawing partner
9. Which of the following must exist to create the potential for a retiring partner to have a bonus
recognized at the date of withdrawal?
a. The retiring partner must be paid more than the book value of his equity
b. The existing partners must decide to not admit a new partner to the partnership
c. The retiring partner’s equity must be acquired by the partnership
d. All of the above are necessary for a bonus to be recognized
Problems
1. Kern and Pate are partners with capital balances of P60,000 and P20,000, respectively.
Pro@ts and losses are divided in the ratio of 60:40. Kern and Pate decide to admit Grant,
who invested land valued at P15,000 for a 20% capital interest in the partnership.
Grant’s capital account should be credited for:

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2. At December 31, RR and SH are partners with capital balances of P40,000 and P20,000,
and they share pro@ts and losses in the ratio of 2:1, respectively. On this date, PP invests
P17,000 in cash for a one-@fth interest in the capital and pro@t of the new partnership.
Assuming that the bonus method is used, how much should be credited to PP’s capital
account on December 31?
3. The capital balance for Messalina is P210,000 and for Romulus is P140,000. These two
partners share pro@ts and losses 60 percent (Messalina) and 40 percent (Romulus).
Claudius invests P100,000 in cash in the partnership for a 20 percent ownership. The
bonus method will be used. What are the capital balances for Messalina, Romulus, and
Claudius after this investment is recorded?
4. Jesse, Joseph, and Leslie are partners with capital accounts of P70,000, P120,000, and
P90,000, respectively. The partnership share pro@ts and losses 45%, 30%, and 25%,
respectively. They are considering allowing Hans to join the partnership by investing
directly into the partnership. The partners intend to revalue the assets before Hans’
admission. Neither bonus nor goodwill are required. If the asset’s market value exceeds
book value P150,000, how much will Hans invest to acquire a 20% equity interest in the
partnership?
5. Sandra and Joshua are partners. They have capital account balances of P250,000 and
P200,000, respectively, and they share pro@ts and losses 70/30. The partners are
considering admitting Judy as a new partner with a 25 percent equity interest for an
investment in the partnership of P180,000. Before admission, Sandra and Joshua will
revalue the partnership’s assets. If the net increase in the partnership’s assets is
P125,000, what will be the balance in Sandra’s capital account immediately before Judy’s
admission?
6. Kris and Mark are partners who share pro@ts and losses 70/30. They have capital
account balances of P170,000 and P260,000, respectively at the date they admit Frank
into the partnership. Frank invests P120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the peso amount of the reduction to
Kris’ capital account at the date of admission?
7. The following balance sheet information is for the partnership of Abel, Boule, and
Cayman:
Cash P 210,000 Liabilities P 510,000
Other assets 1,500,000 Abele, Capital (40%) 300,000
Boule, Capital (40%) 480,000
Cayman, Capital (20%) 420,000
P1,710,000 P1,710,000
Figures shown parenthetically reeect agreed pro@t and loss sharing percentages. If
assets on the initial balance sheet are fairly valued, Abele and Boule consent and Dann
pays Cayman P225,000 for his interest; the revised capital balances of the partners
would be:
8. Pink desires to purchase a one-fourth capital and pro@t and loss interest in the
partnership of Brown, Greene, and Red. The three partners agree to sell Pink one-fourth
of their respective capital and pro@t and loss interests in exchange for a total payment of
P100,000. The payment is made directly to the individual partners. The capital accounts
and the respective percentage interests in pro@ts and losses immediately before the sale
to Pink follow
Capital % Interests in
Accounts Pro@ts and Losses
Brown P168,000 50%
Greene 104,000 35
Red 48,000 15
Total P320,000
All other assets and liabilities are fairly valued and implied goodwill is to be recorded
prior to the acquisition by Pink. Immediately after Pink’s acquisition, what should be the
capital balances of Brown, Greene, and Red, respectively?

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9. Donkey desires to purchase a one-fourth capital and pro@t and loss interest in the
partnership of Shrek, Fiona, and Mugn. The three partners agree to sell Donkey one-
fourth of their respective capital and pro@t and loss interests in exchange for a total
payment of P125,000. The payment is made directly to the individual partners. The
capital accounts and the respective percentage interests in pro@ts and losses
immediately before the sale to Donkey follow
Capital % Interests in
Accounts Pro@ts and Losses
Shrek P210,000 60%
Fiona 130,000 25
Mugn 60,000 15
Total P400,000
All other assets and liabilities are fairly valued by Donkey. Immediately after Donkey’s
acquisition, what should be the capital balances of Shrek, Fiona, and Mugn,
respectively?
10. The partnership of Gilligan, Skipper, and Ginger had total capital of P570,000 on
December 31, 20x4 as follows:
Gilligan, Capital (30%) P180,000
Skipper, Capital (45%) 255,000
Ginger, Capital (25%) 135,000
Total P570,000
Pro@t and loss sharing percentages are shown in parentheses. The partnership has no
liabilities. If Mary Ann purchases a 25 percent interest from each of the old partners for a
total payment of P270,000 directly to the old partners:
a. total partnership net assets can logically be revalued to P1,080,000 on the basis of
the price paid by Mary Ann.
b. the payment of Mary Ann does not constitute a basis for revaluation of partnership
net assets because the capital and income interests of the old partnership were not
aligned.
c. total capital of the new partnership should be P760,000.
d. total capital of the new partnership will be P840,000 assuming no revaluation.
11. Assume the same data in No. 10, except that Mary Ann became a partner by investing
P150,000 in the Gilligan, Skipper, and Ginger partnership for a 25 percent interest in
capital and pro@ts and that partnership net assets are not revalued. Mary Ann’s capital
credit using the bonus method should be
12. Assume the same data in No. 10, except that Professor became a partner by investing
P190,000 in the Gilligan, Skipper, and Ginger partnership for a 25 percent interest in the
capital and pro@ts, and the partnership assets are revalued. Under this assumption
a. Professor’s capital credit will be P150,000.
b. Gilligan’s capital will be increased to P147,000.
c. total partnership capital after Professor’s admission to the partnership will be
P600,000.
d. net assets of the partnership will increase by P190,000, including Professor’s interest.
13. The balance sheet for the partnership of Nina, Pinta, and Santa Maria at January 1, 20x4
follows. The partners share pro@ts and losses in the ratio of 3:2:5, respectively.
Assets at cost P480,000
Liabilities P135,000
Nina, capital 75,000
Pinta, capital 120,000
Santa Maria, capital 150,000
P480,000

Nina is retiring from the partnership. By mutual agreement, the assets are to be adjusted
to their fair value of P540,000 at January 1, 20x4. Pinta and Santa Maria agree that the
partnership will pay Nina P135,000 cash for hers her partnership interest. There is no

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goodwill is to be recorded. What is the balance of Pinta’s capital account after Nina’s
retirement?
14. Alf and Ben, partners in Alf & Ben Partnership who share net income and losses equally,
had capital account balances of P40,000 and P60,000, respectively, on September 25,
20x4, on which date the following journal entry was prepared for the partnership:
Cash 62,000
Goodwill [(P62,000 x 3)  (P100,000 + P62,000)] 24,000
Alf, Capital (P24,000 x 0.50) 12,000
Ben, Capital (P24,000 x 0.50) 12,000
Cam, Capital 62,000
To record investment by Cam for a one-third interest in capital,
with goodwill of P24,000 divided equally between Alf and Ben.
The foregoing journal entry:
a. Is acceptable
b. Should be replaced by an entry allocating an P8,000 bonus equally to Alf and to Ben
c. Should be replaced by an entry allocating a P24,000 bonus equally to Alf and to Ben
d. Should not reeect either a bonus or goodwill
15. Michelle and Steve are partners in a local business. They currently share pro@ts and
losses 60/40 and have capital account balances of P150,000 and P200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a P120,000 investment. Assuming that goodwill is
to be recognized, which partner(s) are contributing the goodwill?
a. Both new and existing partners are contributing goodwill
b. New partner is contributing goodwill
c. Existing partners are contributing goodwill
d. There is not enough information to answer this question
16. Assuming the same data in No. 15, what amount of goodwill would be disclosed on the
partnership balance sheet immediately after Jacob is admitted?
17. Susan and David are partners in a local business. They currently share pro@ts and
losses 45/55 and have capital account balances of P250,000 and P300,000, respectively.
They are considering admitting Jane to the partnership. She will receive a 25 percent
equity interest in the partnership for a P225,000 investment. Assuming that goodwill
(revaluation) is to be recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
d. There is not enough information to answer this question
18. Assuming the same information in No. 17, what amount of goodwill would be disclosed
on the partnership balance sheet immediately after Jane is admitted?
19 At year-end, the Cisco partnership has the following capital balances:
. Montana, P 130,000
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rice, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,000
..
Craig, 80,000
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taylor, 70,000
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Pro@ts and losses are split on a 3:3:2:2 basis, respectively. Craig decides to leave the
partnership and is paid P90,000 from the business based on the original contractual
agreement. If the goodwill (revaluation) method is to be applied, what is the balance of
Montana’s capital account after Craig withdraws?

20. When Elsa Martin withdrew from Lewis, Martin, Noll & Ordway Partnership on January

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31, 20x4, she was paid P80,000, although her capital account balance was only P60,000.
The four partners shared net income and losses equally. The journal entry of the
partnership to record Martin's withdrawal on January 31, 20x4, preferably should include
a debit of:
a. P6,667 to Lewis, Capital c. P80,000 to Goodwill
b. P20,000 to Goodwill d. P80,000 to Martin, Drawing
21. Harry, Susan, and Walter are partners who share pro@ts and losses 35, 40, and 25
percent, respectively. The partners have capital account balances of P80,000, P110,000,
and P55,000, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing all of the partnership’s assets, an increase of
P200,000. If Susan and Walter acquire Harry’s equity, what will be the amount of
Susan’s capital on the partnership’s balance sheet immediately after Harry’s withdrawal,
rounded to the nearest peso?
22. Assuming the same information in No. 21, what will be the amount of total capital on the
partnership’s balance sheet immediately after Harry’s withdrawal?
23. Frank, George, and Scott are partners with capital accounts of P160,000, P120,000, and
P210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Scott’s ownership interest for P250,000. The pro@t and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
Frank’s capital account be reduced if the bonus method is applied for the withdrawal?
24. Assuming the same information in No. 23, what will be the balance in Frank’s capital
account if the bonus method is applied for the withdrawal?
25. Bob, Claire, and Jack are partners who share pro@ts and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
P150,000, P135,000, and P225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is P22,500. Assuming that Bob’s equity
is purchased by a new partner (Deborah) approved by Claire and Jack, what is the
amount of Deborah’s initial capital account?
26. Using the same information in No. 25, except that Bob’s equity is purchased by Claire
(60 percent) and Jack (40 percent), what is the amount of Claire’s capital account at the
date of Bob’s withdrawal?
Use the following information for questions 27 to 29:
Donald, Anne and Todd have the following capital balances; P40,000, P50,000 and P30,000
respectively. The partners share pro@ts and losses 20%, 40% and 40% respectively.
27. Anne retires and is paid P80,000 based on the terms of the original partnership
agreement. If the goodwill (revaluation of asset) method is used, what is the capital of
the remaining partners?
28. Anne retires and is paid P80,000 based on the terms of the original partnership
agreement. If the bonus method is used, what is the capital of the remaining partners?
29. What is the total partnership capital after Anne retires receiving P80,000 and using the
bonus method?
30. XX and YY are partners who have capital of P600,000 and P480,000 sharing pro@ts in
the ratio of 3:2. ZZ is admitted as a partner upon investing P500,000 for 25% interests in
the @rm, pro@ts are to be allocated equally. Given the choice between goodwill and
bonus method, ZZ will prefer bonus or goodwill with a gain amounting to or be
indiqerent.
31. XX and YY are partners who have capital of P600,000 and P480,000 sharing pro@ts in
the ratio of 3:2. ZZ is admitted as a partner upon investing P500,000 for 25% interests in
the @rm, while the other partners continue to participate pro@ts and losses in their

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original ratio. Given the choice between goodwill and bonus method, ZZ will prefer
bonus or goodwill with a gain amounting to or be indiqerent. :
32. Neal, Palmer, and Ruppe are partners in a real estate company. Their respective capital
balances and pro@t-sharing ratios are as follows:
Partners Capital Balance Pro@t-sharing ratio
Neal . . . . . . . . . . . . . . . . . . . . . . . . . P 250,000 4
.
Palmer . . . . . . . . . . . . . . . . . . . . . . . 150,000 3
.
Ruppe . . . . . . . . . . . . . . . . . . . . . . . 100,000 3
.
Neal wishes to withdraw from the partnership on January 1, 2009, Palmer and Ruppe
have agreed to pay Neal P300,000 from the partnership assets for his 50% capital
interest. This settlement price was based on such factors as capital investments, sales
performance, and earning capacity. Palmer and Ruppe must decide whether to use the
bonus method or the goodwill method (recognize total goodwill implied by the payment)
to record the withdrawal, and they wish to compare the results of using the two
methods. The new pro@t and loss ratio is in the same relative ratio as that existing before
Neal’s withdrawal. Given the choice between goodwill and bonus method or indiqerent,
Palmer will choose:
33. Using the same information in No. 32, except that the pro@t and loss ratio is changed to
3:2. Palmer is particularly interested in these results, because he feels that his present
contribution of time and capital is better reeected by this new pro@t and loss ratio. Given
the choice between goodwill and bonus method or indiqerent, Palmer will choose:
34. JJ & KK partnership’s balance sheet at December 31, 20x4, reported the following:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 100,000
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
JJ, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
KK, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
On January 2, 20x4, JJ and KK dissolved their partnership and transferred all assets and
liabilities to a newly-formed corporation. At the date of incorporation, the fair value of the
new assets was P12,000 more than the carrying amount on the partnership’s book, of
which P7,000 was assigned to intangible assets and P5,000 was assigned to goodwill. JJ
and KK were each issued P5,000 shares of the corporation’s P1 par value common stock.
Immediately following incorporation, additional paid-in capital in excess of par should be
credited for:
35.The balance sheet of Sade & Tipp LLP on April 30, 2006, was as follows:

Cash P 8,700Notes payable P10,000

Trade accounts receivable 13,250Trade accounts payable 9,800
Inventories 21,760Sade, Capital 25,110
Equipment 32,400Tipp, Capital 20,000
Less: Accumulated
depreciation (11,200)
______
Total P 64,910Total P64,910

The partnership was converted to S & T Corporation, with new accounting records. Sade
and Tipp received a total of 10,000 shares of P1 par common stock in exchange for the
net assets of the partnership. The accounting records of the partnership had been
maintained in accordance with generally accepted accounting principles, except that an
allowance for doubtful accounts of P800 had not been provided. The current fair values
of the inventories and equipment were P28,000 and P35,000, respectively. Sade and Tipp
shared net income and losses in a 3:2 ratio, respectively.

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Immediately following incorporation, additional paid-in capital in excess of par should be

credited for:

Solu%ons
Mul%ple Choice Theories
1. a
2. d
3. a
4. b
5. c
6. d
7. c
8. a
9. d

Problems
1. P19,000
2.
PP invests P17,000; no goodwill/revaluation recorded:
Investment in partnership P 17,000
New partner's proportionate book value
[(P60,000 + P17,000) x 1/5] (15,400)
Diqerence (investment > book value) P 1,600

Method: Bonus to prior/old partners

PP's capital credit = P77,000 x 1/5
= P15,400

3. Messalina, P216,000; Romulus, P144,000 and Claudius, P90,000

Total capital is P450,000 (P210,000 + P140,000 + P100,000) after the new investment.
As Claudius's portion is to be 20 percent, the new capital balance would be P90,000
(P450,000 × 20%). Since P100,000 was paid, a bonus of P10,000 is being given to the
two original partners based on their pro@t and loss ratio: Messalina – P6,000 (60%) and
Romulus – P4,000 (40%). The increase raises Messalina's capital balance from P210,000
to P216,000 and Romulus's capital balance from P140,000 to P144,000.

4. P107,500 = [(P70,000 + P120,000 + P90,000 + P150,000)/.80](.20)

5. P337,500 = P250,000 + (P125,000 x .70)
6. P121,250 = [P120,000 - (P170,000 + P260,000 + P120,000)(.25)](.70)

7. Abele, P300,000; Boule, P480,000; Dann, P420,000

8. Brown, P156,000; Green, P99,000; Red, P45,000

9. Shrek, P195,000; Fiona, P123,750; Mugn, P56,250

10. Total partnership net assets can logically be revalued to P1,080,000 on the basis of the
price paid by Mary Ann.

11. P180,000

12. Net assets of the partnership will increase by P190,000, including Professor’s interest.

13. P120,000

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14. b
15. c - (P150,000 + P200,000 + P120,000)(.20) = P94,000

16. P130,000
(P150,000 + P200,000 + P120,000)(.20) = P94,000, goodwill to existing partners
P120,000 + P0 = .2(P150,000 + $200,000 + P120,000 + goodwill)
P120,000 = P94,000 + .2 goodwill
P26,000 = .2 goodwill
Goodwill = P130,000

17. b
(P250,000 + P300,000 + P225,000)(.25) = P193,750

18. P125,000
(P250,000 + P300,000 + P225,000)(.25) = P193,750, goodwill to existing partners
P225,000 + P0 = .25 (P250,000 + P300,000 + P225,000 + goodwill)
P225,000 = P193,750 + .25 goodwill
P31,250 = .25 goodwill
Goodwill = P125,000

19. P145,000
Craig receives an additional P10,000. Since Craig is assigned 20 percent of all pro@ts
and losses, this allocation indicates total goodwill of P50,000.

20% of Goodwill = P10,000

.20 G = P10,000
G = P10,000/.20
G = P50,000

Montana is assigned 30% of all pro@ts and losses and would, therefore, record P15,000 of
this goodwill, an entry that raises this partner's capital balance from P130,000 to
P145,000.

20. a – [(P80,000  P60,000)  3 + P6,667]

21. Susan’s capital account balance cannot be determined from the information given
22. P445,000 = P80,000 + P110,000 + P55,000 + P200,000
23. P24,000 = (P250,000 - P210,000)(45/75)
24. P136,000 = P160,000 - (P250,000 - 210,000)(45/75)
25. P172,500 = P150,000 + (P75,000 x .3)
26. P257,250 = P135,000 + (P75,000 x .25) + [P150,000 + (P75,000 x .30)](.60)

27. Donald, P55,000; Todd, P60,000

Anne receives an additional P30,000 above her capital balance. Since she is assigned
40 percent of all pro@ts and losses, this extra allocation indicates total goodwill of
P75,000, which must be split among all partners. 40% of Goodwill = P30,000

Amount paid P 80,000

Less: Book value of Anne (40%) 50,000
Partial goodwill/revaluation adjustment P 30,000
Capitalized at 40%
Goodwill/revaluation P 75,000

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Goodwill/assets 75,000
Donald (20%) 15,000
Anne (40%) 30,000
Todd (40%) 30,000

Anne (P50,000 + P30,000) 80,000

Cash 80,000

Donald: P40,000 + P15,000 = P55,000

Todd: PP30,000 + P30,000 = P60,000

28. Donald, P30,000; Todd, P10,000

The P30,000 bonus is deducted from the remaining partners according to their relative
pro@t and loss ratio. Donald = 20% and Todd = 40% which is a 1/3, 2/3 split.

Anne 50,000
Donald (P30,000 x 2/6) 10,000
Todd (P30,000 x 4/6) 20,000
Cash 80,000

Therefore: Donald: P40,000 – P10,000 = P30,000; Todd: P30,000 – P20,000 = P10,000

29. P40,000 - refer to No. 28 (P30,000 + P10,000 = P40,000)

30. Prefer bonus method due to ZZ’s gain of P35,000
Goodwill method: Using the capital of new partner as a basis for computing total agreed
capital.

Total agreed capital (P500,000 ÷ 25%) P2,000,000

Less: Total contributed capital (P600,000 + P480,000 + P500,000) 1,580,000
Goodwill to old partners P 420,000

Therefore, the capital balances after admission of ZZ:

XX: [P600,000 + (P420,000 x 3/5)] P852,000
YY: [P480,000 + (P420,000 x 2/5)] 648,000
ZZ: 500,000
Total agreed capital P2,000,000

Bonus Method:
Total agreed capital (P600,000 + P480,000)( P500,000) P 1,580,000
Multiplied by; ZZ’s capital interest 25%
Agreed capital to be credited to ZZ P 395,000
Contributed / invested capital of ZZ 500,000
Bonus to XX and YY (old partners) P 105,000

The bonus would be added to XX and YY:

XX: [P600,000 + (P105,000 x 3/5)] P 663,000
YY: [P480,000 + (P105,000 x 2/5)] 522,000
ZZ 395,000
Total agreed capital P 1,580,000

For the purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: if goodwill is found to exist:

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XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Bonus Method is used P 663,000 P 522,000 P 395,000
Add: Goodwill (allocated equally) 140,000 140,000 140,000
P803,000 P 662,000 P 535,000
(Gain) Loss – Bonus method P 49,000 P (140,000) P 35,000

Alternative 2: If goodwill is not realized and written-oq as a loss:

XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Less: Write-oq of goodwill 140,000 140,000 140,000
(equally)
P 712,000 P 508,000 P 360,000
Bonus Method is used 663,000 522,000 395,000
(Gain) Loss – Bonus method P 49,000 P (140,000) P 35,000

Note: The bonus method adheres to the historical cost concept and it is often used in
accounting practice. It is objective that is establishes total capital of the new partnership at
an amount based on actual consideration received from the new partner. The bonus method
indirectly acknowledges the existence of goodwill by giving a bonus to either old or new
partners.

The goodwill method results in the recognition of an asset implied by a transaction rather
than recognizing an asset actually purchased. Historically, goodwill has been recognized
only when purchased so that a more objective measure of its value is established. Therefore,
opponents of the goodwill method contend that goodwill is not determined objectively and
other factors may have ineuenced the amount of investment required from the new
partners.

Although either method can be used in achieving the required interest for the new partner,
the two methods oqer the same ultimate results only:
1. When the incoming partner’s percentage share of pro@t and loss and percentage
interest in assets upon admission are equal, and
2. When the former partners continue to share pro@ts and losses between themselves in
the original ratio.

If these conditions are not fully met, however, results will be diqerent.

31. Be indiqerent for the goodwill (revaluation) or bonus methods are the same.
Goodwill method: Using the capital of new partner as a basis for computing total agreed
capital.
Total agreed capital (P500,000 ÷ 25%) P2,000,000
Less: Total contributed capital (P600,000 + P480,000 + P500,000) 1,580,000
Goodwill to old partners P 420,000

Therefore, the capital balances after admission of ZZ:

XX: [P600,000 + (P420,000 x 3/5)] P852,000
YY: [P480,000 + (P420,000 x 2/5)] 648,000
ZZ: 500,000
Total agreed capital P2,000,000

Bonus Method:
Total agreed capital (P600,000 + P480,000)( P500,000) P 1,580,000
Multiplied by; ZZ’s capital interest 25%

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Agreed capital to be credited to ZZ P 395,000

Contributed / invested capital of ZZ 500,000
Bonus to XX and YY (old partners) P 105,000
The bonus would be added to XX and YY:
XX: [P600,000 + (P105,000 x 3/5)] P 663,000
YY: [P480,000 + (P105,000 x 2/5)] 522,000
ZZ 395,000
Total agreed capital P 1,580,000

For the purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: if goodwill is found to exist:
XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Bonus Method is used P 663,000 P 522,000 P 395,000
Add: Goodwill* (45%: 30%:25%) 189,000 126,000 105,000
P852,000 P 648,000 P 500,000
(Gain) Loss – Bonus method P 0 P 0 P 0

*XX: 75% x 3/5 = 45%; YY: 75% x 2/5 = 30%

Alternative 2: If goodwill is not realized and written-oq as a loss:

XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Less: Write-oq of goodwill* 189,000 126,000 105,000
P 633,000 P 522,000 P 395,000
Bonus Method is used 663,000 522,000 395,000
(Gain) Loss – Bonus method P 0 P 0 P 0

32. Be indiqerent for the goodwill (revaluation) or bonus methods are the same.
*Goodwill (revaluation) method:
Amount paid P300,000
Less: Book value of interest – Neal (40%)) 250,000
Partial goodwill/revaluation adjustment P 50,000
Capitalized at 40%
Goodwill/revaluation P125,000

Neal Palmer Ruppe

Capital balances before withdrawal 250,000 150,000 100,000
Allocate goodwill* 50,000 37,500 37,500
300,000 187,500 137,500
Withdrawal of Neal (300,000) _______ _______
187,500 137,500
Write-oq Impaired Goodwill (125,000  0.50) _______ (62,500) (62,500)
0 125,000 75,000
Capital balances using the bonus method** 125,000 75,000

33. Prefer bonus method due to Palmer’s gain of P12,500

Neal Palmer Ruppe
Capital balances before withdrawal 250,000 150,000 100,000
Allocation of goodwill* 50,000 37,500 37,500
300,000 187,500 137,500
Withdrawal of Neal (300,000) _______ _______
-0- 187,500 137,500
Write-oq Impaired Goodwill

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125,000  0.60 (75,000)

125,000  0.40 ________ _______ (50,000)
-0- 112,500 87,500
Capital balances using the bonus method** 125,000 75,000
(Gain) Loss – Bonus method 0 12,500 12,500

**The excess paid to Neal of P50,000 would have been divided equally between Palmer
and Ruppe as follows:
Palmer Ruppe

Capital balance before withdraw 150,000 100,000

Allocation of excess paid to Neal (25,000) (25,000)
Capital balance using bonus method 125,000 75,000

34. P82,000
Carrying value of net assets (P100,000 – P20,000)………………………P 80,000
Add: Adjustments to reeect fair value…………………………………… 12,000
Fair value of net assets………………………………………………………. P 92,000
Less: Common stock, P1 par (5,000 shares x 2 x P1……………………... 10,000
Additional paid-in capital…………………………………………………… P82,000

35. P54,350
Carrying value of net assets (P25,110 + P20,000))……………………… P 45,110
Add: Adjustments to reeect fair value
(P28,000 – P21,760) – P800 + [(P35,000 – (P32,400 – P11,200)]… 19,240
Fair value of net assets………………………………………………………. P 64,350
Less: Common stock, P1 par (10,000 shares x P1)……………………... 10,000
Additional paid-in capital…………………………………………………… P 54,350
Note: Refer to Problem XII for journal entries for further analysis

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 CHAPTER 7
PARTNERSHIP FORMATION, OPERATION,
AND CHANGE IN OWNERSHIP
SUMMARY OF ITEMS BY TOPIC

Conceptual Computational
True- Multiple Multiple Short
False Choice Choice Problems Answer
Contrasting partnerships, 1-15 107-112 333-336
proprietorships, and
corporations
Equity theories applied to 16-21 113-115 337-338
partnerships
Articles of partnership 22-25 116-117
Initial capital 26-28 118-119 275-277 339-340
contributions
Carrying value assigned 29-30 120 169 275-276
noncash assets
Tax basis assigned 31-33 121 276
noncash assets
Market value assigned 34-36 122 277
noncash assets
Liabilities assumed by 37-40 123 170 278 341
partnership
Partnership formation, 41-47, 124-126 171-173 279-280 342-343
bonus method 49
Partnership formation, 41-44, 127-129 174-176 281-282 344-345
goodwill method 48-50
Drawing accounts 51-53 130-132 346
Sharing profits and losses 54-55 133 347
Interest on capital 56-59 134, 136 177-178, 185, 283-284, 348-349
balances portion of profit 187 288-289
and loss allocation
Salary portion of profit 60-62 135, 137 185-186 288-289 350
and loss allocation
Bonus portion of profit 63-65 138-139 179-181, 185 285-286, 351
and loss allocation 288-289
Residual ratio portion of 66-71 140-142 182-187 287-289 352-353
profit and loss allocation
Unrealized holding gains 72-74 143-144 188-205 290-295, 354-355
and losses 297
 Changes in ownership 75-77 145 356
Admission of new partner 78-80 146-148 206-207 296-297 357-358
- no change in net assets
Admission of new partner 81-83 149-150 208-209 298-299, 359-361
- change in net assets - 302, 305,
revaluation of existing 308
assets
Admission of new partner 84-86 151-153 210-219 300-302 362-363
- bonus to existing
partners
Admission of new partner 87-89 154-155 220-230 303-305 364-365
- bonus to new partner
Admission of new partner 90-92 153, 156- 231-240 306-308 366-368
- goodwill to existing 157
partners
Admission of new partner 90, 93- 158-159 241-249 309-311 368-369
- goodwill to new partner 94
Withdrawal of partner - 95-100 160-162 250-253 312-317
revaluation of existing
assets
Withdrawal of partner - 95-97, 163-165 254-261 318-320 370-371
bonus method 101-103
Withdrawal of partner - 95-97, 166-168 262-274 321-332
goodwill method 104-106

True-False Statements
1. A partnership is an association of two or more investors to carry on as co-owners a
business for profit.

2. Only individuals are allowed to be partners in a partnership.

3. Proprietorships and partnerships are similar in that they are both easily formed.

4. Proprietorships and partnerships are different in that proprietors have unlimited legal
liability while each partner’s legal liability is limited to his/her percentage ownership in
the partnership.

5. A partner’s personal assets may be taken by creditors to pay partnership debts if the
partnership is unable to meet its obligations.

6. Partnerships are not required to prepare financial statements in accordance with

Generally Accepted Accounting Principles unless they have publicly traded debt or are
required to follow GAAP by a creditor.
7. For a partnership to get an unqualified audit opinion, the financial records must conform
to Generally Accepted Accounting Principles.

8. Most small partnerships maintain their financial information in accordance with

Generally Accepted Accounting Principles.

9. Tax authorities basically view partnerships and proprietorships as extensions of their

owners.

10. Partnerships are not required to pay any taxes.

11. The taxable income of all partners does not necessarily sum to the net income of the
partnership.

12. The only accounting difference that must exist between partnerships and corporations is
the reporting of the ownership equity.

13. The manner in which a partnership and a corporation are formed is very similar.

14. It is generally easier to transfer ownership interest in a corporate form of business than in
a partnership.

15. A partnership legally ceases to exist each time a new partner joins the partnership or an
existing partner leaves the partnership

16. The proprietary theory of equity is based on the notion that a business entity is distinct
from the owners.

17. The entity theory of equity is based on the notion that a business entity is distinct from
the owners.

18. An individual partner’s personal responsibility for partnership debts is an example of the
entity theory of equity.

19. The dissolution of a partnership because of the admission of a new partner or withdrawal
of an existing partner is an example of the proprietary theory of equity.

20. The fact that partnerships can enter into contracts is an example of the proprietary theory
of equity.

21. Contributed assets becoming property of the partnership is an example of the entity
theory of equity.

22. The Uniform Partnership Act is the basis for partnership laws in many states.

23. A written agreement is required to form a partnership.

24. When a partnership is formed without a written agreement, the state laws where the
partnership is formed will establish the legal relationship between partners.

25. All provisions of state partnership law must be applied when a partnership is formed.

26. Partners make contributions of equal size when forming a partnership

27. There are different ways the partnership can value noncash assets contributed to the
partnership.

28. Appraisals are not necessarily required when assigning value to noncash assets
contributed to the partnership.

29. Assigning a noncash asset the contributor’s carrying value could result in a misallocation
of gain or loss if the asset is sold.

30. An asset’s carrying value should not be considered when establishing the initial capital
accounts of partners.

31. The tax basis of contributed noncash assets must be used to determine partnership
income allocation for tax reporting purposes.

32. Partnerships are required to file an informational return (Form 1065) with the IRS
indicating the amount of partnership income allocated to each partner.

33. The income assigned to each partner for financial accounting purposes will equal the
partner’s partnership income included on the partner’s individual income tax return.

34. The market value of noncash assets contributed to the partnership may be used for
computing the partners’ taxable income.

35. A contributing partner’s capital account may be assigned the market value of noncash
assets contributed but a market value assignment is not required.

36. The market value of noncash assets contributed to a partnership is the only relevant value
when determining the partners’ beginning capital balances.

37. The assumption of a liability by the partnership with regard to a noncash asset
contributed to the partnership by a partner will affect the value assigned to the partner’s
capital account.

38. The tax basis of a noncash asset contributed to a partnership with an accompanying
liability will not change as a result of the contribution.

39. When a noncash asset is contributed to a partnership with an accompanying liability, the
book value of the asset must become the cost basis of the asset on the partnership’s
financial records.
40. The assumption of a liability related to a noncash asset contributed to a partnership
reduces the value contributed.

41. Initial partner capital balances must equal the sum of the net assets contributed to the
partnership by the partner.

42. Initial partner capital balances are determined by agreement among the partners.

43. Only tangible assets contributed to the partnership can be considered when creating
initial capital balances.

44. There are two ways to consider unidentifiable intangible assets contributed to a
partnership: the bonus method and the goodwill method.

45. The bonus method of recognizing unidentifiable intangible assets contributed at a

partnership’s formation does not result in a net increase in total owners’ equity.

46. The bonus method of recognizing unidentifiable intangible assets contributed at a

partnership’s formation has to make the capital account balances for all partners equal.

47. The bonus method of recognizing unidentifiable intangible assets contributed at a

partnership’s formation will result in all of the partner’s capital accounts increasing.

48. Application of the goodwill method when forming a partnership requires partners to
agree on the amount of goodwill to be assigned to a partner(s).

49. At the date the partnership is formed, the total partner capital will be the same regardless
of whether the bonus method or the goodwill method is used to recognize unidentifiable
intangible assets.

50. Goodwill can be assigned to more than one partner at the date the partnership is formed.

51. The ability of partners to withdraw resources from the partnership is controlled
exclusively by the laws of the state where the partnership resides.
52. The articles of partnership often control the size of withdrawals partners are allowed to
make.

53. If a partnership makes a payment on behalf of a partner, a withdrawal has occurred.

54. Partnerships are required to indicate the manner in which profits and losses are to be
allocated among the partners.

55. With the exception of the residual profit and loss ratio, partners can agree to apply profit
and loss allocation components in any order.

56. The interest component of partnership profit and loss allocation rewards the partner for
labor and expertise brought into the partnership.
57. The purpose of the interest on capital balances component of partnership profit and loss
allocation is to reward partners for contributing economic resources to the partnership.

58. The interest on capital balances component of partnership profit and loss allocation is
always based on each partner’s beginning or period capital balance.

59. The interest on capital balances component of partnership profit and loss allocation is
generally stated as a percentage of the capital balance.

60. The salary portion of the profit and loss allocation is set in the articles of partnership and
will not change over time.

61. The salary portion of the partnership profit and loss allocation is not included in the
partnership’s income statement.

62. The salary portion of the partnership profit and loss allocation is used to compensate
partners for the time and effort expected in the business.

63. Partnerships are required to have bonus clauses in the articles of partnership.

64. Bonus to partners can be based on any criteria on which the partners agree.

65. Partnership bonus arrangements must consider net income as part of the bonus
calculation.

66. A residual interest is always a component of partnership profit and loss allocation.

67. Partnership profit and loss residual percentages must be equal.

68. Partnership profit and loss residual percentages must be the same for profits as they are
for losses.
69. Partnership profit and loss residual percentages are used to allocate any remaining profit
or loss to partners after all other allocation components have been considered.

70. Partnership residual profit and loss percentages may be changed by agreement of the
partners.

71. Partnership residual profit and loss percentages do not have to be the last component
applied in the profit and loss allocation process.

72. When partnership profit and loss ratios are changed, the difference between market and
book values should be determined and allocated to partners based on the currently
existing profit and loss ratios.

73. Partnerships must revalue assets up and/or down when the profit and loss ratios are
adjusted.
74. When an error is discovered in the financial records of a partnership, it should be
corrected immediately. Allocation of any change to capital accounts as a result of an
error correction should be based on the profit and loss ratios that existed when the error
occurred.

75. The dissolution of a partnership occurs only when the partnership is terminating
operations and going out of business.

76. One reason a change in the number of partners in a partnership through the addition or
withdrawal of a partner is important because the partners have unlimited liability.

77. A new partner in a partnership accepts unlimited liability for actions that occurred before
that partner joined the partnership.

78. The admission of a new partner into a partnership can occur without any new assets
being invested into the partnership.

79. If a new partner is going to acquire an ownership interest in a partnership directly from
another partner, the other partners do not need to approve the admission.

80. If a new partner acquires 40 percent of an existing partner’s equity in the partnership, the
new partner is also entitled to 40 percent of the existing partner’s profit and loss
allocation.

81. When a new partner is joining a partnership by making a payment to the partnership for
an amount more than book value, the partners are required to choose one of three
methods of recording the new partner’s payment in excess of book value.

82. The revaluation of assets and liabilities at the date a new partner joins the partnership, by
investing assets directly into the partnership, does not eliminate the possibility that the
partnership might need to record bonuses or goodwill as part of the admission of the new
partner.

83. The amount that assets are revalued when a new partner joins a partnership is always
shared by existing partners equally.

84. If a new partner’s capital account is created for an amount less than the value of net
assets contributed, an error has been made in the partnership’s accounting records.

85. The recognition of a bonus to existing partners at the date a new partner is admitted to a
partnership often occurs in lieu of the recognition of goodwill for the existing partners.

86. The bonus recognized by existing partners when a new partner is admitted to a
partnership is commonly shared among the existing partners based on the existing
partners’ relative profit and loss residual ratios.

87. It is possible for a new partner’s capital account to be established at an amount greater
than the market value of the identifiable assets invested.
88. New partners are never recipients of bonuses when they join the partnership.

89. A bonus paid to a new partner results in a reduction to the capital accounts of the existing
partners in proportion to their profit and loss sharing ratios.

90. The goodwill method of admitting a new partner to a partnership results in greater total
assets than the bonus method of admitting a new partner.

91. When the goodwill method is applied to recognize the admission of a new partner and
the existing partners are responsible for the goodwill, the new partner’s capital account
will always be established equal to the amount of the contribution to the partnership.

92. The existing partners will always recognize goodwill when a new partner is admitted to
the company and the goodwill method is applied.

93. When the goodwill method is applied to recognize the admission of a new partner and
the new partner is responsible for the goodwill, the new partner’s capital account will be
established at the amount of the contribution.

94. When new partner goodwill is recognized at the date the partner joins the partnership, the
existing partners’ capital accounts do not change as a result of the new partner’s
admission

95. A partner may withdraw from a partnership at any time without notice given to the
existing partners.

96. A withdrawing partner may have his/her partnership interest acquired by an outside
investor agreed to by the remaining partners, the remaining partners, or the partnership.

97. If existing partners acquire a withdrawing partner’s equity, the existing partners must
purchase the withdrawing partner’s equity in proportion to their residual profit and loss
ratios.

98. The revaluation of assets when a partner withdraws from the partnership may be a
complete revaluation or a partial revaluation, reflecting the change in value with regard
to the withdrawing partner’s ownership interest.

99. A partnership’s assets must be revalued when a partner withdraws.

100. When a partnership’s assets are revalued at the date a partner withdraws from the
partnership, the withdrawing partner’s equity must be acquired by the partnership. It
cannot be acquired by an outside investor or the existing partners personally.

101. Withdrawing partners from a partnership may receive a bonus or pay a bonus to
remaining partners.
102. If the assets of a partnership are revalued at the date of a partner’s withdrawal, there can
be no bonus recorded.

103. A bonus can be recorded for a retiring partner only if the partnership acquires the equity
of the partner.

104. At the date a partner withdraws from a partnership, the partners must choose to either
recognize the goodwill with respect to the withdrawing partner or they can choose to
recognize all of the partnership’s goodwill.

105. Any goodwill recognized at the date a partner withdraws from a partnership is usually
allocated to partners based on their residual profit and loss ratios.

106. Partnerships may have both a revaluation of assets and liabilities as well as goodwill
recognition at the date a partner withdraws from a partnership.

True-False Statement Solutions

1. T
2. F, Individuals, partnerships, and corporations are allowed to be partners in a partnership.
3. T
4. F, All of the general partners are liable for all the partnership’s debts.
5. T
6. T
7. F, Partnerships may receive an unqualified audit opinion when using a comprehensive
basis of accounting other that accrual such as cash, modified accrual, or the tax basis.
8. F, Most small partnerships maintain their financial information using the tax basis.
9. T
10. F, While the partnership does not pay income taxes, it is responsible for other taxes such
as payroll taxes and franchise taxes.
11. T
12. T
13. F, Partnerships and corporations are formed by two are more parties. A written
agreement is not necessary and state approval is not required for a partnership but a
corporation must file articles of incorporation with the state to attain a corporate charter.
14. T
15. T
16. F, The proprietary theory is based on the notion that the business entity is an aggregation
of the owners
17. T
18. F, This is an example of the proprietary theory of equity.
19. T
20. F, This is an example of the entity theory of equity.
21. T
22. T
23. F, While a written agreement is generally recommended when forming a partnership, it is
not required.
24. T
25. F, Most provisions only apply if there is no agreement among the partners with regard to
that specific issue.
26. F, Initial capital contributions are determined by agreement among the partners and do
not have to be equal in size.
27. T
28. T
29. T
30. F, Any basis (i.e., carrying value, tax basis, or market value) can be used to value
noncash assets contributed to a partnership
31. T
32. T
33. F, There are numerous differences that can cause the income assigned to partners for
accounting purposes to differ from income assigned to partners for tax purposes such as
noncash assets contributed to the partnership valued at an amount different than the
contributing partner’s tax basis
34. F, The tax basis of noncash assets contributed to the partnership must be used to
determine taxable income.
35. T
36. F, Partners should agree on the method to be used to value noncash asset contributions
when preparing the articles of partnership. A variety of bases can be used and the market
value is one of the alternatives.
37. T
38. F, The amount of the liability assumed by the partnership, excluding the contributing
partners share of that liability, will reduce the tax basis of the asset contributed.
39. F, The assumption of a liability has no impact on the valuation approach by the
partnership.
40. T
41. F, The capital balances established can be any amounts agreed by the partners.
42. T
43. F, Partners may contribute tangible and intangible assets to the partnership. It is possible
to consider both when determining initial partnership capital account balances.
44. T
45. T
46. F, The bonus method reallocates the total partnership capital among the partners’ capital
based on the agreed value of unidentifiable intangible assets contributed. Capital
accounts do not have to be the same when the process is completed.
47. F, The bonus method reallocates the total partnership capital among the partners based on
the agreed value of unidentifiable intangible assets contributed. It will always result in
one or more partner’s capital accounts decreasing while the remaining partner(s) capital
accounts increase.
48. T
49. F, The goodwill method requires an additional asset (Goodwill) to be recognized on the
balance sheet. As a result, the partners’ capital accounts will be greater in aggregate.
The bonus method results in a reallocation of capital among the partners and does not
result in a change in total partnership capital.
50. T
51. F, While states may have laws indicating that the partners cannot withdraw resources and
make the partnership insolvent, withdrawals are typically controlled by the articles of
partnership.
52. T,
53. T
54. F, If the partnership agreement is silent with regard to profit and loss allocation, profits
and losses are shared equally.
55. T
56. F, The interest component of partnership profit and loss allocation rewards partners for
capital contributions.
57. T
58. F, The interest on capital balances component of partnership profit and loss allocation
may be based on the beginning, ending, simple average capital balance, or weighted
average capital balance.
59. T
60. F, The salary component of the partnership profit and loss allocation would be expected
to be renegotiated periodically as the duties of the partners change.
61. T
62. T
63. F, Partnerships can offer bonuses to anyone. The choice is up to the partners. On the
other hand, there is no requirement to ever offer a bonus.
64. T
65. F, While many bonuses are based on a measure of income, it is not required. Bonus can
be based on other criteria such as market share, revenue, or average cost per unit.
66. T
67. F, Residual interests may be equal but they are not required to be equal.
68. F, While profit residual ratios and loss residual ratios are generally the same, they can
differ.
69. T
70. T
71. F, Residual profit and loss percentages are the last component of the profit and loss
allocation process applied because they are designed to allocate any remaining amount to
the partners.
72. T
73. F, There are several ways that the difference between market and book value of assets
can be addressed when the profit and loss ratios are changed. Revaluing the assets is one
of the possibilities along with maintaining a record of assets with market and book value
differences as well as directly adjusting capital accounts while leaving asset values
unchanged.
74. T
75. F, A dissolution occurs every time there is a change in relationship among the partners.
This can occur when a new partner enters the partnership or an existing partner leaves the
partnership. A dissolution occurs when the partnership is going out of business but the
termination of business is not a requirement for a dissolution.
76. T
77. F, A new partner's liability for actions that occurred before joining the partnership is
limited to the amount invested in the partnership.
78. T
79. F, Regardless how a new partner enters a partnership, the other partners have to approve
the admission because they must accept unlimited liability due to actions of the new
partner taken on behalf of the partnership.
80. F, There is no necessary relationship between the percentage of equity acquired and the
amount of profit or loss received. These are separate contractual issues.
81. F, There are three methods that may be used when a new partner is paying an amount
more than book value for the investment: revaluation of existing assets, bonus method,
and goodwill method. The partners do not have to choose one method. It would not be
inconsistent to revalue the assets and apply either the bonus or the goodwill method to
record the investment.
82. T
83. F, Existing partners share the difference between market value and book value equally if
that is the manner in which profits and losses are shared. If profits and losses are shared
in some other manner, then the difference between market and book values are shared in
that manner.
84. F, While it is possible that an error has been made, it is more likely that the existing
partners recognized an increase in their capital accounts via a bonus. The difference
between the amount credited to the new partner’s capital account and the amount
invested is shared by the existing partners.
85. T
86. T
87. T
88. F, New partners may receive a bonus if they bring value to the partnership in excess of
the tangible assets invested. This additional amount may be from such things as
expertise, experience, or business contacts. The bonus allocated to the new partner is
payment for these types of unidentifiable assets contributed to the partnership.
89. T
90. T
91. T
92. F, Goodwill may be recognized with regard to the existing partners but it may also be
recognized with regard to the new partner.
93. F, When goodwill is recognized with regard to the new partner, the new partner’s capital
account will be greater than the amount invested by the recognized goodwill.
94. T
95. F, The articles of partnership may include an agreement on the length of advanced notice
a partner must give before withdrawing from a partnership. Failure to provide the agreed
notice may result in the withdrawing partner being liable for damages suffered by the
partnership.
96. T
97. F, If existing partners acquire a withdrawing partner’s equity, they can divide the
purchase of that equity among themselves in any manner they choose.
98. T
99. F, Partnership assets may be revalued but they may also remain at their carrying value.
100. F, The revaluation of the partnership’s assets is unrelated to the purchase of the
withdrawing partners ownership interest in the partnership.
101. T
102. F, The revaluation of partnership assets at the time of a partner’s withdrawal has no
impact on the recognition of a bonus or goodwill.
103. T
104. F, While the partners can recognize either the withdrawing partner’s goodwill or the
entire partnership’s goodwill, there is no requirement to recognize any goodwill when a
partner withdraws from a partnership.
105. T
106. T

Conceptual Multiple Choice Questions

107. Which of the following is not a reason for forming a partnership?
a. Combine economic resources
b. Share managerial talent
c. Avoid complicated tax laws
d. Undertake a specific business objective

108. Which of the following business entity forms is (are) required to maintain their financial
information in accordance with Generally Accepted Accounting Principles?
a. Corporations
b. Corporation and Partnership
c. Partnership and Proprietorships
d. Corporation, Partnerships, and Proprietorships

109. Which of the following statements is not true with regard to tax issues of partnerships?
a. Partnerships are viewed as an extension of the owners
b. Partnerships are required to pay some forms of taxes
c. The IRS must be informed as to the manner partnership income is allocated to the
partners
d. All of the above are true

110. Which of the following is not a similarity that exists between proprietorships and
partnerships?
a. Neither requires approval by a state to form
b. Both can use an accounting method that does not conform to GAAP
c. Owners put the company’s income on the owner’s individual tax return
d. All of the above are similarities of proprietorships and partnerships

111. Which of the following is not an area where there are differences when comparing
partnerships and corporations?
a. The ease of formation
b. The level of owner legal liability
c. The ease of ownership transferability
d. All of the above are areas where partnerships and corporations differ

112. Which of the following is not a difference when comparing partnerships and
corporations?
a. Corporations must conform to GAAP whereas partnerships are not required to
conform to GAAP
b. Partnerships and corporations neither are required to attain state approval to form
 c. Partners have unlimited liability while corporation shareholders generally do not
have unlimited liability
d. Corporations are required to pay income tax while partnerships are not required to
pay income taxes

113. What theory of equity is applicable for partnerships?

a. Proprietary theory
b. Entity theory
c. A mix of proprietary and entity theory
d. Partnership theory

114. Which of the following is not an example of the proprietary theory of equity?
a. Partners do not have claims to specific assets
b. Individual partners are liable for all debts of the partnership
c. A partner’s income tax includes the partner’s share of partnership net income, and
the partnership does not pay income taxes
d. Salaries of partners are viewed as distributions of income, not components of net
income

115. Which of the following is not an example of the entity theory of equity?
a. Continuity of the partnership when admission or withdrawal of partners occurs
b. A partnership can enter into contracts
c. Assets contributed to the partnership retain the existing tax basis to the partner
contributing
d Partnership creditors have priority claim to partnership assets and the creditors of
partners have priority claim to the partner’s assets in the event of liquidation

116. Which of the following statements is not true with regard to articles of partnership?
a. Written articles of partnership are not required to form a partnership
b. The Uniform Partnership Act provides a list of items that must be included in
articles of partnership
c. A written partnership agreement enables the partners to detail the agreed working
relationship among the partners
d. State law applies only if there is not agreement among the partners with regard to
that specific issue

117. When a partnership agreement is silent with regard to any aspect of a partnership
operation, who/what decides on that aspect of the partnership’s operations?
a. State law
b. Uniform Partnership Act
c. Majority vote of stockholders
d. Decision by senior partner

118. Which of the following valuation amounts is not allowed when assigning values to
noncash assets in a partnership formation?
a. Contributor’s carrying value
b. Contributor’s tax basis
c. Market (appraised) value
 d. All of the above valuation amounts are allowed

119. Which of the following statements is correct with regard to the creation of initial capital
account balances on a partnership’s financial records?
a. The capital accounts can be created for any dollar amount agreed by all partners
b. The market value of noncash assets must be considered when creating the initial
capital balances
c. Each partner’s capital account must have a non-zero value assigned to it
d. All of the above statements are correct

120. Which of the following statements is not true with regard to assigning the carrying value
of noncash assets contributed to those assets at the date of a partnership’s formation?
a. Use of the noncash asset’s historical cost can result in the misstatement of the
partners’ capital accounts
b. Assigning the historical cost to noncash assets contributed to a partnership may
require the partnership agreement to address profit/loss distribution that will
occur when the contributed asset is sold
c. Assigning the historical cost to noncash assets contributed to a partnership will
not cause partner taxable income to differ from the partner’s share of partnership
income
d. All of the above statements are correct

121. Which of the following statements is true with regard to assigning a noncash asset
contributed to a partnership the tax basis of the contributing partner?
a. The tax basis of noncash assets contributed must be used if the partnership is a
taxable entity
b. The tax basis must be considered when determine each partner’s allocation of
taxable partnership income
c. The contributing partner’s tax basis may not be used for financial accounting
records
d. None of the above statements are true

122. Which of the following statements is not true with regard to assigning the market value
of noncash assets contributed to those assets at the date of a partnership’s formation?
a. Gains or losses would likely not be recorded if the asset were sold at the date for
partnership is formed
b. The contributing partner’s share of the partnership’s income would be adjusted by
the difference between the market value and tax basis at the date the asset is
contributed to the partnership
c. The market value is the most commonly assigned value to contributed noncash
assets
d. All of the above statements are correct

123. Which of the following statements is correct with regard to the contribution of assets and
associated liabilities to a partnership?
a. Liabilities associated with assets contributed to a partnership remain the liability
of the contributing partner
 b. Liabilities associated with assets contributed to a partnership become the liability
of the partnership
c. Liabilities associated with assets contributed to a partnership become the liability
of both the contributing partner and the partnership
d. Assets may not be contributed to a partnership if there is a liability associated
with the asset

124. The bonus method of recognizing unidentifiable intangible asset contributions to a

partnership does which of the following?
a. It recognizes that partners may contribute more than the observable assets to the
partnership
b. It increases total partnership capital
c. Can only increase partner capital accounts
d. b and c are correct

125. This method of recognizing unidentifiable intangible assets does not result in a change to
total contributed capital.
a. Goodwill method
b. Bonus method
c. Reciprocal method
d. None of these methods will result in a change to total contributed capital

126. When can the bonus method be applied?

a. When a partnership is formed
b. When a new partner is added to the partnership
c. When an existing partner retires from the partnership
d. The bonus method can be applied in all three of the above circumstances

127. Shawn, Harris, and Derek are forming a partnership. The partners agree that Harris
should be assigned goodwill because of his knowledge of the business. Which partners’
capital accounts will have the dollar assigned dollar amounts altered due to the
recognition of the goodwill?
a. Shawn
b. Harris
c. Derek
d. All dollar amount assigned to all three partners’ capital accounts will be altered.

128. This method of recognizing unidentifiable intangible assets results in a change to total
contributed capital.
a. Goodwill method
b. Bonus method
c. Reciprocal method
d. None of these methods will result in a change to total contributed capital

129. The goodwill method always results in which of the following?

a. A change in the dollar value assigned to two or more partners’ capital accounts
b. A decrease in a partner’s capital account
c. An increase in a partner’s capital account
 d. An increase in a partner’s capital account and a decrease in at least one partners’
capital account

130. For what purpose(s) might a drawing account be used for a partnership?
a. To keep a list of business contacts made by a partner
b. To recognize a loan made to a partner
c. To recognize inventory removed from the partnership by the partner
d. None of the above ore possible uses of a drawing account

131. Which of the following is not a withdrawal that may be found in a partnership’s drawing
account?
a. Removal of cash by a partner
b. Payment of a partner’s speeding ticket by the partnership
c. Removal of inventory by a partner
d. All of the above may be found in a drawing account

132. Which of the following statements is correct with regard to drawing accounts that may be
used by a partnership?
a. Drawing accounts are closed to the partners’ capital accounts at the end of the
accounting period
b. Drawing accounts establish the amount that may be taken from the partnership by
a partner in a given time period
c. Drawing accounts are similar to Retained Earnings in a corporation
d. Drawing accounts appear on the balance sheet as a contra-equity account

133. Which of the following should not be done by the accountant with regard to partnership
profit and loss allocation?
a. Prepare an analysis of alternative methods to allocate profits and losses
b. Recommend a particular method for allocating profits and losses
c. Inform partners of different ways that profits and losses could be allocated
d. All of the above are reasonable duties of the accountant

134. What is the underlying purpose of the interest on capital balances component of
allocating partnership profits and losses?
a. Compensate partners who contribute economic resources to the partnership
b. Reward labor and expertise contributions
c. Reward for special responsibilities undertaken
d. None of the above

135. What is the underlying purpose of the salary component of allocating partnership profits
and losses?
a. Compensate partners who contribute economic resources to the partnership
b. Reward labor and expertise contributions
c. Reward for special responsibilities undertaken
d. None of the above

136. Which of the following interest component calculation bases is least susceptible to
manipulation when allocating profits and losses to partners?
 a. Beginning capital account balance
b. Average of beginning and ending capital account balances
c. Weighted average capital account balance
d. Ending capital account balance

137. Which component of the partnership profit and loss allocation compensates partners for
the routine time and effort expended in the business?
a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest

138. Which component of the partnership profit and loss allocation is most commonly offered
to the partner who manages the business?
a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest

139. Which of the following may be a basis for determining the amount of a partner’s bonus?
a. Operating income
b. Market share
c. Average cost per unit
d. All of the three may be bases for determining the amount of a partner’s bonus

140. Which component of the partnership profit and loss allocation must be performed last?
a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest

141. Which of the following statements is true with regard to partnership residual profit and
loss ratios?
a. A partner’s residual profit ratio must be the same as the loss ratio
b. Residual profit and loss ratios can be changed by agreement
c. The residual profit and loss ratio must always be applied
d. All of the above are true statements

142. Applying the partnership residual profit and loss ratio can have which of the following
effects on a partner’s allocation of profit and/or loss?
a. Increase
b. Decrease
c. Increase or decrease
d. The residual profit and loss ratio is not used for the allocation or profit and/or loss

143. Which of the following should be done when the partnership profit and loss ratios are
changed?
a. The book and market value of assets and liabilities should be evaluated
 b. The capital accounts should be modified to reflect the new profit and loss ratios
c. The creditors should be informed that the profit and loss ratios have been changed
d. The partners must draft new articles of partnership.

144. Which of the following is not a common way to address the difference between market
and book values of assets and liabilities when the partnership profit and loss ratios are
changed?
a. Assets and liabilities are revalued to market value
b. Assets with a difference between market and book value are sold and the profit is
distributed to partners based on existing profit and loss ratios
c. A list of differences between market value and book value are made
d. Capital accounts of the partners are altered to reflect the difference between
market and book values at the date the profit and loss ratios change

145. Which of the following occurs every time a new partner is admitted to a partnership or an
existing partner leaves the partnership?
a. Dissolution
b. Termination
c. Dissolution and termination
d. None of the above occurs

146. Which of the following forms of new partner admission will not result in a change in the
partnership’s net assets?
a. Purchase of an ownership interest directly from the partnership
b. Purchase of an ownership interest directly from an existing partner
c. Either of the above
d. Neither of the above

147. Which of the following must occur for a new partner to enter the partnership by
acquiring an ownership interest directly from an existing partner?
a. Existing partners must know the amount the new partner is paying for the
ownership interest
b. The new partner must acquire all of the current partner’s ownership interest
c. Existing partners must approve the admission of the new partner into the
partnership
d. The new partner must live in the same state as the other partners

148. Which of the following must be true when a new partner acquires an ownership interest
directly from an existing partner?
a. Capital must be assigned to the new partner
b. The new partner’s profit and loss allocation must be proportionate to the capital
account balance
c. The new partner must be allocated some amount of profit and loss
d. The existing partners must provide a list of all the partnership’s outstanding
liabilities to the new partner

149. When a new partner joins a partnership by investing assets into the partnership, what
method may be used to record the admission of the new partner?
 a. Revaluation of existing assets
b. Recognition of goodwill
c. Application of the bonus method
d. Any of the three or a combination may be applied

150. Which of the following is a reason to not revalue partnership assets at the date a new
partner is admitted to the partnership?
a. There has been a change in ownership
b. A new legal entity exists
c. The partnership has not ceased operations
d. All three are reasons to not revalue partnership assets at the date of a new
partner’s admission

151. A bonus is recognized by existing partners at the date a new partner joins a partnership
when which of the following relationships occur?
a. The new partner’s contribution exceeds his/her percentage of total partnership
capital after the investment is made
b. The new partner’s contribution is less than his/her percentage of total partnership
capital after the investment is made
c. The new partner’s contribution is equal to his/her percentage of total partnership
capital after the investment is made
d. It is not possible to determine the answer to this question

152. Which of the following is not a criterion for recognizing a bonus to existing partners
when a new partner joins the partnership?
a. Only cash assets were contributed to the partnership by the new partner
b. The existing partners desire to not recognize goodwill on the balance sheet
c. The articles of partnership indicate that the bonus method will be used to admit
new partners
d. The new partner invests more into the partnership that his/her share of total
partnership capital after the investment is made

153. Which method of recording the admission of a new partner into a partnership potentially
results in the existing partners’ capital accounts changing in value?
a. Bonus method
b. Goodwill method
c. Either bonus method or goodwill method
d. Existing partners’ capital accounts never change when a new partner is admitted
into a partnership.

154. A bonus recognized by a new partner at the date of admission into the partnership is
generally shared by the existing partners in what way?
a. Equally
b. In proportion to capital account balances
c. In proportion to profit and loss residual ratios
d. In proportion to salaries
155. Which of the following is not a criterion for recognizing a bonus to a new partner when
the new partner joins the partnership?
a. Only cash assets were contributed to the partnership by the new partner
b. The existing partners desire to not recognize goodwill on the balance sheet
c. The articles of partnership indicate that the bonus method will be used to admit
new partners
d. The new partner invests less into the partnership that his/her share of total
partnership capital after the investment is made

156. When the goodwill method of recognizing the admission of a new partner is applied and
the existing partners contribute the goodwill, which of the following will result?
a. An increase in the capital accounts of existing partners
b. A decrease in the amount invested by the new partner
c. A decrease in the partnership’s total assets
d. A new partner’s capital account less than the amount invested

157. Which of the following will occur when the existing partners contribute goodwill and a
new partner is admitted to the partnership?
a. The existing partner’s capital accounts will be decreased
b. The existing partner will receive cash from the partnership
c. The partnership’s total assets will be increased
d. The new partner will be required to reduce his/her profit and loss sharing ratio

158. Which of the following statements is false with regard to the goodwill recognized for a
new partner entering a partnership?
a. The new partner’s capital account balance will exceed the amount invested
b. The existing partners’ capital accounts will remain unchanged
c. The amount invested by the new partner will be less than his/her proportion of the
partnership’s book value before goodwill is recognized
d. The three partners will have equal capital account balances when the transaction
is completed

159. Which of the following statements presents a reason that goodwill may be recorded with
regard to a new partner at the date of that partner’s admission to the partnership?
a. The existing partnership is worth more than the appraised value of the tangible
net assets
b. The new partner has a strong desire to become a member of the partnership
c. The total value of the new partner’s contribution to the partnership is greater than
the value of the identifiable net assets contributed
d. The new partner’s residual interest in profits and losses is greater than 30 percent

160. What portion of the partnership’s assets must be revalued when a partner withdraws from
the partnership?
a. The withdrawing partner’s share must be revalued
b. All of the partnership’s assets must be revalued
c. Any or all of the partnership’s assets may be revalued but none have to be
revalued
d. Partnership assets may not be revalued when a partner withdraws
161. Who may acquire the ownership interest of a partner who is withdrawing from a
partnership?
a. Existing partners
b. New investor
c. The partnership
d. All of the above

162. If existing partners acquire the equity of a withdrawing partner, in what manner do they
divide the equity?
a. In any manner they choose
b. Equally
c. Proportionate to their residual profit and loss ratios
d. Existing partners are not permitted to acquire the equity of a withdrawing partner

163. Which of the following must exist to create the potential for a retiring partner to have a
bonus recognized at the date of withdrawal?
a. The retiring partner must be paid more than the book value of his equity
b. The existing partners must decide to not admit a new partner to the partnership
c. The retiring partner’s equity must be acquired by the partnership
d. All of the above are necessary for a bonus to be recognized

164. In what manner do the remaining partners share in the bonus paid to a withdrawing
partner?
a. In proportion to their residual profit and loss ratios
b. Equally
c. In proportion to their capital account balances
d. The partner with the greatest capital account is assigned the bonus

165. Which of the following statements is true with regard to a withdrawing partner?
a. A bonus must be paid to the retiring partner
b. A bonus may be paid to the retiring partner
c. A bonus must be paid to the retiring partner or to the remaining partners
d. Recognizing a bonus is not appropriate when a partner retires

166. What change occurs to continuing partners’ capital accounts when a withdrawing partner
is assigned goodwill at the date of withdrawal?
a. Continuing partners’ capital accounts decease by their profit and loss ratio
proportion of the goodwill assigned to the withdrawing partner
b. Continuing partners’ capital accounts increase
c. Continuing partners’ capital accounts do not change
d. Goodwill cannot be recognized with regard to withdrawing partners

167. What amount of goodwill can be recognized at the date a partner withdraws from a
partnership?
a. The withdrawing partner’s portion of goodwill
b. The continuing partners’ portion of goodwill
c. Goodwill may not be recognized at the date a partner withdraws
 d. Either the withdrawing partner’s portion of goodwill or the goodwill attributable
to the entire partnership

168. Which of the following will occur when the goodwill method is used to recognize the
withdrawal of a partner?
a. The partnership must acquire the equity of the withdrawing partner
b. The withdrawing partner will be paid the book value of his/her equity after the
goodwill is recognized
c. The existing partners will divide the salary of the withdrawing partner
d. The total equity of the partnership will not change as a result of the partner’s
withdrawal

Conceptual Multiple Choice Question Difficulty and Solutions

107. easy c
108. moderate a
109. moderate d
110. easy d
111. easy d
112. moderate b
113. moderate c
114. difficult a
115. difficult c
116. moderate b
117. moderate a
118. easy d
119. moderate a
120. difficult c
121. moderate b
122. moderate d
123. easy b
124. easy a
125. easy b
126. moderate d
127. easy b
128. easy a
129. moderate c
130. easy c
131. moderate d
132. moderate a
133. easy b
134. easy a
135. easy b
136. easy c
137. easy c
138. easy b
139. moderate d
140. easy d
141. moderate b
142. easy c
143. moderate a
144. easy b
145. easy a
146. easy b
147. easy c
148. moderate c
149. easy d
150. moderate c
151. moderate b
152. easy a
153. easy c
154. easy c
155. easy a
156. moderate a
157. easy c
158. easy d
159. moderate c
160. easy c
161. easy d
162. moderate a
163. moderate d
164. easy a
165. easy b
166. easy c
167. easy d
168. easy b

Computational Multiple Choice Questions

169. Paul, Jeremy, and Juan are forming a partnership. Juan contributes a building having an
historical cost, accumulated depreciation, and market value of $290,000, $100,000, and
$400,000, respectively. The building is initially recorded on the partnership’s books at
Juan’s book value ($190,000). Two years later the building is sold for a $270,000 gain.
What portion of the profit or loss should be allocated to Juan?
a. $20,000
b. $230,000
c. $210,000
d. $90,000

170. Philip, Ray, and Sarah are forming a partnership. Philip contributes cash of $100,000;
Ray contributes inventory with a value of $100,000; and Sarah contributes a building
with a market value of $300,000. The partnership also assumed the $210,000 mortgage
on the building. What is the amount of capital assigned to each partner?
Philip Ray Sarah
a. $30,000 $30,000 $230,000
b. $56,000 $56,000 $174,000
c. $100,000 $100,000 $90,000
 d. $100,000 $100,000 $300,000

171. Max, Ike, and Tony are forming a partnership. The appraised value of assets contributed
is $60,000, $80,000, and $100,000, respectively. In addition, Max and Tony agree that
Ike’s experience is worth $30,000. The partners desire to apply the bonus method where
applicable. What is the total capital recorded at the date the partnership is formed?
a. $210,000
b. $240,000
c. $270,000
d. Some other dollar amount

172. Richardson, Peterson, and Wilkerson are forming a partnership. The partners contribute
cash and noncash assets valued at $30,000, $50,000, and $25,000, respectively. The
partners choose to apply the bonus method where applicable. If the partners agree to
establish equal capital account balances when the partnership is formed, how much of a
bonus is received by Richardson?
a. $15,000
b. $10,000
c. $5,000
d. Richardson does not receive a bonus

173. Richardson, Peterson, and Wilkerson are forming a partnership. The partners contribute
cash and noncash assets valued at $30,000, $50,000, and $25,000, respectively. The
partners choose to apply the bonus method where applicable. If the partners agree to
establish equal capital account balances when the partnership is formed, how much
capital is Peterson sacrificing to give a bonus to Richardson and Wilkerson?
a. $15,000
b. $10,000
c. $5,000
d. Richardson does not receive a bonus

174. Albert, Claude, and Jamie form a partnership by contributing $25,000, $70,000, and
$80,000, respectively. In addition, the partners agree that Albert should receive $20,000
of goodwill because of his special skills relevant to this business. What amount of capital
will exist for Albert when the partnership is formed?
a. $20,000
b. $25,000
c. $65,000
d. $45,000

175. Albert, Claude, and Jamie form a partnership by contributing $25,000, $70,000, and
$80,000, respectively. In addition, the partners agree that Albert should receive $20,000
of goodwill because of his special skills relevant to this business. What amount of capital
will exist for Claude when the partnership is formed?
a. $60,000
b. $65,000
c. $70,000
d. Some other amount
176. Chris and David are forming a partnership with contributions of $75,000 and $125,000,
respectively. In addition, they agree that they will recognize $25,000 goodwill with
regard to David’s contacts in the area. What is the total amount of capital that will exist
for the partnership immediately after it is formed?
a. $75,000
b. $125,000
c. $150,000
d. $225,000

177. Chris is a partner in a local partnership. The profit and loss sharing agreement includes
an interest allocation of 7 percent on the invested capital. The capital account of Chris
reveals that he had a beginning capital account balance of $50,000. He withdrew
$10,000 on May 1 and invested $25,000 on October 31. Rounded to the nearest dollar,
what is Chris’ weighted average capital balance?
a. $57,500
b. $51,667
c. $47,500
d. $28,333

178. Richard is a partner in a local partnership. The profit and loss sharing agreement
includes an interest allocation of 8 percent on the invested capital. Richard had a
beginning capital balance of $60,000. He invested $30,000 on March 1, withdrew
$20,000 on August 1, and invested $40,000 on December 1. Rounded to the nearest
dollar, what dollar amount is allocated to Richard as interest on capital balance if the
weighted average capital balance is used as the basis of the computation?
a. $82,500
b. $6,400
c. $80,000
d. $6,600

179. Shawn is a managing partner in a local business. Part of his profit allocation is a bonus
based on the store’s operating income. The bonus is 8 percent of operating income in
excess of $200,000 after deducting the bonus. If operating income for the year is
$250,000, what is Shawn’s bonus (rounded to the nearest dollar)?
a. $3,703
b. $40,000
c. $20,000
d. $4,000

180. James has a bonus as part of his partner profit allocation. The bonus is based on the
partnerships net income. James receives a bonus equal to 5 percent that the net income
exceeds $150,000. If the net income in the current year is $180,000, how much bonus
does James receive?
a. $30,000
b. $7,500
c. $1,500
d. $9,000
181. Cheryl is the manager of a local store. She is also a partner in the company and she
receives a bonus as part of the profit and loss allocation. Cheryl’s bonus is based on the
increase in revenues recorded during the period. The bonus arrangement is that Cheryl
receives 1 percent of net income for every full percentage point growth for revenues in
excess of a 5 percent revenue growth. During the most recent period, revenues grew
from $500,000 to $540,000 and net income grew from $98,000 to $120,000. How much
bonus does Cheryl receive for this period?
a. $2,000
b. $1,100
c. $6,000
d. $3,600

182. Norman, Sarah, and Taylor are partners. The partnership income for the period is
$130,000. The partnership agreement assigns salaries to the partners of $10,000,
$15,000, and $18,000, respectively. In addition, the partners have profit and loss residual
ratios of 30%, 45%, and 25%. What is the amount of profit and loss allocated to Sarah
as a result of applying the residual ratios?
a. $39,150
b. $54,150
c. $58,500
d. $51,750

183. Jim and Scott are partners who have residual profit and loss ratios of 55% and 45%,
respectively. The partnership has income of $60,000 for the current period. How much
of this income is allocated to Scott?
a. $30,000
b. $33,000
c. $14,850
d. $27,000

184. Mike and Michelle are partners in a local business. The business has a $25,000 loss this
year. How much of this loss is allocated to Mike?
a. $12,500
b. $0
c. $25,000
d. Losses cannot be allocated without residual profit and loss ratios

185. Nick, Joe, and Mike are partners. The company has $150,000 net income for the period.
How is this income divided to the partners if the following profit and loss allocation
process is followed?
Nick Joe Mike
Weighted average capital $200,000 $350,000 $180,000
Salary 25,000 15,000 35,000
Bonus .1 (NI - $100,000)
Residual profit/loss ratios .25 .45 .30
Return on invested capital 9%
 Nick Joe Mike
a. $43,000 $46,500 $60,500
b. $45,325 $50,685 $53,990
c. $50,000 $50,000 $50,000
d. $44,075 $48,435 $57,490

186. Harriet, Bob, and Tim are partners. Income for the current year is $500,000. The profit
and loss agreement states that salaries are $35,000, $50,000, and $40,000, respectively.
In addition, the residual profit and loss ratios are 40%, 30%, and 30%, respectively.
How much of the profit is allocated to Harriet?
a. $150,000
b. $185,000
c. $162,500
d. $152,500

187. Suzanne, Thomas, and Vicky are partners. They have average capital account balances
of $200,000, $250,000, and $400,000, respectively. In addition, they have residual profit
and loss ratios of 15%, 25%, and 60%, respectively. If income for the year is $300,000
and the partners earn 8 percent return on invested capital, how much will be allocated to
Thomas?
a. $78,000
b. $100,000
c. $50,800
d. $171,200

188. Johnson and Pritchard are partners. They are changing the profit and loss ratios from the
current 60/40 to 70/30. At the date of the change, vacant land owned by the partnership
has a book value of $50,000 and a market value of $60,000. The partners choose to
prepare an itemized list of assets with market values different from book values. If the
land is sold in the future for $80,000, how much of the gain will be assigned to Johnson?
a. $21,000
b. $18,000
c. $27,000
d. $20,000

189. Johnson and Pritchard are partners. They are changing the profit and loss ratios from the
current 60/40 to 70/30. At the date of the change, vacant land owned by the partnership
has a book value of $50,000 and a market value of $60,000. The partners choose to
prepare an itemized list of assets with market values different from book values. If the
land is sold in the future for $80,000, how much of the gain will be assigned to
Pritchard?
a. $12,000
b. $10,000
c. $9,000
d. $13,000

190. Karen and Andrea are currently changing their partnership profit and loss ratios from
75/25 to 60/40. They have created a list of assets that have market and book value
 differences. One of the assets is a building with a $300,000 market value and $200,000
book value. Two years after changing the profit and loss ratios, the building is sold for
$380,000. How much of the profit is allocated to Karen?
a. $135,000
b. $108,000
c. $123,000
d. $183,000

191. Karen and Andrea are currently changing their partnership profit and loss ratios from
75/25 to 60/40. They have created a list of assets that have market and book value
differences. One of the assets is a building with a $300,000 market value and $200,000
book value. Two years after changing the profit and loss ratios, the building is sold for
$380,000. How much of the profit is allocated to Andrea?
a. $57,000
b. $45,000
c. $72,000
d. $97,000

192. Peter and Ronald are partners. They have shared profits and losses 65/35 for a number of
years. Peter has indicated that he is going to reduce his involvement in the partnership so
the profit and loss ratio is being modified to 45/55. At the date of the change in the profit
and loss ratio, the partnership own vacant land with a market value of $300,000 and a
book value of $100,000. Peter and Ronald compile a list of assets with market and book
value differences. Two years after the change in the profit and loss ratios, the land is sold
for $450,000. How much of the gain is allocated to Peter?
a. $197,500
b. $227,500
c. $157,500
d. $287,500

193. Peter and Ronald are partners. They have shared profits and losses 65/35 for a number of
years. Peter has indicated that he is going to reduce his involvement in the partnership so
the profit and loss ratio is being modified to 45/55. At the date of the change in the profit
and loss ratio, the partnership own vacant land with a market value of $300,000 and a
book value of $100,000. Peter and Ronald compile a list of assets with market and book
value differences. Two years after the change in the profit and loss ratios, the land is sold
for $450,000. How much of the gain is allocated to Ronald?
a. $122,500
b. $192,500
c. $152,500
d. $262,500

194. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
changed, the land is sold for $200,000. What is the amount of change to Jennifer’s
capital account at the date the land is revalued?
 a. $72,000
b. $42,000
c. $30,000
d. $28,000

195. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
changed, the land is sold for $200,000. What is the amount of change to Robert’s capital
account at the date the land is revalued?
a. $72,000
b. $42,000
c. $30,000
d. $28,000

196. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
changed, the land is sold for $200,000. What is the amount of change to Jennifer’s
capital account at the date the land is sold?
a. $48,000
b. $67,500
c. $31,500
d. $36,000

197. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
changed, the land is sold for $200,000. What is the amount of change to Robert’s capital
account at the date the land is sold?
a. $44,000
b. $82,500
c. $32,000
d. $60,000

198. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to James’
capital account at the date the building is revalued?
a. $105,000
b. $91,000
c. $45,000
 d. $39,000

199. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to Bruce’s
capital account at the date the building is revalued?
a. $105,000
b. $91,000
c. $45,000
d. $39,000

200. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to James’
capital account at the date the building is sold?
a. $91,000
b. $78,000
c. $39,000
d. $52,000

201. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to Bruce’s
capital account at the date the building is sold?
a. $91,000
b. $78,000
c. $39,000
d. $52,000

202. Theresa and Craig are partners. Their current profit and loss ratios (70/30) are being
changed to (60/40). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, land has a market value of
$250,000 and a book value of $120,000. How much will Theresa’s capital account be
adjusted at the date of the change in the profit and loss ratios?
a. $52,000 increase
b. $13,000 increase
c. $52,000 decrease
d. $13,000 decrease
203. Theresa and Craig are partners. Their current profit and loss ratios (70/30) are being
changed to (60/40). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, land has a market value of
$250,000 and a book value of $120,000. How much will Craig’s capital account be
adjusted at the date of the change in the profit and loss ratios?
a. $52,000 increase
b. $13,000 increase
c. $52,000 decrease
d. $13,000 decrease

204. Eric and Phillip have been partners for several years. During that time they have shared
profits and losses (60/40). They are currently revising the profit and loss ratios to
(70/30). Eric and Phillip decide to adjust the capital accounts at the date of the change to
reflect the difference between market value and book value of assets and liabilities. At
the date of the change, the partnership owns a building with a book value of $350,000
and a market value of $600,000. How much will Eric’s capital account be adjusted at the
date of the change in the profit and loss ratios?
a. $25,000 increase
b. $50,000 increase
c. $25,000 decrease
d. $50,000 decrease

205. Eric and Phillip have been partners for several years. During that time they have shared
profits and losses (60/40). They are currently revising the profit and loss ratios to
(70/30). Eric and Phillip decide to adjust the capital accounts at the date of the change to
reflect the difference between market value and book value of assets and liabilities. At
the date of the change, the partnership owns a building with a book value of $350,000
and a market value of $600,000. How much will Phillip’s capital account be adjusted at
the date of the change in the profit and loss ratios?
a. $25,000 increase
b. $50,000 increase
c. $25,000 decrease
d. $50,000 decrease

206. Jenna is about to purchase some of Cynthia’s partnership interest. Cynthia currently has
partnership equity of $84,500. If Jenna pays Cynthia $30,000 for 30 percent of her
capital, what amount will be recorded in the partnership accounting records?
Jenna Cynthia
a. $30,000 credit $25,350 debit
b. $25,350 credit $25,350 debit
c. $30,000 credit $30,000 debit
d. $25,350 debit $25,350 credit

207. Sam and Ray are partners with capital accounts of $150,000 and $225,000, respectively.
They are considering allowing Richard to purchase 30 percent of Ray’s equity. At the
date of the proposed transaction, Sam and Ray want to revalue the partnership’s assets
 and allocate any differences based on their 40/60 profit sharing agreement. Assume that
the net market versus book value differences is $100,000. What amount would Richard
pay for the 30 percent interest?
a. $67,500
b. $76,500
c. $97,500
d. The amount cannot be determined from the information provided

208. Jesse, Joseph, and Leslie are partners with capital accounts of $70,000, $120,000, and
$90,000, respectively. The partnership share profits and losses 45%, 30%, and 25%,
respectively. They are considering allowing Hans to join the partnership by investing
directly into the partnership. The partners intend to revalue the assets before Hans’
admission. Neither bonus nor goodwill are required. If the asset’s market value exceeds
book value $150,000, how much will Hans invest to acquire a 20% equity interest in the
partnership?
a. $107,500
b. $86,000
c. $70,000
d. $100,000

209. Sandra and Joshua are partners. They have capital account balances of $250,000 and
$200,000, respectively, and they share profits and losses 70/30. The partners are
considering admitting Judy as a new partner with a 25 percent equity interest for an
investment in the partnership of $180,000. Before admission, Sandra and Joshua will
revalue the partnership’s assets. If the net increase in the partnership’s assets is
$125,000, what will be the balance in Sandra’s capital account immediately before Judy’s
admission?
a. $575,000
b. $337,500
c. $528,500
d. $262,500

210. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of Susan’s capital
account at the date of admission?
a. $142,500
b. $150,000
c. $144,000
d. The dollar amount cannot be determined from this information

211. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of bonus recognized
in Ken’s capital account at the date of admission?
a. $4,500
 b. $34,500
c. $6,000
d. $1,500

212. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of bonus recognized
in Robert’s capital account at the date of admission?
a. $6,000
b. $1,500
c. $144,000
d. $4,500

213. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of Ken’s capital
account at the date of admission?
a. $274,500
b. $304,500
c. $144,000
d. $271,500

214. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of Robert’s capital
account at the date of admission?
a. $271,500
b. $301,500
c. $144,000
d. $304,500

215. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of Pierre’s capital account at
the date of admission?
a. $933,000
b. $450,000
c. $388,750
d. $622,000

216. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
 and the bonus method is applied. What is the dollar amount of bonus recognized in
John’s capital account at the date of admission?
a. $98,000
b. $61,250
c. $24,500
d. $36,750

217. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of bonus recognized in
Sam’s capital account at the date of admission?
a. $98,000
b. $61,250
c. $24,500
d. $36,750

218. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of John’s capital account at
the date of admission?
a. $516,750
b. $661,750
c. $649,500
d. $504,500

219. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of John’s capital account at
the date of admission?
a. $516,750
b. $661,750
c. $649,500
d. $504,500

220. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of Frank’s capital
account at the date of admission?
a. $137,500
b. $120,000
c. $143,333
d. The dollar amount cannot be determined from this information
221. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of bonus recognized
in Frank’s capital account at the date of admission?
a. $70,000
b. $23,333
c. $17,500
d. $52,500

222. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of the reduction to
Kris’ capital account at the date of admission?
a. $5,250
b. $12,250
c. $17,500
d. $100,333

223. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of the reduction to
Mark’s capital account at the date of admission?
a. $5,250
b. $12,250
c. $17,500
d. $100,333

224. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of Kris’ capital
account at the date of admission?
a. $157,750
b. $254,750
c. $164,750
d. $247,750

225. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of Mark’s capital
account at the date of admission?
a. $157,750
b. $254,750
c. $164,750
 d. $247,750

226. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg into
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of Greg’s capital account at
the date of admission?
a. $60,000
b. $78,530
c. $429,250
d. $75,750

227. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of reduction to Tom’s capital
account at the date of admission?
a. $6,300
b. $9,450
c. $54,300
d. $81,450

228. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of reduction to Barbara’s
capital account at the date of admission?
a. $6,300
b. $9,450
c. $54,300
d. $81,450

229. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of Tom’s capital account at
the date of admission?
a. $255,550
b. $258,700
c. $173,700
d. $170,550

230. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of Barbara’s capital account
at the date of admission?
a. $255,550
 b. $258,700
c. $173,700
d. $170,550

231. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, which partner(s) are contributing the goodwill?
a. Both new and existing partners are contributing goodwill
b. New partner is contributing goodwill
c. Existing partners are contributing goodwill
d. There is not enough information to answer this question

232. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jacob is admitted?
a. $130,000
b. $26,000
c. $87,500
d. $32,500

233. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Jacob immediately after he
is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000

234. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Michelle immediately after
Jacob is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000
235. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Steve immediately after
Jacob is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000

236. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
d. There is not enough information to answer this question

237. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jane is admitted?
a. $31,250
b. $125,000
c. $183,333
d. $41,667

238. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Jane immediately after she is
admitted?
a. $225,000
b. $281,250
c. $293,750
d. $183,333

239. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
 recognized, what will be the capital account balance of Susan immediately after Jane is
admitted?
a. $318,750
b. $356,250
c. $368,750
d. $306,250

240. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of David immediately after Jane is
admitted?
a. $318,750
b. $356,250
c. $368,750
d. $306,250

241. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jason is admitted?
a. $11,250
b. $8,438
c. $186,250
d. $15,000

242. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Jason immediately after he
is admitted?
a. $190,000
b. $175,000
c. $15,000
d. $186,250

243. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Dan immediately after Jason
is admitted?
a. $285,000
b. $186,250
 c. $250,000
d. $320,000

244. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Stephanie immediately after
Jason is admitted?
a. $285,000
b. $186,250
c. $250,000
d. $320,000

245. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
d. There is not enough information to answer this question

246. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Julia is admitted?
a. $142,000
b. $150,000
c. $10,000
d. $8,000

247. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Julia immediately after she is
admitted?
a. $160,000
b. $150,000
c. $152,000
d. $158,000

248. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
 are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Juan immediately after Julia is
admitted?
a. $280,000
b. $142,000
c. $320,000
d. $240,000

249. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Felix immediately after Julia is
admitted?
a. $280,000
b. $142,000
c. $320,000
d. $240,000

250. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25 percent,
respectively. Harry is withdrawing from the partnership. At the date of withdrawal, the
partners are revaluing Harry’s portion of the partnership’s assets. If the value of the
partnership’s assets are $200,000 greater than book value, what is the dollar amount of
capital account adjustment that will be recorded?
a. $50,000
b. $70,000
c. $80,000
d. $200,000

251. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25 percent,
respectively. Harry is withdrawing from the partnership. At the date of withdrawal, the
partners are revaluing all of the partnership’s assets. If the value of the partnership’s
assets are $200,000 greater than book value, what is the dollar amount of capital account
adjustment that will be recorded?
a. $50,000
b. $70,000
c. $80,000
d. $200,000

252. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25 percent,
respectively. The partners have capital account balances of $80,000, $110,000, and
$55,000, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing all of the partnership’s assets, an increase of
$200,000. If Susan and Walter acquire Harry’s equity, what will be the amount of
Susan’s capital on the partnership’s balance sheet immediately after Harry’s withdrawal,
rounded to the nearest dollar?
a. $110,000
 b. $230,000
c. $282,308
d. Susan’s capital account balance cannot be determined from the information given

253. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25 percent,
respectively. The partners have capital account balances of $80,000, $110,000, and
$55,000, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing all of the partnership’s assets, an increase of
$200,000. If Susan and Walter acquire Harry’s equity, what will be the amount of total
capital on the partnership’s balance sheet immediately after Harry’s withdrawal?
a. $245,000
b. $445,000
c. $365,000
d. $295,000

254. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
Frank’s capital account be reduced if the bonus method is applied for the withdrawal?
a. $40,000
b. $24,000
c. $20,000
d. $16,000

255. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. What will be the
balance in Frank’s capital account if the bonus method is applied for the withdrawal?
a. $160,000
b. $104,000
c. $184,000
d. $136,000

256. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
George’s capital account be reduced if the bonus method is applied for the withdrawal?
a. $40,000
b. $24,000
c. $20,000
d. $16,000
257. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. What will be the
balance in George’s capital account if the bonus method is applied for the withdrawal?
a. $120,000
b. $104,000
c. $184,000
d. $136,000

258. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. How much
will Melissa’s capital account be reduced if the bonus method is applied for the
withdrawal?
a. $36,000
b. $60,000
c. $24,000
d. $30,000

259. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. What will be
the balance in Melissa’s capital account if the bonus method is applied for the
withdrawal?
a. $336,000
b. $300,000
c. $264,000
d. $246,000

260. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. How much
will Sarah’s capital account be reduced if the bonus method is applied for the
withdrawal?
a. $36,000
b. $60,000
c. $24,000
d. $30,000
261. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. What will be
the balance in Sarah’s capital account if the bonus method is applied for the withdrawal?
a. $336,000
b. $300,000
c. $264,000
d. $246,000

262. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is $22,500. Assuming that Bob’s equity
is purchased by a new partner (Deborah) approved by Claire and Jack, what is the
amount of Deborah’s initial capital account?
a. $150,000
b. $170,000
c. $172,500
d. The amount cannot be determined because the amount Deborah paid for Bob’s
equity is not known

263. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is $22,500. Assuming that Bob’s equity
is purchased by Claire (60 percent) and Jack (40 percent), what is the amount of Claire’s
capital account at the date of Bob’s withdrawal?
a. $238,500
b. $307,500
c. $186,750
d. $180,000

264. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is $22,500. Assuming that Bob’s equity
 is purchased by Claire (60 percent) and Jack (40 percent), what is the amount of Jack’s
capital account at the date of Bob’s withdrawal?
a. $397,500
b. $294,000
c. $285,000
d. $159,000

265. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the
partnership’s goodwill $75,000. Assuming that Bob’s equity is purchased by a new
partner (Deborah) approved by Claire and Jack, what is the amount of Deborah’s initial
capital account?
a. $150,000
b. $170,000
c. $172,500
d. The amount cannot be determined because the amount Deborah paid for Bob’s
equity is not known

266. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the
partnership’s goodwill $75,000. Assuming that Bob’s equity is purchased by Claire (60
percent) and Jack (40 percent), what is the amount of Claire’s capital account at the date
of Bob’s withdrawal?
a. $175,500
b. $247,500
c. $257,250
d. $327,750

267. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the
partnership’s goodwill $75,000. Assuming that Bob’s equity is purchased by Claire (60
percent) and Jack (40 percent), what is the amount of Jack’s capital account at the date of
Bob’s withdrawal?
a. $175,500
b. $247,500
c. $257,250
 d. $327,750

268. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.
Assuming that Sally’s equity is purchased by a new partner (Mary) approved by Bonnie
and Gwen, what is the amount of Mary’s initial capital account?
a. $240,000
b. $390,000
c. $320,000
d. The amount cannot be determined because the amount Mary paid for Sally’s
equity is not known

269. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.
Assuming that Sally’s equity is purchased by Bonnie (60 percent) and Gwen (40
percent), what is the amount of Bonnie’s capital account at the date of Sally’s
withdrawal?
a. $446,000
b. $494,000
c. $424,000
d. $376,000

270. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.
Assuming that Sally’s equity is purchased by Bonnie (60 percent) and Gwen (40
percent), what is the amount of Gwen’s capital account at the date of Sally’s withdrawal?
a. $446,000
b. $494,000
c. $424,000
d. $376,000

271. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
 partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
equity is purchased by a new partner (Mary) approved by Bonnie and Gwen, what is the
amount of Mary’s initial capital account?
a. $87,500
b. $237,500
c. $350,000
d. The amount cannot be determined because the amount Mary paid for Sally’s
equity is not known

272. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is the amount of
Bonnie’s capital account at the date of Sally’s withdrawal?
a. $441,000
b. $490,000
c. $560,000
d. $420,000

273 Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is the amount of
Bonnie’s capital account at the date of Sally’s withdrawal?
a. $441,000
b. $490,000
c. $560,000
d. $420,000

274. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is total
partnership equity after the withdrawal?
a. $980,000
b. $780,000
c. $830,000
d. $630,000
Computational Multiple Choice Question Difficulty and Solutions
169. difficult b
($400,000 - $190,000) + [$270,000 - ($400,000 - $190,000)]/3 = $230,000
170. easy c
171. easy b
$60,000 + $80,000 + $100,000 = $240,000
172. easy c
$30,000 + $50,000 + $25,000 = $105,000/3 = $35,000 - $30,000 = $5,000
173. moderate a
$30,000 + $50,000 + $25,000 = $105,000/3 = $35,000
$50,000 - $30,000 = $15,000
174. easy d
175. easy c
176. easy d
177. moderate c
[($50,000 x 4) + ($40,000 x 6) + ($65,000 x 2)]/12 = $47,500
178. moderate b
[($60,000 x 2) + ($90,000 x 5) + ($70,000 x 4) + $110,000] (.08) = $6,400
179. difficult a
B = .08($250,000 - $200,000 - B)
180. moderate c
B = .05($180,000 - $150,000)
181. difficult d
B = {[($540,000 - $500,000)/$500,000] - .05} $120,000
182. moderate a
($130,000 - $10,000 - $15,000 - $18,000) .45
183. easy d
$60,000 x .45
184. easy a
Profits and losses are allocated equally if there is no allocation provided
185. difficult d
Nick Joe Mike Total
Interest on capital
$200,000 x .09 $18,000
$350,000 x .09 $31,500
$180,000 x .09 $16,200 $65,700
Salary 25,000 15,000 35,000 75,000
Bonus .1($150,000 - $100,000) 5,000 5,000
Residual
$4,300 x .25 1,075
$4,300 x .45 1,935
$4,500 x .30 1,290 4,300
Totals $44,075 $48,435 $57,490 $150,000
186. moderate b
$35,000 + ($500,000 - $35,000 - $50,000 - $40,000) .4
187. moderate a
($250,000 x .08) + [$300,000 - ($200,000 + $250,000 + $400,000)(.08)] .25
188. moderate d
 ($60,000 - $50,000)(.60) + ($80,000 - $60,000)(.70)
189. moderate b
($60,000 - $50,000)(.40) + ($80,000 - $60,000)(.30)
190. moderate c
($300,000 - $200,000)(.75) + ($380,000 - $300,000)(.60)
191. moderate a
($300,000 - $200,000)(.25) + ($380,000 - $300,000)(.40)
192. moderate a
($300,000 - $100,000)(.65) + ($450,000 - $300,000)(.45)
193. moderate c
($300,000 - $100,000)(.35) + ($450,000 - $300,000)(.55)
194. easy b
($120,000 - $50,000)(.60)
195. easy d
($120,000 - $50,000)(.40)
196. easy d
($200,000 - $120,000)(.45)
197. easy a
($200,000 - $120,000)(.55)
198. moderate a
($520,000 - $370,000)(.70)
199. moderate c
($520,000 - $370,000)(.30)
200. moderate b
($650,000 - $520,000)(.60)
201. moderate d
($650,000 - $520,000)(.40)
202. difficult b
($250,000 - $120,000)(.70 - .60)
203. difficult d
($250,000 - $120,000)(.30 - .40)
204. difficult c
($600,000 - $350,000)(.70 - .60)
205. difficult a
($600,000 - $350,000)(.40 - .30)
206. easy b
$84,500 x .3
207. difficult d
The amount that Richard will pay Ray depends on many factors and cannot be
determined from the information provided here.
208. difficult a
[($70,000 + $120,000 + $90,000 + $150,000)/.80](.20)
209. easy b
$250,000 + ($125,000 x .70)
210. moderate c
($270,000 + $300,000 + $150,000)(.20)
211. moderate a
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.75)
212. moderate b
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.25)
213. difficult a
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.75) + $270,000
214. difficult b
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.25) + $300,000
215. moderate c
($625,000 + $480,000 + $450,000)(.25)
216. moderate d
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.60)
217. moderate c
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.40)
218. difficult b
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.60) + $625,000
219. difficult d
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.40) + $480,000
220. moderate a
($170,000 + $260,000 + $120,000)(.25)
221. moderate c
[$120,000 - ($170,000 + $260,000 + $120,000)(.25)]
222. moderate b
[$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.70)
223. moderate a
[$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.30)
224. difficult a
$170,000 - [$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.70)
225. difficult b
$260,000 - [$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.30)
226. moderate d
($265,000 + $180,000 + $60,000)(.15)
227. moderate a
[$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.40)
228. moderate b
[$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.60)
229. difficult b
$265,000 - [$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.40)
230. difficult d
$180,000 - [$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.60)
231. moderate c
($150,000 + $200,000 + $120,000)(.20) = $94,000
232. difficult a
($150,000 + $200,000 + $120,000)(.20) = $94,000, goodwill to existing partners
$120,000 + $0 = .2($150,000 + $200,000 + $120,000 + goodwill)
$120,000 = $94,000 + .2 goodwill
$26,000 = .2 goodwill
Goodwill = $130,000
233. moderate d
 ($150,000 + $200,000 + $120,000)(.20) = $94,000, goodwill to existing partners; new
partner capital account recognized at amount invested
234. difficult a
($150,000 + $200,000 + $120,000)(.20) = $94,000, goodwill to existing partners
$120,000 + $0 = .2($150,000 + $200,000 + $120,000 + goodwill)
$120,000 = $94,000 + .2 goodwill
$26,000 = .2 goodwill
Goodwill = $130,000
$150,000 + $130,000 x .60
235. difficult b
($150,000 + $200,000 + $120,000)(.20) = $94,000, goodwill to existing partners
$120,000 + $0 = .2($150,000 + $200,000 + $120,000 + goodwill)
$120,000 = $94,000 + .2 goodwill
$26,000 = .2 goodwill
Goodwill = $130,000
$200,000 + $130,000 x .40
236. moderate b
($250,000 + $300,000 + $225,000)(.25) = $193,750
237. difficult b
($250,000 + $300,000 + $225,000)(.25) = $193,750, goodwill to existing partners
$225,000 + $0 = .25($250,000 + $300,000 + $225,000 + goodwill)
$225,000 = $193,750 + .25 goodwill
$31,250 = .25 goodwill
Goodwill = $125,000
238. moderate a
($250,000 + $300,000 + $225,000)(.25) = $193,750, goodwill to existing partners; new
partner capital account recognized at amount invested
239. difficult d
($250,000 + $300,000 + $225,000)(.25) = $193,750, goodwill to existing partners
$225,000 + $0 = .25($250,000 + $300,000 + $225,000 + goodwill)
$225,000 = $193,750 + .25 goodwill
$31,250 = .25 goodwill
Goodwill = $125,000
$250,000 + $125,000 x .45
240. difficult c
($250,000 + $300,000 + $225,000)(.25) = $193,750, goodwill to existing partners
$225,000 + $0 = .25($250,000 + $300,000 + $225,000 + goodwill)
$225,000 = $193,750 + .25 goodwill
$31,250 = .25 goodwill
Goodwill = $125,000
$300,000 + $125,000 x .55
241. difficult d
($250,000 + $320,000 + $175,000)(.25) = $186,250, goodwill to new partner
$175,000 + goodwill = .25($250,000 + $320,000 + $175,000 + goodwill)
$175,000 + goodwill = $186,250 + .25 goodwill
.75 goodwill = 11,250
Goodwill = $15,000
242. difficult a
 ($250,000 + $320,000 + $175,000)(.25) = $186,250, goodwill to new partner
$175,000 + goodwill = .25($250,000 + $320,000 + $175,000 + goodwill)
$175,000 + goodwill = $186,250 + .25 goodwill
.75 goodwill = 11,250
Goodwill = $15,000
$175,000 + $15,000
243. moderate c
($250,000 + $320,000 + $175,000)(.25) = $186,250, goodwill to new partner; existing
partners’ capital accounts do not change
244. moderate d
($250,000 + $320,000 + $175,000)(.25) = $186,250, goodwill to new partner; existing
partners’ capital accounts do not change
245. moderate a
($240,000 + $320,000 + $150,000)(.20) = $142,000
246. difficult c
($240,000 + $320,000 + $150,000)(.20) = $142,000, goodwill to new partner
$150,000 + goodwill = .20($240,000 + $320,000 + $150,000 + goodwill)
$150,000 + goodwill = $142,000 + .20 goodwill
.80 goodwill = $8,000
Goodwill = $10,000
247. difficult a
($240,000 + $320,000 + $150,000)(.20) = $142,000, goodwill to new partner
$150,000 + goodwill = .20($240,000 + $320,000 + $150,000 + goodwill)
$150,000 + goodwill = $142,000 + .20 goodwill
.80 goodwill = $8,000
Goodwill = $10,000
$160,000 + $10,000
248. moderate d
($240,000 + $320,000 + $150,000)(.20) = $142,000, goodwill to new partner, capital
accounts of existing partners do not change
249. moderate c
($240,000 + $320,000 + $150,000)(.20) = $142,000, goodwill to new partner, capital
accounts of existing partners do not change
250. easy b
$200,000 x .35
251. easy d
252. moderate d
253. moderate b
$80,000 + $110,000 + $55,000 + $200,000
254. moderate b
($250,000 - $210,000)(45/75)
255. moderate d
$160,000 - ($250,000 - $210,000)(45/75)
256. moderate d
($250,000 - $210,000)(30/75)
257. moderate b
$120,000 - ($250,000 - $210,000)(30/75)
258. moderate a
 ($240,000 - $180,000)(42/70)
259. moderate c
$300,000 - ($240,000 - $180,000)(42/70)
260. moderate c
($240,000 - $180,000)(28/70)
261. moderate d
$270,000 - ($240,000 - $180,000)(28/70)
262. easy c
$150,000 + $22,500
263. moderate a
$135,000 + ($150,000 + $22,500)(.60)
264. moderate b
$225,000 + ($150,000 + $22,500)(.40)
265. easy c
$150,000 + ($75,000 x .3)
266. difficult c
$135,000 + ($75,000 x .25) + [$150,000 + ($75,000 x .30)](.60)
267. difficult d
$225,000 + ($75,000 x .45) + [$150,000 + ($75,000 x .30)](.40)
268. easy a
$200,000 + $40,000
269. moderate b
$350,000 + ($200,000 + $40,000)(.60)
270. moderate c
$280,000 + ($200,000 + $40,000)(.40)
271. easy b
$200,000 + ($150,000 x .25)
272. difficult c
$350,000 + ($150,000 x .45) + [$200,000 + ($150,000 x .25)](.60)
273 difficult d
$280,000 + ($150,000 x .30) + [$200,000 + ($150,000 x .25)](.40)
274. moderate a
$350,000 + $280,000 + $200,000 + $150,000

Problems
275. (10 Points) moderate
Alan, Betty, and Carl are forming a partnership. Each will contribute cash and noncash
assets. Assume the initial capital account balances will be determined based on the value
of the assets contributed. Information regarding the initial contributions is provided
below:

Alan Betty Carl__

Cash $150,000 $275,000 $125,000
Plant Assets - historical cost 280,000 350,000 540,000
Plant Assets - carrying value 215,000 225,000 300,000
Plant Assets - tax basis 200,000 190,000 230,000
Plant Assets - market value 350,000 260,000 310,000
 Required:
a. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the carrying value is used to determine the value assigned to
noncash assets contributed. Assume also that each partner’s capital account is
assigned a value equal to the cash and noncash assets contributed by that partner.
b. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the carrying value is used to determine the value assigned to
noncash assets contributed. Assume also that all of the partners’ capital accounts
are equal when the journal entry is completed.
c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?

Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($215,000 + $225,000 + $300,000) 740,000
Alan, Capital ($150,000 + $215,000) 365,000
Betty, Capital ($275,000 + $225,000) 500,000
Carl, Capital ($125,000 + $300,000) 425,000
Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($215,000 + $225,000 + $300,000) 740,000
Alan, Capital ($550,000 + $740,000)/3 430,000
Betty, Capital ($550,000 + $740,000)/3 430,000
Carl, Capital ($550,000 + $740,000)/3 430,000

Part c. Alan has significantly more capital when it is divided equally when compared to
assigning the sum of the carrying values of assets contributed. On the other hand,
Betty has significantly less capital when it is divided equally. Carl has
approximately the same amount under either assignment method. One possibility
is that Betty is giving up some capital to Alan because Alan has substantially
more expertise in running the business. Thus, Betty is paying a bonus to Alan.

276. (10 Points) moderate

Alan, Betty, and Carl are forming a partnership. Each will contribute cash and noncash
assets. Assume the initial capital account balances will be determined based on the value
of the assets contributed. Information regarding the initial contributions is provided
below:

Alan Betty Carl__

Cash $150,000 $275,000 $125,000
Plant Assets - historical cost 280,000 350,000 540,000
Plant Assets - carrying value 220,000 225,000 300,000
Plant Assets - tax basis 200,000 190,000 230,000
Plant Assets - market value 350,000 260,000 310,000

Required:
 a. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the tax basis is used to determine the value assigned to noncash
assets contributed. Assume also that each partner’s capital account is assigned a
value equal to the cash and noncash assets contributed by that partner.
b. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the tax basis is used to determine the value assigned to noncash
assets contributed. Assume also that all of the partners’ capital accounts are equal
when the journal entry is completed.
c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?

Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($200,000 + $190,000 + $230,000) 620,000
Alan, Capital ($150,000 + $200,000) 350,000
Betty, Capital ($275,000 + $190,000) 465,000
Carl, Capital ($125,000 + $230,000) 355,000

Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($200,000 + $190,000 + $230,000) 620,000
Alan, Capital ($550,000 + $620,000)/3 390,000
Betty, Capital ($550,000 + $620,000)/3 390,000
Carl, Capital ($550,000 + $620,000)/3 390,000

Part c. Alan and Carl each have significantly more capital when it is divided equally
when compared to assigning the sum of the carrying values of assets contributed.
On the other hand, Betty has significantly less capital when it is divided equally.
One possibility is that Betty is giving up some capital to Alan and Carl because
they have substantially more expertise in running the business. Thus, Betty is
paying a bonus to Alan and Carl.

277. (10 Points) moderate

Alan, Betty, and Carl are forming a partnership. Each will contribute cash and noncash
assets. Assume the initial capital account balances will be determined based on the value
of the assets contributed. Information regarding the initial contributions is provided
below:

Alan Betty Carl__

Cash $150,000 $275,000 $125,000
Plant Assets - historical cost 280,000 350,000 540,000
Plant Assets - carrying value 220,000 225,000 300,000
Plant Assets - tax basis 200,000 190,000 230,000
Plant Assets - market value 350,000 260,000 310,000

Required:
 a. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the market value is used to determine the value assigned to
noncash assets contributed. Assume also that each partner’s capital account is
assigned a value equal to the cash and noncash assets contributed by that partner.
b. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the market value is used to determine the value assigned to
noncash assets contributed. Assume also that all of the partners’ capital accounts
are equal when the journal entry is completed.
c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?

Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($350,000 + $260,000 + $310,000) 920,000
Alan, Capital ($150,000 + $350,000) 500,000
Betty, Capital ($275,000 + $260,000) 535,000
Carl, Capital ($125,000 + $310,000) 435,000

Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($350,000 + $260,000 + $310,000) 920,000
Alan, Capital ($550,000 + $920,000)/3 490,000
Betty, Capital ($550,000 + $920,000)/3 490,000
Carl, Capital ($550,000 + $920,000)/3 490,000

Part c. Carl has significantly more capital when it is divided equally when compared to
assigning the sum of the carrying values of assets contributed. On the other hand,
Betty has significantly less capital when it is divided equally. Alan has
approximately the same amount under either assignment method. One possibility
is that Betty is giving up some capital to Carl because Carl has substantially more
expertise in running the business. Thus, Betty is paying a bonus to Carl.

278. (5 Points) easy

Alex, Bill, and Martha contribute the following assets to begin partnership operations:

Alex Bill Martha_

Cash $150,000 $225,000 $175,000
Inventory 57,000 89,000
Plant Assets 350,000 100,000
Accounts Payable 14,000 40,000
Notes Payable 160,000

Record the journal entry to establish the assets and owners’ equity of the partnership.

Answer:
Cash ($150,000 + $225,000 + $175,000) 550,000
Inventory ($57,000 + $89,000) 146,000
 Plant Assets ($350,000 + $100,000) 450,000
Accounts Payable ($14,000 + $40,000) 54,000
Notes Payable 160,000
Alex, capital ($150,000 + $57,000 - $14,000) 193,000
Bill, capital ($225,000 + $350,000 - $160,000) 415,000
Martha, capital ($175,000 + $89,000 + 324,000
$100,000 - $40,000)

279. (10 Points) moderate

William, Casey, and Samantha are forming a partnership. Below is a table outlining the
contributions of each partner.

William Casey Samantha

Cash $ 15,000 $20,000 $ 10,000
Inventory 100,000 60,000 80,000
Plant Assets 250,000 160,000
Liabilities Assumed by Partnership 130,000 90,000

In addition, Casey brings significant experience needed to run the business. It is agreed
that partners will receive capital allocations equal to the market value of the net assets
contributed and that Casey will receive additional capital of $75,000 and the bonus
method will be applied. Two-thirds of the bonus is to come from William and one-third
from Samantha. Record the journal entry for the creation of the partnership.

Answer:
Cash ($15,000 + $20,000 + $10,000) 45,000
Inventory ($100,000 + $60,000 + $80,000) 240,000
Plant Assets ($250,000 + $160,000) 410,000
Liabilities ($130,000 + $90,000) 220,000
Casey, Capital ($20,000 + $60,000 + $75,000) 155,000
Samantha, Capital [$10,000 + $80,000 + 135,000
$160,000 - $90,000 - ($75,000/3)]
William, Capital [$15,000 + $100,000 + 185,000
$250,000 - $130,000 - ($75,000 x 2/3)]

280. (10 Points) moderate

Bonnie, Connie, and Deborah are forming a partnership. The partners will contribute the
following identifiable assets:

Bonnie Connie Deborah

Cash $150,000 $200,000 $140,000
Inventory 160,000 190,000 180,000
Plant Assets 300,000 340,000
Liabilities Assumed by Partnership 180,000 130,000

In addition, Bonnie brings significant experience because she has run a similar type of
business. It is agreed that Bonnie will receive additional capital of $80,000 and the
 bonus method will be applied. Sixty percent of the bonus is to come from Deborah and
forty percent from Connie. Record the journal entry for the creation of the partnership.

Answer:
Cash ($150,000 + $200,000 + $140,000) 490,000
Inventory ($160,000 + $190,000 + $180,000) 530,000
Plant Assets ($300,000 + $340,000) 640,000
Liabilities ($180,000 + $130,000) 310,000
Bonnie, Capital ($150,000 + $160,000 + 510,000
$300,000 - $180,000 + $80,000)
Connie, Capital [$200,000 + $190,000 - 358,000
($80,000 x .4)]
Deborah, Capital [$140,000 + $180,000 + 482,000
$340,000 - $130,000 - ($80,000 x .6)]

281. (10 Points) moderate

Able, Baker, and Charlie are forming a partnership. Charlie has significant experience in
the type of business the partners are starting. As a result, Able and Baker agree that
goodwill of $50,000 should be recognized with regard to Charlie. The partners
contribute the following tangible assets:

Able Baker Charlie

Cash $20,000 $35,000 $55,000
Plant Assets 75,000 90,000 60,000
Liabilities 25,000 45,000 15,000

Record the journal entry to establish the partnership.

Answer:
Cash ($20,000 + $35,000 + $55,000) 110,000
Plant Assets ($75,000 + $90,000 + $60,000) 225,000
Goodwill 50,000
Liabilities ($25,000 + $45,000 + $15,000) 85,000
Able, Capital ($20,000 + $75,000 - $25,000) 70,000
Baker, Capital ($35,000 + $90,000 - $45,000) 80,000
Charlie, Capital ($55,000 + $60,000 - $15,000 + 150,000
$50,000)

282. (15 Points) moderate

Jessica, Mary, and Susan currently operate three separate businesses. They are planning
to combine and form a partnership to operate as one business. The prospective partners
agree that, in addition to the net market value of the tangible assets contributed to the
partnership, Jessica and Susan should have goodwill recognized in the amounts of
$80,000 and $40,000, respectively. The following table presents the market value of the
assets and liabilities contributed to the partnership.

Jessica Mary Susan

Cash $100,000 $250,000 $170,000
 Inventory 280,000 400,000 450,000
Plant Assets 750,000 500,000 600,000
Accounts Payable 190,000 270,000 260,000
Mortgage Payable 340,000 200,000 320,000

Required:
a. Record the journal entry to establish the partnership.
b. What appears to be the partners’ intent when creating the new partnership?

Answer:
Part a.
Cash ($100,000 + $250,000 + $170,000) 520,000
Inventory ($280,000 + $400,000 + $450,000) 1,130,000
Plant Assets ($750,000 + $500,000 + $600,000) 1,850,000
Goodwill 120,000
Accounts Payable ($190,000 + $270,000 + 720,000
$260,000)
Mortgage Payable ($340,000 + $200,000 + 860,000
$320,000)
Jessica, Capital ($100,000 + $280,000 + 680,000
$750,000 - $190,000 - $340,000 + $80,000)
Mary, Capital ($250,000 + $400,000 + 680,000
$500,000 - $270,000 - $200,000)
Susan, Capital ($170,000 + $450,000 + 680,000
$600,000 - $260,000 - $320,000 + $40,000)

Part b.
The apparent intent of the partners is to make all three partner capital accounts of equal
dollar amount when the partnership is formed.

283. (20 Points) moderate

Tom, Jon, and Sandy are partners in a thriving business. You work for the firm that
provides accounting services to the partnership. The accounting period recently ended
and you have been assigned the task of helping with the profit allocation to the partners.
The following information has been extracted from the partnership’s accounting records:

Date Tom Jon Sandy____

1/1 Balance $850,000 Balance $680,000 Balance $450,000
4/30 Withdraw $75,000 Withdraw $30,000
9/1 Invest $120,000 Withdraw $100,000
12/1 Invest $90,000 Invest $40,000 Withdraw $60,000

The partnership agreement stipulates that the weighted-average capital balance is the
basis for the interest on capital component of profit and loss allocation and the rate of
return on invested capital is 12 percent. What is the amount of interest on capital
allocated to each partner as a part of the profit and loss allocation?

Answer:
 TOM’S AVERAGE CAPITAL BALANCE
Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $850,000 4 months $ 3,400,000
April 30 Withdraw $75,000 775,000 4 months 3,100,000
September 1 Invest $120,000 895,000 3 months 2,685,000
December 1 Invest $90,000 985,000 1 month 985,000
$10,170,000
Average capital ($10,170,000 / 12) $847,500

JON’S AVERAGE CAPITAL BALANCE

Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $680,000 8 months $5,440,000
September 1 Withdraw $100,000 580,000 3 months 1,740,000
December 1 Invest $40,000 620,000 1 month 620,000
$7,800,000
Average capital ($7,800,000 / 12) $650,000

SANDY’S AVERAGE CAPITAL BALANCE

Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $450,000 4 months $1,800,000
April 30 Withdraw $30,000 420,000 7 months 2,940,000
December 1 Withdraw $60,000 360,000 1 month 360,000
$5,100,000
Average capital ($5,100,000 / 12) $425,000

Interest on capital contributions:

Tom: $847,500 x .12 = $101,700
Jon: $650,000 x .12 = $78,000
Sandy: $425,000 x .12 = $51,000

284. (20 Points) moderate

John, Roger, and Troy are partners in a local business. You are a staff accountant at a
firm that provides accounting services to the partnership. You were just assigned the task
of helping prepare the profit allocation to the partners. The following information was
extracted from the partnership’s accounting records:

Date John Roger Troy_____

1/1 Balance $250,000 Balance $350,000 Balance $500,000
3/31 Withdraw $30,000 Invest $50,000
8/31 Invest $40,000 Withdraw $90,000
11/1 Invest $25,000 Invest $60,000 Withdraw $60,000

The partnership agreement stipulates that the weighted-average capital balance is the
basis for the interest on capital component of profit and loss allocation and the rate of
 return on invested capital is 10 percent. What is the amount of interest on capital
allocated to each partner as a part of the profit and loss allocation?

Answer:
JOHN’S AVERAGE CAPITAL BALANCE
Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $250,000 3 months $ 750,000
March 31 Withdraw $30,000 220,000 5 months 1,100,000
August 31 Invest $40,000 260,000 2 months 520,000
November 1 Invest $25,000 285,000 2 months 570,000
$2,940,000
Average capital ($2,940,000 / 12) $245,000

ROGER’S AVERAGE CAPITAL BALANCE

Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $350,000 8 months $2,800,000
August 31 Withdraw $90,000 260,000 2 months 520,000
November 1 Invest $60,000 320,000 2 months 640,000
$3,960,000
Average capital ($3,960,000 / 12) $330,000

TROY’S AVERAGE CAPITAL BALANCE

Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $500,000 3 months $1,500,000
March 31 Invest $50,000 550,000 7 months 3,850,000
November 1 Withdraw $60,000 490,000 2 months 980,000
$6,330,000
Average capital ($6,660,000 / 12) $527,500

Interest on capital contributions:

John: $245,000 x .10 = $24,500
Roger: $330,000 x .10 = $33,000
Troy: $527,500 x .10 = $52,750

285. (10 Points) easy

Philip is the managing partner of a local company. Part of his profit and loss allocation is
a bonus based on the store operating income. The bonus arrangement is 8 percent of
operating income in excess of $200,000 after deducting the bonus. How much is Philip’s
bonus this year if operating income before deducting the bonus is $350,000?

Answer:
Bonus = .08($350,000 - $200,000 - B)
1.08 Bonus = $12,000
Bonus = $11,111.11
286. (10 Points) easy
Sally is a partner, and business manager, in a local partnership. Part of the profit and loss
agreement in the articles of partnership is a bonus to be paid to the business manager.
The bonus is currently calculated at 12 percent of income in excess of $250,000 after
subtracting the bonus.

How much bonus will Sally receive if income is $400,000?

Answer:
Bonus = .12 ($400,000 - $250,000 - B)
Bonus = $16,071.43

287. (10 Points) easy

Frank, George, and Hank are partners. Partnership profits for the year are $90,000.

Required:
a. How much is allocated to each partner if the profit and loss residual ratios are
30%, 20%, and 50%, respectively?

b. How would the profit be allocated if there were no profit and loss residual ratios?

Answer:
Part a.
Frank $90,000 x .30 = $27,000
George $90,000 x .20 = $18,000
Hank $90,000 x .50 = $45,000

Part b.
Frank, George and Hank $90,000/3 = $30,000

288. (30 Points) difficult

Beverly, Brad, and Bob are partners in the 3Bs company. The partners have been in
business for a number of years. The following information exists with regard to the
allocation of profits and losses.

Beverly _ Brad Bob__

Weighted-average capital balance $400,000 $650,000 $550,000
Salary 40,000 65,000 80,000
Bonus .1(Net income - $200,000)
Residual 40% 35% 25%

The interest portion of the profit and loss allocation is 8 percent of the weighted-average
capital balance. Profit allocation is determined in the order presented above. Assume the
allocation is completed regardless of the level of profit. Partnership losses, on the other
hand, are allocated by the residual ratios only.

Required:
 a. Determine the profit allocation if the partnership net income is $580,000.
b. Determine the profit allocation if the partnership net income is $250,000.
c. Determine the loss allocation if the partnership net loss is ($50,000).

Solution:
Part a.
Beverly Brad Bob Total__
Interest on capital
$400,000 x .08 $ 32,000
$650,000 x .08 $ 52,000
$550,000 x .08 $ 44,000 $128,000
Salary 40,000 65,000 80,000 185,000
Bonus
.1($580,000 - $200,000) 38,000 38,000
Residual
$229,000 x .4 91,600
$229,000 x .35 80,150
$229,000 x .25 57,250 229,000
$163,600 $235,150 $181,250 $580,000

Part b.
Beverly Brad Bob Total__
Interest on capital
$400,000 x .08 $32,000
$650,000 x .08 $ 52,000
$550,000 x .08 $44,000 $128,000
Salary 40,000 65,000 80,000 185,000
Bonus
.1($250,000 - $200,000) 5,000 5,000
Residual
($68,000) x .4 (27,200)
($68,000) x .35 (23,800)
($68,000) x .25 (17,000) (68,000)
$44,800 $98,200 $107,000 $250,000

Part c.
Beverly Brad Bob Total__
Residual
($50,000) x .4 ($20,000)
($50,000) x .35 ($17,500)
($50,000) x .25 ($12,500) ($50,000)

289. (15 Points) difficult

Tiffany, Jason, and Shanel are partners in a marketing firm. They allocate profits and
losses based on four criteria: (1) 6 percent return on invested capital; (2) salary, based on
$40 per billable hour; (3) bonus to Jason for managing the business [.15 (net income -
$250,000 - bonus)]; and (4) residual allocation. For the year, the partners have the
following average invested capital and billable hours.
 Tiffany Jason Shanel_
Average invested capital $200,000 $180,000 $160,000
Billable hours 1,500 1,700 2,200

Prepare a schedule allocating the partnership’s $450,000 profit. Round all

amounts to the nearest dollar.

Solution:
Tiffany Jason Shanel Total_
Interest on capital
$200,000 x .06 $ 12,000
$180,000 x .06 $ 10,800
$160,000 x .06 $ 9,600 $ 32,400
Salary
1,500 x $40 60,000
1,700 x $40 68,000
2,200 x $40 88,000 216,000
Bonus
.15($450,000 - $250,000 - B) 26,087 26,087
Residual
$175,513/3 58,504 58,504 58,505 175,513
$130,504 $163,391 $156,105 $450,000

290. (10 Points) moderate

Stan and Allan have been partners for several years. Their current partnership profit and
loss ratios are being changed from 75/25 to 60/40. As part of the change, they have
created a list of assets that have market and book value differences. One of the assets is
vacant land with a $200,000 market value and a $110,000 book value. One year after
changing the profit and loss ratios, the building is sold for $280,000. Record (1) the sale
of the land and (2) the distribution of the gain on sale to the partners.

Solution:
Cash 280,000
Land 110,000
Gain on Sale of Land 170,000

Gain on Sale of Land 170,000

Stan, capital ($200,000 - $110,000)(.75) + 115,500
($280,000 - $200,000)(.60)
Allan, capital ($200,000 - $110,000)(.25) + 54,500
($280,000 - $200,000)(.40)

291. (10 Points) moderate

Susan and Mary have been partners for several years. Their current partnership profit
and loss ratios are being changed from 65/35 to 55/45. As part of the change, they have
created a list of assets that have market and book value differences. One of the assets is a
 building with a $370,000 market value and a $150,000 book value. One year after
changing the profit and loss ratios, the building is sold for $500,000. Record (1) the sale
of the building and (2) the distribution of the gain on sale to the partners.

Solution:
Cash 500,000
Building 150,000
Gain on Sale of Building 350,000

Gain on Sale of Land 350,000

Susan, capital ($370,000 - $150,000)(.65) + 214,500
($500,000 - $370,000)(.55)
Mary, capital ($370,000 - $150,000)(.35) + 135,500
($500,000 - $370,000)(.45)

292. (10 Points) easy

Janice and Richard are partners who are changing their profit and loss ratios from 40/60
to 55/45. At the date of the change, the partners chooses to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$250,000 and a market value of $420,000. Two years after the profit and loss ratio is
changed, the land is sold for $600,000. Record (1) the revaluation of the land, (2) the
sale of the land, and (3) the distribution of the gain on sale of land to the partners.

Solution:
Land ($420,000 - $250,000) 170,000
Janice, capital ($170,000 x .40) 68,000
Richard, capital ($170,000 x .60) 102,000

Cash 600,000
Land 420,000
Gain on Sale of Land ($600,000 - $420,000) 180,000

Gain on Sale of Land 180,000

Janice, capital ($180,000 x .55) 99,000
Richard, capital ($180,000 x .45) 81,000

293. (10 Points) moderate

John and Renee are partners who are changing their profit and loss ratios from 70/30 to
60/40. At the date of the change, the partners chooses to revalue assets with market value
different from book value. One asset revalued is a building with a net book value of
$100,000 and a market value of $340,000. One year after the profit and loss ratio is
changed, the building is sold for $270,000. Record (1) the revaluation of the building,
(2) the sale of the building, and (3) the distribution of the loss on sale of the building to
the partners.

Solution:
Building ($340,000 - $100,000) 240,000
 John, capital ($240,000 x .70)
168,000
Renee, capital ($240,000 x .30) 72,000

Cash 270,000
Loss on Sale of Building ($270,000 - $340,000) 70,000
Building 340,000

John, capital ($70,000 x .60) 42,000

Renee, capital ($70,000 x .40) 28,000
Loss on Sale of Building 70,000

294. (10 Points) moderate

Tom and Darris are partners. Their current profit and loss ratios (80/20) are being
changed to (70/30). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, land has a market value of
$350,000 and a book value of $140,000. Record the adjustment to the capital accounts at
the date of the change in the profit and loss ratios.

Solution:
Darris, capital [($340,000 - $150,000)(.20-.30)] 21,000
Tom, capital [($340,000 - $150,000)(.80 - .70)] 21,000

295. (10 Points) moderate

Tim and Donna are partners. Their current profit and loss ratios (60/40) are being
changed to (45/55). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, a building has a book
value of $400,000 and a market value of $650,000. Record the adjustment to the capital
accounts at the date of the change in the profit and loss ratios.

Solution:
Donna, capital [($650,000 - $400,000)(.40-.55)] 37,500
Tim, capital [($650,000 - $400,000)(.60 - .45)] 37,500

296. (5 Points) easy

Wesley, Slyvia, and Mel are partners. They have capital accounts of $60,000, $95,000,
and $105,000, respectively. Heather is talking to Mel about joining the partnership and
acquiring 1/3 of his equity. Wesley and Slyvia know Heather and they have approved her
admission into the partnership. Record Heather’s admission assuming she pays $50,000
to acquire 1/3 of Mel’s equity.

Solution:
Mel, capital ($105,000/3) 35,000
Heather, capital 35,000

297. (10 Points) moderate

 John, Linda, and Bill are partners with capital accounts of $78,000, $59,000, and
$183,000, respectively. In addition, they share profits and losses 30%, 25%, and 45%,
respectively. Bill is planning to partially retire and has asked John and Linda if they
would approve Mitch as a new partner. John and Linda respond that Mitch is acceptable
but they want to revalue the partnership’s assets before Mitch is admitted. At the date of
the admission, the net assets are written up $250,000. Mitch pays Bill $200,000 for 60
percent of his equity. Record the revaluation of the assets and the admission of Mitch
into the partnership.

Solution:
Assets 250,000
John, capital ($250,000 x .30)
75,000
Linda, capital ($250,000 x .25) 62,500
Bill, capital ($250,000 x .45) 112,500

Bill, capital ($183,000 + $112,500)(.60) 177,300

Mitch, capital 177,300

298. (20 Points) moderate

Susan and Tom are partners with capital accounts of $280,000 and $182,500,
respectively. The partners share profits and losses 60/40. They are considering admitting
Scott into the partnership as a 25% equity ownership for an investment into the
partnership of $187,500. Before admission of Scott, the partnership’s assets will be
revalued up $100,000. Record the revaluation of the assets and the admission of Scott
into the partnership.

Solution:
Assets 100,000
Susan, capital ($100,000 x .60) 60,000
Tom, capital ($100,000 x .40) 40,000

Book value of capital before the investment $562,500

($280,000 + $182,500 + $100,000)
Scott’s investment 187,500
Total book value of capital after the investment $750,000
Scott’s percentage ownership 0.25
Book value of Scott’s ownership percentage capital $187,500

Cash 187,500
Scott, capital 187,500

299. (20 Points) moderate

Wayne and Dennis are partners with capital accounts of $250,000 and $300,000,
respectively. The partners share profits and losses 30/70. They are considering admitting
Dorothy into the partnership with a 20% equity ownership for an investment into the
partnership of $193,750. Before admission of Dorothy, the partnership’s assets will be
 revalued up $225,000. Record the revaluation of the assets and the admission of Dorothy
into the partnership.

Answer:
Assets 225,000
Wayne, capital ($225,000 x .30) 67,500
Dennis, capital ($225,000 x .70) 157,500

Book value of capital before the investment $775,000

($250,000 + $300,000 + $225,000)
Dorothy’s investment 193,750
Total book value of capital after the investment $968,750
Dorothy’s percentage ownership 0.20
Book value of Scott’s ownership percentage capital $193,750

Cash 193,750
Dorothy, capital 193,750

300. (10 Points) easy

Louise and Jane are considering admitting Mary into their partnership. Louise and Jane
share profits at losses 70/30 and their capital account balances are $260,000 and
$190,000, respectively. The partnership agreement indicates that the bonus method will
be applied when new partners are admitted to the company. Louise and Jane want to
know what the journal entry would look like if Mary is admitted with a 20 percent equity
interest in the partnership for an investment of $140,000. Prepare the journal entry at the
date of admission.

Answer:
Cash 140,000
Jane, capital ($140,000 - $118,000)(.30) 6,600
Louise, capital ($140,000 - $118,000)(.70) 15,400
Mary, capital ($260,000 + $190,000 + $140,000)(.20) 118,000

301. (10 Points) easy

Steve and Ray are partners with capital accounts of $300,000 and $460,000, respectively.
They share profits and losses 60/40. Their business is growing and they need to admit a
new partner. Sheila has indicated that she would like to be part of the business.
Negotiations occur and Sheila is admitted with a 25 percent equity interest for $325,000.
Record the admission of Sheila if the bonus method is applied.

Answer:
Cash 325,000
Sheila, capital ($300,000 + $460,000 + 271,250
$325,000)(.25)
Ray, capital ($325,000 - $271,250)(.40) 21,500
Steve, capital ($325,000 - $271,250)(.60) 32,250

302. (20 Points) moderate

 Deborah and Randy are partners who share profits and losses 55/45. They have capital
account balances of $450,000 and $380,000, respectively. The partners have been
negotiating with Marsha about her joining the partnership. The parties agree that the
partnership will revalue assets to their market value ($150,000 above book value) and
that Marsha will invest $250,000 for a 15 percent equity interest. Record the revaluation
and the admission of Marsha into the partnership assuming the bonus method is applied.

Answer:
Assets 150,000
Deborah, capital ($150,000 x .55) 82,500
Randy, capital ($150,000 x .45) 67,500

Cash 250,000
Deborah, capital ($250,000 - $184,500)(.55) 36,025
Marsha, capital ($450,000 + $380,000 + 184,500
$150,000 + $250,000)(.15)
Randy, capital ($250,000 - $184,500)(.45) 29,475

303. (10 Points) easy

Jennifer and Juan are partners with capital accounts of $100,000 and $160,000,
respectively. They share profits and losses 45/55. The business is expanding and they
need to admit a new partner. Kathryn has indicated that she would like to join the
partnership. Negotiations occur and Kathryn is admitted with a 25 percent equity interest
for $75,000. Record the admission of Kathryn assuming the bonus method is applied.

Answer:
Cash 80,000
Jennifer, capital ($85,000 - $80,000)(.45) 2,250
Juan, capital ($85,000 - $80,000)(.55) 2,750
Kathryn, capital ($100,000 + $160,000 + 85,000
$80,000)(.25)

304. (10 Points) easy

Fred and Laurie are considering admitting John into their partnership. Fred and Laurie
share profits at losses 60/40 and their capital account balances are $160,000 and
$290,000, respectively. The partnership agreement indicates that the bonus method will
be applied when new partners are admitted to the company. Fred and Laurie have asked
you to prepare the journal entry to admit John with a 25 percent equity interest in the
partnership for an investment of $125,000.

Answer:
Cash 125,000
Fred, capital ($143,750 - $125,000)(.60) 11,250
Laurie, capital ($143,750 - $125,000)(.40) 7,500
John, capital ($160,000 + $290,000 + 143,750
$125,000)(.25)

305. (20 Points) moderate

 Jo Ann and Robert are partners who share profits and losses 30/70. They have capital
account balances of $150,000 and $280,000, respectively. The partners have been
negotiating with Bill about him joining the partnership. The parties agree that the
partnership will revalue assets to their market value ($80,000 above book value) and that
Bill will invest $100,000 for a 20 percent equity interest. Record the revaluation and the
admission of Bill into the partnership assuming the bonus method is applied.

Answer:
Assets 80,000
Jo Ann, capital ($80,000 x .30) 24,000
Robert, capital ($80,000 x .70) 56,000

Cash 100,000
Jo Ann, capital ($122,000 - $100,000)(.30) 6,600
Robert, capital ($122,000 - $100,000)(.70) 15,400
Bill, capital ($280,000 + $150,000 + 122,000
$80,000 + $100,000)(.20)

306. (20 Points) moderate

Robert and Steven are partners in a local company. They have capital accounts in the
amounts of $250,000 and $320,000, respectively, when they agree to admit a new
partner, Don, to the company. Don has agreed to contribute $225,000 for a 25 percent
interest in the owners’ equity of the partnership. Before Don’s admission to the
partnership, Robert and Steven share profits and losses 80 percent and 20 percent,
respectively. Record the admission of Don assuming the goodwill method is applied.

Answer:
Book value of capital before the investment $570,000
Don’s investment 225,000
Total book value of capital after the investment $795,000
Don’s percentage ownership 0.25
Book value of Don’s ownership percentage capital $198,750

Goodwill to existing partners

$225,000 = (.25)($795,000 + Goodwill)

$225,000 = $198,750 + .25 (Goodwill)
$26,250 = .25 (Goodwill)
Goodwill = $105,000

Cash 225,000
Goodwill 105,000
Don, capital 225,000
Robert, capital ($105,000 x .80) 84,000
Steve, capital ($105,000 x .20) 21,000

307. (20 Points) moderate

 Ann and Sarah are partners in a local company. They have capital accounts in the
amounts of $150,000 and $220,000, respectively, when they agree to admit a new
partner, John, to the company. John has agreed to contribute $175,000 for a 25 percent
interest in the owners’ equity of the partnership. Before John’s admission to the
partnership, Ann and Sarah share profits and losses 40 percent and 60 percent,
respectively. Record the admission of John assuming the goodwill method is applied.

Answer:
Book value of capital before the investment $370,000
John’s investment 175,000
Total book value of capital after the investment 545,000
John’s percentage ownership 0.25
Book value of John’s ownership percentage capital 136,250

Goodwill to existing partners

$175,000 = (.25)($495,000 + Goodwill)

$175,000 = $136,250 + .25 (Goodwill)
$38,750 = .25 (Goodwill)
Goodwill = $155,000

Cash 175,000
Goodwill 155,000
Ann, capital ($155,000 x .40) 62,000
John, capital 175,000
Sarah, capital ($155,000 x .60) 93,000

308. (30 Points) difficult

Bob and Norman are partners and they share profits and losses 70/30. They have capital
accounts balances of $350,000 and $480,000, respectively, when they agree to admit
Richard to the company. All parties have agreed that the partnership will first revalue
tangible assets to their market value ($150,000 above book value) and then Richard will
invest $300,000 for a 20 percent interest in the partnership’s owners’ equity. Record the
revaluation and the admission of Richard into the partnership assuming the goodwill
method is applied.

Answer:
Assets 150,000
Bob, capital ($150,000 x .70) 105,000
Norman, capital ($150,000 x .30) 45,000

Book value of capital before the investment $ 980,000

($350,000 + $480,000 + $150,000)
Richard’s investment 300,000
Total book value of capital after the investment $1,280,000
Richard’s percentage ownership 0.20
Book value of Richard’s ownership percentage capital $ 256,000
 Goodwill to existing partners

$300,000 = (.20)($1,280,000 + Goodwill)

$300,000 = $256,000 + .20 (Goodwill)
$44,000 = .20 (Goodwill)
Goodwill = $220,000

Cash 300,000
Goodwill 220,000
Bob, capital ($220,000 x .70) 154,000
Norman, capital ($220,000 x .30) 66,000
John, capital 300,000

309. (10 Points) moderate

Skip and Amy are partners in a struggling company. An investor, James, has offered to
join the partnership and provide the needed expertise. Skip and Amy have capital
account balances in the amount of $120,000 and $160,000, respectively, at the date James
is admitted to the partnership and their respective profit and loss ratios are 60 percent and
40 percent. James agrees to invest $60,000 for a 20 percent interest in the partnership
capital. Assuming the goodwill method is applied, record the admission of James.

Answer:
Book value of capital before the investment $280,000
($120,000 + $160,000)
James’ investment 60,000
Total book value of capital after the investment $340,000
James’ percentage ownership 0.20
Book value of James’ ownership percentage capital $ 68,000

Goodwill to new partner

$60,000 + goodwill = (.20)($340,000 + Goodwill)

$60,000 + goodwill = $68,000 + .20 (Goodwill)
.80 goodwill = $8,000
Goodwill = $10,000

Cash 60,000
Goodwill 10,000
James, capital 70,000

310. (10 Points) moderate

Rich and Barbara are partners who share profits and losses 70/30. They have been
looking for a new partner to help with the expanding business. Frank has expressed an
interest and discussions are underway. Frank is willing to join the partnership by
investing $270,000 for a 25 percent equity interest. At the date Frank joins the
partnership, Rich and Barbara have capital account balances of $370,000 and $500,000,
respectively. Assuming the goodwill method is applied, record Frank’s admission to the
partnership.
 Answer:
Book value of capital before the investment $ 870,000
($370,000 + $500,000)
Frank’s investment 270,000
Total book value of capital after the investment 1,140,000
Frank’s percentage ownership 0.25
Book value of Frank’s ownership percentage capital $ 285,000

Goodwill to new partner

$270,000 + goodwill = (.25)($1,140,000 + Goodwill)

$270,000 + goodwill = $285,000 + .25 (Goodwill)
.75 goodwill = $15,000
Goodwill = $20,000

Cash 270,000
Goodwill 20,000
Frank, capital 290,000

311. (30 Points) difficult

Clark and Nick are partners and they share profits and losses 75/25. They have capital
accounts balances of $250,000 and $380,000, respectively, when they agree to admit Ron
to the company. All parties have agreed that the partnership will first revalue tangible
assets to their market value ($200,000 above book value) and then Ron will invest
$170,000 for a 20 percent interest in the partnership’s owners’ equity. Record the
revaluation and Ron’s admission into the partnership assuming the goodwill method is
applied.

Answer:
Assets 200,000
Clark, capital ($200,000 x .75) 150,000
Nick, capital ($200,000 x .25) 50,000

Book value of capital before the investment $ 830,000

($250,000 + $380,000 + $200,000)
Ron’s investment $ 170,000
Total book value of capital after the investment $1,000,000
Ron’s percentage ownership 0.20
Book value of Ron’s ownership percentage capital $ 200,000

Goodwill to new partner

$170,000 + goodwill = (.20)($1,000,000 + Goodwill)

$170,000 + goodwill = $200,000 + .20 (Goodwill)
.80 goodwill = $30,000
Goodwill = $37,500
 Cash 170,000
Goodwill 37,500
Ron, capital 207,500

312. (10 Points) easy

Sarah, Tanya, and Theresa are partners who share profits and losses 25 percent, 35
percent, and 40 percent, respectively. Theresa has decided to leave the partnership. The
fixed assets of the partnership are undervalued by $50,000. The capital accounts of
Sarah, Tanya, and Theresa before Theresa’s withdrawal are $82,000, $130,000, and
$156,000, respectively. The articles of partnership state that the withdrawing partner’s
share of any differences between market value and carrying value should be recognized
when a partner leaves the partnership. Record the journal entry for the revaluation of the
assets. Record also Theresa’s withdrawal assuming that Marsha purchases Theresa’s
equity.

Answer:
Assets ($50,000 x .40) 20,000
Theresa, capital ($50,000 x .40) 20,000

Theresa, capital ($156,000 + $20,000) 176,000

Marsha, capital 176,000

313. (10 Points) easy

Sarah, Tanya, and Theresa are partners who share profits and losses 25 percent, 35
percent, and 40 percent, respectively. Theresa has decided to leave the partnership. The
fixed assets of the partnership are undervalued by $50,000. The capital accounts of
Sarah, Tanya, and Theresa before Theresa’s withdrawal are $82,000, $130,000, and
$156,000, respectively. The articles of partnership state that the full market value of all
assets and liabilities should be recognized when a partner leaves the partnership. Record
the journal entry for the revaluation of the assets. Record also Theresa’s withdrawal
assuming that Marsha purchases Theresa’s equity.

Answer:
Assets 50,000
Sarah, capital ($50,000 x .25) 12,500
Tanya, capital ($50,000 x .35) 17,500
Theresa, capital ($50,000 x .40) 20,000

Theresa, capital ($156,000 + $20,000) 176,000

Marsha, capital 176,000

314. (10 Points) moderate

Sam, Tim, and Tyrone are partners who share profits and losses 15 percent, 40 percent,
and 45 percent, respectively. Tyrone has decided to leave the partnership. The fixed
assets of the partnership are undervalued by $80,000. The partners’ capital account
balances before the withdrawal are $70,000, $190,000, and $250,000, respectively. The
articles of partnership state that the withdrawing partner’s share of any differences
between market value and carrying value should be recognized when a partner leaves the
 partnership. Record the journal entry for the revaluation of the assets. Record the
withdrawal assuming that Sam purchases 30 percent and Tim purchase 70 percent of
Tyrone’s equity.

Answer:
Assets ($80,000 x .45) 36,000
Tyrone, capital 36,000

Tyrone, capital ($250,000 + $36,000) 286,000

Sam, capital ($286,000 x .30) 85,800
Tim, capital ($286,000 x .70) 200,200

315. (10 Points) moderate

Sam, Tim, and Tyrone are partners who share profits and losses 15 percent, 40 percent,
and 45 percent, respectively. Tyrone has decided to leave the partnership. The fixed
assets of the partnership are undervalued by $80,000. The partners’ capital account
balances before the withdrawal are $70,000, $190,000, and $250,000, respectively. The
articles of partnership state that the full market value of all assets and liabilities should be
recognized when a partner leaves the partnership. Record the journal entry for the
revaluation of the assets. Record the withdrawal assuming that Sam purchases 30 percent
and Tim purchase 70 percent of Tyrone’s equity.

Answer:
Assets 80,000
Sam, capital ($80,000 x .15) 12,000
Tim, capital ($80,000 x .40) 32,000
Tyrone, capital ($80,000 x .45) 36,000

Tyrone, capital ($250,000 + $36,000) 286,000

Sam, capital ($286,000 x .30) 85,800
Tim, capital ($286,000 x .70) 200,200

316. (10 Points) easy

Don, Mark, and James are partners who share profits and losses 25 percent, 20 percent,
and 55 percent, respectively. Mark has decided to leave the partnership. The articles of
partnership state that the withdrawing partner’s share of any differences between market
value and carrying value should be recognized when a partner leaves the partnership.
The fixed assets of the partnership are undervalued by $75,000. The partners’ capital
account balances before the withdrawal are $90,000, $110,000, and $240,000,
respectively. Record the journal entry for the revaluation of the assets. Record the
withdrawal assuming that the partnership acquires Mark’s equity.

Answer:
Assets ($75,000 x .20) 15,000
Mark, capital 15,000

Mark, capital ($110,000 + $15,000) 125,000

Cash 125,000
317. (10 Points) easy
Don, Mark, and James are partners who share profits and losses 25 percent, 20 percent,
and 55 percent, respectively. Mark has decided to leave the partnership. The articles of
partnership state that the full market value of all assets and liabilities should be
recognized when a partner leaves the partnership. The fixed assets of the partnership are
undervalued by $75,000. The partners’ capital account balances before the withdrawal
are $90,000, $110,000, and $240,000, respectively. Record the journal entry for the
revaluation of the assets. Record the withdrawal assuming that the partnership acquires
Mark’s equity.

Answer:
Assets 75,000
Don, capital ($75,000 x .25) 18,750
Mark, capital ($75,000 x .20) 15,000
James, capital ($75,000 x .55) 41,250

Mark, capital ($110,000 + $15,000) 125,000

Cash 125,000

318. (30 Points) difficult

Berry, Carl, and Phil have been partners for many years. Carl has indicated that he plans
to withdraw from the partnership. To prepare for his departure, the following
information is gathered:

Book Market
Value Value_
Current Assets 210,000 210,000
Fixed Assets 850,000 980,000
Total Assets 1,060,000
Current Liabilities 110,000 110,000
Long-term Debt 220,000 180,000
Berry, Capital (45%) 380,000
Carl, Capital (25%) 180,000
Phil, Capital (30%) 170,000
Total Liabilities and Partnership Equity 1,060,000

The partnership agreement specifies that the withdrawing partner’s portion of the change
in value of any assets and liabilities should be recognized at the date of withdrawal. The
partners agree that $300,000 of partnership assets will be used to purchase Carl’s
ownership equity. The assets are to be financed by borrowing the money on long-term
notes payable. Record these events assuming that the bonus method is used to recognize
the withdrawal.

Answer:
Fixed Assets ($980,000 - $850,000)(.25) 32,500
Long-term Debt ($220,000 - $180,000)(.25) 10,000
Carl, capital 42,500
 Cash 300,000
Long-term Debt 300,000

Carl, capital ($180,000 + $42,500) 222,500

Berry, capital ($300,000 - $222,500)(45/75) 46,500
Phil, capital ($300,000 - $222,500)(30/75) 31,000
Cash 300,000

319. (10 Points) moderate

Barbara, Mitch, and Susan are partners with capital accounts of $280,000, $350,000, and
$420,000, respectively. Barbara has informed Mitch and Susan that she is withdrawing
from the partnership. The partners have agreed that the partnership will purchase
Barbara’s ownership interest for $340,000. The profit and loss residual ratios before
Barbara’s retirement are 30 percent, 28 percent, and 42 percent, respectively. Assuming
the bonus method is applied, record Barbara’s withdrawal.

Answer
Barbara, capital 280,000
Mitch, capital ($340,000 - $280,000)(28/70) 24,000
Susan, capital ($340,000 - $280,000)(42/70) 36,000
Cash 340,000

320. (10 Points) easy

Fred, Greg, and Sam are partners with capital accounts of $175,000, $225,000, and
$150,000, respectively. Sam informs Fred and Greg that is withdrawing from the
partnership. The partners agree that the partnership will purchase Sam’s ownership
interest for $200,000. The profit and loss residual ratios before Sam’s retirement are 45
percent, 35 percent, and 20 percent, respectively. Record Sam’s withdrawal assuming the
bonus method is applied.

Answer:
Sam, capital 150,000
Fred, capital ($200,000 - $150,000)(45/80) 28,125
Greg, capital ($200,000 - $150,000)(35/80) 21,875
Cash 200,000

321. (10 Points) moderate

Jack, Ken, and Laura are partners in a local company. Ken has announced his
withdrawal from the company. The articles of partnership indicate that the withdrawing
partner’s goodwill is to be recognized at the date of withdrawal. Jack, Ken, and Laura
share profits in a 30 percent, 25 percent, and 45 percent ratio, respectively, and their
respective capital accounts just prior to the withdrawal are $225,000, $260,000, and
$325,000, respectively. Estimated goodwill attributable to Ken’s ownership percentage is
$80,000. Prepare the journal entry (entries) necessary to reflect the withdrawal of Ken
assuming that Martin has been approved to become the new partner. Martin pays Ken
$380,000 for 100 percent of his partnership equity.
 Answer:
Goodwill 80,000
Ken, capital 80,000

Ken, capital ($260,000 + $80,000) 340,000

Martin, capital 340,000

322. (10 Points) moderate

Doris, Elmer, and Fran are partners in a local company. Doris has announced her
withdrawal from the company. The articles of partnership indicate that the withdrawing
partner’s goodwill is to be recognized at the date of withdrawal. Doris, Elmer, and Fran
share profits in a 20 percent, 35 percent, and 45 percent ratio, respectively, and their
respective capital accounts just prior to the withdrawal are $120,000, $180,000, and
$275,000, respectively. Estimated goodwill attributable to Doris’ ownership percentage
is $50,000. Prepare the journal entry (entries) necessary to reflect the withdrawal of
Doris assuming that Greg has been approved to become the new partner. Greg pays
Doris $190,000 for 100 percent of her partnership equity.

Answer:
Goodwill 50,000
Doris, capital 50,000

Doris, capital ($120,000 + $50,000) 170,000

Greg, capital 170,000

323. (10 Points) moderate

Shawn, Teresa, and Mark are partners who share profits and losses 25 percent, 35
percent, and 40 percent, respectively. Mark announced his withdrawal from the company
when the partners’ capital accounts were $190,000, $238,000, and $210,000,
respectively. The articles of partnership indicate that the withdrawing partner’s goodwill
is to be recognized at the date of withdrawal. Estimated goodwill attributable to Mark’s
ownership percentage is $75,000. Prepare the journal entry (entries) necessary to reflect
the withdrawal of Mark assuming that Shawn and Teresa acquire Mark’s equity. Shawn
pays Mark $190,000 for 60 percent of Mark’s equity and Teresa pays $130,000 for 40
percent of Mark’s equity.

Answer:
Goodwill 75,000
Mark, capital 75,000

Mark, capital ($210,000 + $75,000) 285,000

Shawn, capital ($285,000 x .60) 171,000
Theresa, capital ($280,000 x .40) 114,000

324. (10 Points) moderate

David, Eric, and Glenn are partners who share profits and losses 35 percent, 40 percent,
and 25 percent, respectively. Eric announced his withdrawal from the company when the
partners’ capital accounts were $220,000, $200,000, and $280,000, respectively. The
 articles of partnership indicate that the withdrawing partner’s goodwill is to be
recognized at the date of withdrawal. Estimated goodwill attributable to Eric’s
ownership percentage is $90,000. Prepare the journal entry (entries) necessary to reflect
Eric’s withdrawal assuming that David and Glenn acquire Eric’s equity. David pays
$95,000 for 30 percent of Eric’s equity and Glenn pays $190,000 for 70 percent of Eric’s
equity.

Answer:
Goodwill 90,000
Eric, capital 90,000

Eric, capital ($200,000 + $90,000) 290,000

David, capital ($290,000 x .30) 87,000
Glenn, capital ($290,000 x .70) 203,000

325. (10 Points) easy

Rich, Sam, and Clarence are partners who share profits and losses 15 percent, 45 percent,
and 40 percent, respectively. Sam announced his withdrawal from the company when
the partners’ capital accounts were $90,000, $210,000, and $190,000, respectively. The
articles of partnership indicate that the withdrawing partner’s goodwill is to be
recognized at the date of withdrawal. Estimated goodwill attributable to Sam’s
ownership percentage is $60,000. Prepare the journal entry (entries) necessary to reflect
Sam’s withdrawal assuming that the partnership acquires Sam’s equity.

Answer:
Goodwill 60,000
Sam, capital 60,000

Sam, capital ($210,000 + $60,000) 270,000

Cash 270,000

326. (10 Points) easy

Hal, Norris, and Eddie are partners who share profits and losses 25 percent, 15 percent,
and 60 percent, respectively. Hal announced his withdrawal from the company when the
partners’ capital accounts were $120,000, $100,000, and $380,000, respectively. The
articles of partnership indicate that the withdrawing partner’s goodwill is to be
recognized at the date of withdrawal. Estimated goodwill attributable to Hal’s ownership
percentage is $30,000. Prepare the journal entry (entries) necessary to reflect Hal’s
withdrawal assuming that the partnership acquires Hal’s equity.

Answer:
Goodwill 30,000
Hal, capital 30,000

Hal, capital ($120,000 + $30,000) 150,000

Cash 150,000

327. (10 Points) moderate

 James, Kris, and Lance are partners in a local company. Kris has announced her
withdrawal from the company. The articles of partnership indicate that the entire
partnership’s goodwill is to be recognized at the date of withdrawal. James, Kris, and
Lance share profits in a 30 percent, 25 percent, and 45 percent ratio, respectively, and
their respective capital accounts just prior to the withdrawal are $160,000, $120,000, and
$225,000, respectively. Estimated goodwill is $180,000. Prepare the journal entry
(entries) necessary to reflect the withdrawal of Kris assuming that Felix has been
approved to become the new partner. Felix pays Kris $175,000 for 100 percent of her
partnership equity.

Answer:
Goodwill 180,000
James, capital ($180,000 x .30) 54,000
Kris, capital ($180,000 x .25) 45,000
Lance, capital ($180,000 x .45) 81,000

Kris, capital ($120,000 + $45,000) 165,000

Felix, capital 165,000

328. (10 Points) moderate

Nicole, Melvin, and Joshua are partners in a local company. Melvin has announced his
withdrawal from the company. The articles of partnership indicate that the entire
partnership’s goodwill is to be recognized at the date of withdrawal. Nicole, Melvin, and
Joshua share profits in a 40 percent, 25 percent, and 35 percent ratio, respectively, and
their respective capital accounts just prior to the withdrawal are $200,000, $150,000, and
$190,000, respectively. Estimated goodwill is $120,000. Prepare the journal entry
(entries) necessary to reflect the withdrawal of Melvin assuming that Hans has been
approved to become the new partner. Hans pays Melvin $160,000 for 100 percent of his
partnership equity.

Answer:
Goodwill 120,000
Nicole, capital ($120,000 x .40) 48,000
Melvin, capital ($120,000 x .25) 30,000
Joshua, capital ($120,000 x .35) 42,000

Melvin, capital ($150,000 + $30,000) 180,000

Hans, capital 180,000

329. (10 Points) moderate

Kim, Jennifer, and David are partners who share profits and losses 40 percent, 25
percent, and 35 percent, respectively. Kim announced her withdrawal from the company
when the partners’ capital accounts were $250,000, $180,000, and $210,000,
respectively. The articles of partnership indicate that the entire partnership’s goodwill is
to be recognized at the date of withdrawal. Estimated goodwill is $95,000. Prepare the
journal entry (entries) necessary to reflect Kim’s withdrawal assuming that Jennifer and
David acquire Kim’s equity. Jennifer pays Kim $180,000 for 60 percent of her equity
and David pays $130,000 for 40 percent of Kim’s equity.
 Answer:
Goodwill 95,000
Kim, capital ($95,000 x .40) 38,000
Jennifer, capital ($95,000 x .25) 23,750
David, capital ($95,000 x .35) 33,250

Kim, capital ($250,000 + $38,000) 288,000

Jennifer, capital ($288,000 x .60) 172,800
David, capital ($288,000 x .40) 115,200

330. (10 Points) moderate

Natalie, Oscar, and Paul are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Paul announced his withdrawal from the company when
the partners’ capital accounts were $180,000, $160,000, and $320,000, respectively. The
articles of partnership indicate that the entire partnership’s goodwill is to be recognized at
the date of withdrawal. Estimated goodwill is $110,000. Prepare the journal entry
(entries) necessary to reflect Paul’s withdrawal assuming that Natalie and Oscar acquire
Paul’s equity. Natalie pays Paul $140,000 for 30 percent of his equity and Oscar pays
$310,000 for 70 percent of Paul’s equity.

Answer:
Goodwill 110,000
Natalie, capital ($110,000 x .30) 33,000
Oscar, capital ($110,000 x .25) 27,500
Paul, capital ($110,000 x .45) 49,500

Paul, capital ($320,000 + $49,500) 369,500

Natalie, capital ($369,500 x .30) 110,850
Oscar, capital ($369,500 x .70) 258,650

331. (10 Points) easy

Cindy, Tony, and Ben are partners who share profits and losses 25 percent, 55 percent,
and 20 percent, respectively. Ben announced his withdrawal from the company when the
partners’ capital accounts were $120,000, $250,000, and $100,000, respectively. The
articles of partnership indicate that the entire partnership’s goodwill is to be recognized at
the date of withdrawal. Estimated goodwill is $40,000. Prepare the journal entry
(entries) necessary to reflect Ben’s withdrawal assuming that the partnership acquires
Ben’s equity.

Answer:
Goodwill 40,000
Cindy, capital ($40,000 x .25) 10,000
Tony, capital ($40,000 x .55) 22,000
Ben, capital ($40,000 x .20) 8,000

Ben, capital ($100,000 + $8,000) 108,000

Cash 108,000
332. (10 Points) easy
Mary, Nick, and Shawn are partners who share profits and losses 15 percent, 25 percent,
and 60 percent, respectively. Mary announced her withdrawal from the company when
the partners’ capital accounts were $80,000, $140,000, and $280,000, respectively. The
articles of partnership indicate that the entire partnership’s goodwill is to be recognized at
the date of withdrawal. Estimated goodwill is $50,000. Prepare the journal entry
(entries) necessary to reflect Mary’s withdrawal assuming that the partnership acquires
Mary’s equity.

Answer:
Goodwill 50,000
Mary, capital ($50,000 x .15) 7,500
Nick, capital ($50,000 x .25) 12,500
Shawn, capital ($50,000 x .60) 30,000

Mary, capital ($80,000 + $7,500) 87,500

Cash 87,500

Short Answer Questions

333. Helen and Richard are considering forming a partnership. They have worked out many
of the issues but they are unsure about how the accounting records have to be maintained.
They come to you for information pertaining to the application of GAAP for partnership
records.

Answer: Partnerships are not required to comply with generally accepted accounting
principles (GAAP) unless the entity has publicly traded debt securities or the entity is
required to comply with GAAP by a creditor.

334. What are the similarities and differences among proprietorships, partnerships, and
corporations with regard income tax filing.

Answer: Partnerships and proprietorships are viewed as an extension of the owners.

Neither entity is separately taxed on income. The taxable income or loss is allocated to
the owners according to the partners’ profit and loss sharing agreement. Once a partner’s
taxable partnership income is determined, the income is included on the partner’s
individual tax return. The partnership is required to file an informational tax return
(Form 1065) to disclose how the taxable income has been allocated to the partners. The
corporation, on the other hand, is a taxable entity and income tax is paid on the
corporation’s taxable income.

335. Three individuals are considering forming a business together. One of their concerns is
the liability exposure from the business. Prepare a short note to these individuals
explaining the extent of liability each has when forming a partnership and a corporation.

Answer: A partner may bind the partnership by contract when conducting business in the
name of the partnership. This results in each partner being liable for the partnership
 business dealings of the other partners. In addition, partners have unlimited liability with
regard to partnership debts. On the other hand, stockholders of a corporation do not
share such legal liability. The corporation is a legal entity separate from the owners and
management can commit the corporation to legal contracts in the name of the
corporation, but not the stockholders. Thus, management of the corporation can sue in
the name of the corporation and the corporation can be sued. As a result, the
stockholders are generally not liable for the debts of the corporation beyond the amount
invested.

336. Alex is the owner of a small local business. He has operated as a proprietorship for many
years but his health is starting to fail. As a result, Alex is going to reduce the number of
hours worked in the business. He has asked you to explain how changing his business to
a partnership would affect him (legally). Prepare a brief memo outlining the similarity
and differences between a proprietorship and a partnership with regard to legal issues.

Answer: Similarities to be discussed include (1) ease of formation and (2) unlimited
owner’s liability. Difference to be discussed is shared management.

337. Compare and contrast the proprietary theory of equity and the entity theory of equity
with regard to partnerships.

Answer: The proprietary theory is based on the notion that the business entity is an
extension of the owners. The entity theory is based on the notion that the business entity
is distinct and separate from the owners. Partnerships contain elements of both the
proprietary and entity theories. Support for the proprietary theory can be found in the
following:
Individual partners are liable for all debts of the partnership
Salaries of partners are viewed as distributions of income, not components of net
income
The admission of a new partner or withdrawal of an existing partner results in the
dissolution of the partnership
Assets contributed to the partnership retain the existing tax basis to the partner
contributing
A partner’s income tax includes the partner’s share of partnership net income, and
the partnership does not pay income taxes

Support for the entity theory can be found in the following:

Assets contributed to the partnership become property of the partnership
A partnership can enter into contracts
Partners do not have claims to specific assets
Partnership creditors have priority claim to partnership assets and the creditors of
partners have priority claim to partner’s assets in the event of liquidation
Continuity of the partnership when admission or withdrawal of partners occurs
338. Partnership accounting applies elements of both the proprietary and entity theories.
Explain the underlying theoretical basis for the proprietary theory and the entity theory.

Answer: The proprietary theory is based on the notion that the business entity is an
extension of the owners. The entity theory is based on the notion that the business entity
is distinct and separate from the owners.

339. Hans and Felix are attempting to work out the final issues for forming a partnership.
They are currently debating the values to assign to noncash assets contributed to the
partnership by each partner. Hans believe that the market value has to be assigned to
these assets while Felix believes there may be other alternatives. Prepare a short note to
the two potential partners clarifying this issue.

Answer: The three most likely valuations that can be assigned to noncash assets are the 1)
contributor’s carrying value, 2) contributor’s tax basis, or 3) market or appraised value of
the asset. The amount to be assigned to the noncash assets can be determined by
agreement among the partners or by appraisal (if market values are used).

340. Berry and Charlie plan to start a partnership. One partner is contributing an old building
while the other partner is contributing several delivery trucks. Both partners are also
contributing cash. A difference of opinion exists regarding the amount at which the
building and delivery trucks are to be placed on the partnership’s books. Berry believes
the carrying values should be recorded. Charlie objects because it would give Berry too
great a share of the partnership’s owners’ equity. Charlie believes the tax basis should be
used. Berry objects to the tax basis for the same reason Charlie objects to the book basis.
The partners ask for your opinion. How do you respond?

Answer: The amounts recorded on the partnership’s books do not determine the amounts
assigned to each individual capital account. The amount recorded for the assets will help
determine total capital, not how total capital is divided between the partners.

341. Explain how the assumption of a liability by the partnership on an asset contributed by a
partner impacts the contributing partner’s capital account and tax basis in that asset.

Answer: Generally the value assigned to the asset (e.g., carrying value, tax basis, market
value) is explicitly reduced by the amount of the liability assumed to determine the
contributing partner’s capital account balance. The reduction may be implicit if partners
agree to create capital accounts in equal amounts through such techniques as the
recognition of goodwill for other partners. The tax basis of a contributing partner is only
reduced by the part of the liability assumed by the partnership because the IRS interprets
this event as all partners sharing the obligation so the contributing partner is still
obligated for part of the liability.

342. Clark, Mitchell, and Thomas are forming a partnership. Each partner is contributing cash
and other tangible assets. In addition, Clark has a significant amount of experience in
operating the type of business being created. The partners do not like the idea of
recording goodwill but they are not sure how to otherwise recognize the additional
 contribution Clark is making. Prepare a brief memo explaining a different way to
recognize Clark’s contribution.

Answer: The initial capital accounts can be modified to reflect Clark’s additional
contribution. Mitchell and Thomas would give up an agreed amount of capital to be
assigned to Clark. This approach is called the bonus method. Mitchell and Thomas are
giving a bonus to Clark because of the additional contribution that cannot be measured in
a traditional manner.

343. James and Rachel are forming a partnership. They agree on the values to assign to all of
the assets and liabilities. The partners also want to recognize that Rachel has many
contacts that will be of value to the business. A mutual friend who owns a business has
told them the bank will be unhappy with their balance sheet if they record goodwill for
Rachel. How else can they recognize Rachel’s contacts?

Answer: The bonus method can be used instead of the goodwill method. The bonus
method reallocates capital from James to Rachel to recognize the contribution made by
Rachel in excess of the identifiable assets. As a result, James will have a reduced capital
account balance and Rachel will have a greater balance.

344. Barry, George, and Felix are forming a partnership. Each partner is contributing cash
and other tangible assets. George and Felix are contributing greater amounts of cash and
other tangible assets but Barry has a significant amount of experience in operating the
type of business being created. A mutual friend has suggested that the three make their
initial capital accounts equal in value. George and Felix do not like the idea of recording
their capital accounts at an amount less than the market value of what they are
contributing but they are not sure how to otherwise recognize the additional contribution
Barry is making. Prepare a brief memo explaining a different way to recognize Barry’s
contribution.

Answer: The additional contribution being made by Barry could be recorded as goodwill.
This intangible asset would be created at an amount agreed by the partners. Goodwill
results in an increase in the value of Barry’s capital account but it does not result in a
decrease in the value of the other partners’ capital accounts.

345. Explain how partners may determine the dollar amount of goodwill recognized at the
date a partnership is formed.

Answer: The value assigned to goodwill can be determined in any legal manner
agreeable to the partners. One possibility is to have an independent appraisal of the
intangible asset contributed. Another possibility is for the partners to agree on an
assigned value of the intangible asset.

346. Explain how a drawing account used by a partnership is similar in concept to a dividend
account used by a corporation.

Answer: Both accounts contain information pertaining to distributions to owners. These

distributions can take any form such as cash, inventory, and other assets. Both accounts
 are temporary in nature. They do not exist on the company’s balance sheet and they are
closed at the end of the accounting period to permanent equity accounts (partnership
capital accounts for drawing accounts and retained earnings for dividends).

347. Vicky, Robert, and Ray are forming a partnership. They have asked for some
information regarding the allocation of profits and losses among the partners. While they
believe that each partner will contribute significantly to the partnership, this contribution
will take different forms. They are unsure how to recognize these different types of
contributions. Prepare a short note explaining the different components that might be
considered when allocating partnership profits to individual partners.

Answer: Partnership profits and losses can be allocated in any manner but there are four
common components: interest on capital balance, salary, bonus, and residual percentages.
These different components reward partners for contributions of economic resources,
labor and expertise, taking on special responsibilities, and agreed allocation of any
residual profit or loss remaining after the other components have been considered.

348. Susan is joining an already existing partnership. She is reading the profit and loss
sharing part of the partnership agreement. She calls you with a question regarding a term
she does not understand, weighted average capital balance. Prepare a short note
explaining what is meant by this term.

Answer: The weighted average capital balance is the calculated average dollar amount in
the capital account after considering the length of time that balance existed. This method
of computing the average is less subject to manipulation that the simple average, which is
beginning amount plus ending amount divided by two.

349. Ben is a new partner in a local company. When he became a partner, he received a copy
of the partnership agreement including the profit and loss sharing agreement. Ben is
concerned about the interest on capital balance portion of the profit and loss sharing
agreement because his capital account is very small. Prepare a short note explaining the
reason this component of profit and loss allocation exists.

Answer: The interest on capital balance is meant to reward partners for contributions of
economic resources. As a new partner, a small capital account will likely exist and
therefore this component of the profit allocation will be small. As the capital account
grows through additional investment and profit accumulation, this component of the
profit and loss allocation will also grow.

350. Michelle is a new partner is considering becoming a partner in a small company. She
obtained a copy of the most recent income statement and is surprised when she does not
find salaries on the income statement. She asks you if it is unusual for partners to not
receive a salary from their work in the partnership.

Answer: The lack of salary expense on the income statement does not mean that the
partners do not receive a salary. Partner salaries are not on the income statement, they
are part of the profit allocation.
351. Are there any differences between bonuses offered to partners and bonuses offered to
managers in corporations?

Answer: Bonuses offered to partners and bonuses offered to managers in corporations

are the same. Both are forms of compensations designed to encourage performance.
Furthermore, both should be based on criteria within the control of the person who will
receive the bonus.

352. Ben and Natalie are forming a partnership. They have worked out many of the details
but they are confused about how to divide profits and losses. They have spoken with
several associates who are in different partnership and there seems to be some
inconsistencies. Some partnerships have residual profit and loss ratios while others do
not. Prepare a note to Ben and Natalie informing them of the reason for this
inconsistency.

Answer: Residual profit and loss ratios are not needed if the ratios are to be equal. The
default profit and loss ratio, if not stated, is that all partners will share the residual profit
and loss equally. If the desire is to share the residual amount of profit or loss in some
other proportion, the allocation must be disclosed.

353. Do partnership residual profit ratios have to be the same as partnership residual loss
ratios? Why or why not.

Answer: Residual profit and loss ratios are part of a contractual agreement among the
partners. As a result, the partnership can apply any ratios agreed by the partners. The
ratios are typically the same for profits and losses but they can differ.

354. Alex, Shawn, and Tammy are partners in a local company. They have been conducting
business for a number of years and Shawn recently told the partners that he is going to
reduce his activities in the partnership. As a result, the partners have agreed that the
profit and loss sharing arrangement should be modified. They have agreed to adjust the
salaries and the profit and loss residuals. They come to you with a concern regarding the
assets that are currently owned by the partnership. The partners know that the assets are
worth more than the amount recorded on the financial records but they do not know how
this should be considered when the profit and loss ratios are changed. Prepare a short
note to the partners outlining the their options.

Answer: The difference between the market and book values of assets that exist when the
profit and loss ratios change can be addressed in several ways. One way is to make a list
of these assets and their market value at the date of the change. When the assets are sold,
the amount of the gain that existed when the profit and loss ratios were changed would be
allocated based on the previous profit and loss ratios and any change in market value that
occurs after the ratios are changed would be allocated based on the new ratios. Another
approach is to revalue the assets at the date the profit and loss ratios are changed. The
gain would be allocated based on the previous ratios. A third approach is to determine
the impact of the unrealized gains on the capital accounts due to the change in the ratios
and directly adjust the capital accounts. The gain on the assets at the date of sale would
 then be allocated based on the new ratios. All three approaches give the same end result,
the choice is a matter of preference by the partners.

355. Partners sometimes change the profit and loss ratios used to determine the allocation of
profits and losses. When this occurs, why would the partners choose to prepare a list of
assets with market values different from book values when they could have chosen to
revalue the assets to market value at the date the profit and loss ratios were changed?

Answer: Some partners and possibly their creditors may not want to have the assets
revalued to market value. The revaluation is a significant departure from GAAP and the
partners and their creditors may prefer to have the partnership’s financial records
maintained in accord with GAAP.

356. Sarah, a friend who knows you are a CPA comes to you with a concern. She has been
asked by a colleague to consider becoming a partner in a small company. She will be the
fourth partner in the company. Sarah has had two meetings with the current partners.
She is concerned that one of the current partners who does not know her has been asking
a variety of questions pertaining to her business practices beliefs and her personal ethics.
Sarah asks if you have any idea why this partner would ask such questions. How do you
respond?

Answer: The current partner may be concerned because the existing partners will have
unlimited liability for the actions of the new partner. Given that this partner does not
know Sarah, he/she is gathering information so a choice can be made about accepting
such risk.

357. Don and Jerry are partners in a publishing company. Don is interested in reducing his
involvement in the company and they have been searching for a new partner to take on
some of the work. They learn that Ted is interested in joining the partnership and they
enter into negotiations. Don is willing to support Ted joining the partnership if Ted will
pay Don $250,000. Don will not transfer any of his equity to Ted but will allocate 30
percent of his profit allocation to Ted. Ted comes to you with a concern about Don’s
unwillingness to allocate any equity to him even though a significant investment is
required. How do you respond?

Answer: There is no requirement for a partner to give up equity to a new partner

acquiring part of his ownership. Ted’s is purchasing an ownership in the income stream
of the partnership. His capital account would start at $0 an increase as the partnership
has income.

358. Sally, Robert, and Stuart are partners in a manufacturing company. They are considering
allowing Dick to acquire an ownership interest in the partnership by purchasing part of
Stuart’s equity. Dick is interested in purchasing 40 percent of Stuart’s equity. Dick
comes to you with a question just before a negotiating session with the current partners.
He asks if his ownership in Stuart’s equity gives him the right to 40 percent of Stuart’s
profit allocation or if that is a separate issue. How do you respond?
 Answer: A purchase of Stuart’s equity is a separate issue from the allocation of profits
and losses. These two items have to be negotiated simultaneously but they are
independent. Dick has to be comfortable with the outcome on both issues if he is going
to acquire a part ownership in the partnership.

359. Fred is negotiating an investment to join a partnership. The existing partners are asking
for an investment of $80,000 for a 20 percent ownership in the partnership’s equity. Fred
is encouraged by this proposal but then he learns that the partners plan to revalue the
assets before Fred’s admission. Fred does not understand the reason for the revaluations.
Prepare a note to Fred explaining why the existing partners want to revalue the assets
before he is admitted.

Answer: The partners believe that the difference between market value and book value of
existing assets belong to them because they have been the partners during the time period
when the assets value increased. As a result, they intend to have the unrealized increase
in value added to their capital accounts so that it will not be shared with the new partner.
Any changes in value after Fred becomes a member of the partnership will be allocated
to all of the partners, including Fred.

360. Why are some people opposed to the revaluation of partnership assets when a new
partner is admitted to the partnership?

Answer: These individuals contend that the partnership is still in operation and there
should be no change in the values assigned to assets and liabilities while the partnership
is in operation. There has not been a change in ownership so there is no transaction to
justify the revaluation.

361. You are a staff accountant for a local company. The partners of a client are discussing
the admission of a new partner. Some partners believe that the partnership’s assets
should be revalued before admission of the new partner while other partners are opposed
to the revaluation. Prepare a short note explaining why it may be appropriate to revalue
the partnership’s assets at this time.

Answer: The change in value of the assets has occurred over time and the partners during
that time should share in the increase in value. The new partner should have no claim to
increases in value before that partner’s investment in the company. In addition, when the
new partner joins the company, there is a new legal entity so recording the assets at the
market value at that date is not inappropriate.

362. Sam and Mark are discussing bringing Susan into the partnership. Susan understands
that the partnership’s assets will be revalued before her admission but she does not
understand why she should invest more in the partnership than her share of the market
value of the partnership’s assets. Prepare a short note to Susan explaining the reason that
it may require a greater investment to become a member of this partnership.

Answer: Revaluing the partnership’s assets does not recognize the goodwill that exists in
the company. The partners have chosen to not record goodwill on the company’s balance
sheet but goodwill still exists. The amount that Susan is investing in excess of the capital
 account created represents her investment in the goodwill that already exists in the
company. She is paying a bonus to the existing partners for allowing her to share in the
goodwill of the partnership.

363. Steve is negotiating with the partners in a local business. He would like to become a new
partner in the business but there are several issues he does not understand. One of the
primary issues pertains to the amount of his capital account at the date of investment.
The partners told Steve that he would have to invest $100,000 to join the business but his
capital account would be created for $85,000. Prepare a short note to Steve explaining
why his capital account would be recognized at an amount less than his investment.

Answer: The partnership has an unidentified asset (goodwill) that has value to the
company. The partners have chosen to not record goodwill on the company’s balance
sheet but goodwill still exists. The amount that Steve is investing in excess of the capital
account created represents his investment in the goodwill that already exists in the
company. He is paying a bonus to the existing partners for allowing him to share in the
goodwill of the partnership.

364. Jim and Fred have decided to admit Richard into their partnership. Jim and Fred know
that they are going to apply something called the bonus method to record the admission
of Richard into the partnership but they do not understand the technical accounting part
of the transaction. As a result, they do not understand why Richard’s capital account will
be created at an amount greater than the amount of his investment in the partnership.
Prepare a short note to Jim and Fred explaining the reason that Richard’s capital account
is created for this amount.

Answer: The parties have agreed that Richard is going to receive a certain percentage of
the partnership’s equity at the date of the investment. They have also agreed on the
amount that Richard will invest. When the investment takes place, the bonus method
required Richard’s capital account to be created at the agreed percentage of the total
capital after the investment. This amount may be less than, equal to, or more than the
amount invested. If it is less than or more than the amount of the investment, the capital
accounts of the existing partners is adjusted to make up for the difference.

365. John and Joel are negotiating with a potential partner to join their local business. They
would like Laura to become a new partner in the business but there are several issues
they do not understand. One of the primary issues pertains to the amount of his capital
account at the date of investment. The partners agreed that Laura would have to invest
$75,000 to join the business and they agree that he is going to have a 30% equity interest
in the partnership. What they did not realize is that their capital accounts were going to
decrease when Laura joined the partnership. Prepare a short note to John and Joel
explaining why their capital accounts would be reduced when Laura joins the company.

Answer: The partners have agreed that Laura is contributing something to the partnership
in addition to the tangible assets. They have also agreed on the value of this contribution
when they established the interest she would have in the partnership’s total capital.
When the bonus method is applied, the total capital (based on the existing partners’
capital plus the investment) is allocated to the new and existing partners in the agreed
 manner. If the new partner is receiving an equity interest more or less than the amount
invested, the existing partners’ capital accounts must be adjusted. In this instance, the
capital account of the new partner is greater than the amount invested so the existing
partners’ capital accounts must be reduced.

366. Shawn is currently in discussion with Ted and Mark regarding his joining their
partnership. Initial discussions resulted in an agreement that Shawn would contribute
$50,000 for a 20 percent equity interest in the partnership. The last discussion was about
how the transaction would be disclosed in the partnership’s financial statements. Shawn
noticed that the Ted and Mark’s capital accounts were greater in the pro forma balance
sheet and that goodwill had been added to the balance sheet. Shawn asks for an
explanation of this change. You are the accountant attending the meetings, how do you
respond?

Answer: The partnership agreement indicates that the goodwill method is to be applied
when new partners join the company. In this instance, Shawn is contributing more than
his share of the book value of the company. This implies that there exists goodwill in the
company. The goodwill is recorded and allocated to Ted and Mark because they were the
partners when the goodwill was developed. As a result, Shawn’s $50,000 investment will
exactly equal his share of the partnership’s book value after the goodwill is recorded.

367. You are conducting training for new loan officers of a bank. The topic of the day is
partnerships and their changes in ownership. The bank often receives loan requests when
partnerships are expanding. At the same time, the partnership may also be adding a new
partner to increase the company’s capital and improving its potential for a loan from the
bank. You hand out several partnership balance sheets before and after a new partner has
joined. One loan officer asks about the reason for a change in existing partner capital
accounts and the addition of goodwill to the balance sheet. How do you respond?

Answer: Partnerships are permitted to record goodwill when a new partner joins the
company. Estimated goodwill is determined by evaluating the new partner’s investment
and that partner’s share of the partnership’s total equity after the investment. If the
investment results in the new partner receiving less than his/her share of the partnership’s
equity, goodwill is said to exist in the current partners. As a result, this goodwill is
recorded and allocated to the current partners.

368. Three investors have asked for your assistance in planning the formation of a partnership.
After about two hours of discussion the group arrives at the topic of how to admit
additional partners in the future or retire existing partners. You explain that there are two
methods that can be used to account for these events: the bonus method and the goodwill
method. One of the partners listens to the explanation of the two methods and then asks
for you to summarize the criteria that may be used to determine which method this
partnership wants to use. Prepare a response to the partner’s request.

Answer: The difference that exists when comparing the bonus method and the goodwill
method is whether the partners wish to recognize goodwill on the balance sheet. The
goodwill method will result in greater total assets than the bonus method but the
 relationship that exists among the partners will be the same regardless of the method
applied.

369. Why would partners in an existing partnership agree to allocate an equity interest to a
new partner that is greater than the value of the identifiable net assets contributed by the
new partner?

Answer: The existing partners would be willing to allocate a capital account to a new
partner greater than the value of the identifiable new assets contributed because the new
partner is contributing unidentifiable assets to the partnership. These other assets may
include business expertise, a good reputation, or existing customers. The additional
assets contributed to the partnership result in the new partner having goodwill.

370. You are an analyst for a local bank. A question just arrived in your email from a new
loan officer. The loan officer is reviewing information from a small partnership
requesting a loan. The partnership indicates that one of the partners is withdrawing from
the partnership. The remaining partners send a current balance sheet and a pro forma
balance sheet after the withdrawal. The loan officer is confused because the withdrawing
partner’s capital account is deleted and all of the other partners’ capital accounts have
been reduced. Why might all of the other partners’ capital accounts be reduced?

Answer: There are two reasons why the remaining partners’ capital accounts could be
reduced. First, the partnership may have revalued assets to their market value. If the
market value were less than book value, the capital accounts would be reduced. The
second, and more likely, reason is that the remaining partners are going to pay a bonus to
the withdrawing partner. As a result, each of the remaining partners’ capital accounts
will be reduced by his/her proportion of the bonus paid.

371. Jennifer is confused with regard to the recognition of the withdrawal of a partner from
the company. The partnership agreement indicates that they will apply the bonus method
to recognize the withdrawal and that any bonus will be shared by the remaining partners
based on their profit and loss ratio. Jennifer was surprised when she is assigned 40
percent of the bonus paid even though she only has a 35 percent ownership interest in the
partnership. How do you respond?

Answer: The remaining partners, based on their profit and loss residual ratios, absorb the
bonus paid to the withdrawing partner. As a result, Jennifer’s 35 percent ownership
became 40 percent of the remaining equity after the existing partner was removed from
consideration.
QUIZ:
1. The following is the condensed balance sheet of the partnership Jo, Li and Bi who share
profits and losses in the ratio of 4:3:3.

Cash P 180,000 Accounts, payable P 420,000

Other assets 1,660,000 Bi, Loan 60,000
Jo, receivable 40,000 Jo, Capital 620,000
Li, Capital 400,000
__ Bi, Capital 380,000
Total P 1,880,000 Total P1,880,000

Assume that the assets and liabilities are fairly valued on the balance Sheet and the partnership
decides to admit Mac as a new partner, with a 20% interest. No goodwill or bonus is to be
recorded. How much Mac should contribute in cash or other assets?
a. P 350,000
b. P 280,000
c. P 355,000
d. P 284,000

2. Fernando and Jose are partners with capital balances of P30,000 and P70,000, respectively.
Fernando has a 30% interest in profits and losses. All assets of the partnership are at fair
market value except equipment with book value of P300,000 and fair market value of
P320,000.

At this time, the partnership has decided to admit Rosa and Linda as new partners. Rosa
contributes cash of P55,000 for a 20% interest in capital and a 30% interest in profits and losses.
Linda contributes cash of P10,000 and an equipment with a fair market value of P50,000 for a
25% interest in capital and a 35% interest in profits and losses. Linda is also bringing special
expertise and clients contact into the new partnership. Using the bonus method, what is the
amount of bonus?
a. P24,750
b. 18,250
c. 14,000
d. 7,500

3. The capital accounts of the partnership of Nakpil, Ortiz, and Perez on June 1, 2005 are
presented below with their respective profit and loss ratios:

Nakpil P 139,200 1/2

Ortiz 208,800 1/3
Perez 96,000 1/6
P 444,000

On June 1, 2005, Quizon is admitted to the partnership when he purchased, for P 132,000, a
proportionate interest from Nakpil and Ortiz in the net assets and profits of the partnership. As a
result of a transaction, Quizon acquired a one-fifth interest in the net assets and profits of the
firm. Assuming that implied goodwill is not to be recorded, what is the combined gain realized
by Nakpil and Ortiz upon the sale of a portion of their interest in the partnership to Quizon?
a. P 0
b. P 43,200
c. P 62,400
d. P 82,000

4. In the AAA-BBB partnership, AAA and BBB had a capital ratio of 3:1 and a profit and loss

partner. What ratio would be used to allocate, to AAA

a.
b.
c.
d. d loss ratio

5. When Mill retired from the partnership of Mill, Yale, and Lear, 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 Yale and Lear.
d. Had no effect on the capital balances of Yale and Lear.

6. C, D and E are partners with capital balances on December 31, 20x1 of P300,000 and
P200,000 respectively. Profit are shared equally. E wishes to withdraw and it is agreed that
she is to take certain furniture and fixtures with second hand value of P50,000 and note for
the balance of her interest. The furniture and fixtures are carried in the books at P65,000.
s acquisition of the second-hand
furniture will result to:
a. Reduction in capital of P15,000 each for C and D.
b. Reduction in capital of P10,000 for E.
c. Reduction in capital of P5,000 each for C and D and E.
d. Reduction in capital of P7,500 each for C and D.

7. In
capital balances were: Mikee, P600,000; Raul, P600,000; Imelda, P400,000. It was agreed
nd hand value
of P24,000 that cost the partnership P36,000.

If profits and losses are shared equally, what would be the capital balances of the remaining
partners after the retirement of Imelda?
Mikee Raul__
a. P600,000 P600,000
b. 592,000 592,000
c. 608,000 608,000
d. 612,000 612,000

8. On June 30, 1998, the balance sheet for the partnership of Coll, Maduro, and Prieto, together
with their respective profit and loss ratios, was as follows:

Assets, at cost P 180,000

Coll, loan P 9,000

Coll, capital (20%) 42,000
Maduro, capital (20%) 39,000
Prieto, capital (60%) 90,000
Total P 180,000

Coll decided to retire from the partnership. By mutual agreement, the assets are to be adjusted to
their fair value of P 216,000 at June 30, 1998. It was agreed that the partnership would pay Coll

account?
a. P 36,450
b. 39,000
c. 45,450
d. 46,200

9. On June 30, 2009, the balance sheets of the partnership of AAA, BBB and CCC, together
with their respective profit and loss ratios, were as follows:
Assets, at cost P 180,000

AAA, loan P 9,000

AAA, capital (20%) 42,000
BBB. Capital (20%) 39,000
CCC , capital (60%) 90,000
Total P 180,000

AAA has decided to retire from the partnership. By mutual agreement, the assets are to be
adjusted to their fair value of P216,000 at June 30, 2009. It was agreed that the partnership

bal
a. P36,450 c. P45,450
b. P39,000 d. P46,200

10. On June 30, the balance sheet for the partnership of Williams, Brown and Lowe together
with their respective profit and loss ratios was as follows:

Assets, at cost P300,000

Williams, loan P 15,000
Williams, capital (20%) 70,000
Brown, capital (20%) 65,000
Lowe, capital (60%) 150,000
Total P300,000

Williams has decided to retire from the partnership and by mutual agreement the assets are to be
adjusted to their fair value of P360,000 at June 30. It was agreed that the partnership would pay
Williams P102,000 cash for his partnership interest exclusive of his loan which is to be repaid in
full. No goodwill is to be recorded in this transaction. After William's retirement what are the
capital account balances of Brown and Lowe, respectively?
a. P65,000 and P150,000.
b. P72,000 and P171,000.
c. P73,000 and P174,000.
d. P77,000 and P186,000.

your God. I will

(Isaiah 41:10)

- END
SOLUTIONS:

1. A620,000 + 400,000 + 380,000 = 1,400,000 x 80% = 1,750,000 x 20% = 350,000

2. BTotal equity = 100,000 not revalued; Rosa 55,000 for 20%; Linda 60,000 for 25%; for a
total of P215,000. P215,000 x 55% = 118,250 100,000 = 18,250.

3. B444,000 x 1/5 = 88,800; 132,000 88,800 = 43,200

4. D

5. C

6. C 65,000 50,000 = 15,000 impairment loss ÷ 3

7. C
Mikee Raul Imelda
600,000 600,000 400,000 1,600,000
8,000 8,000 8,000 24,000 fully depreciated
(408,000) (372,000)
608,000 608,000 - 1,252,000
1,216,000

8. C
C 20% M 20% P 60%
9,000 - - 9,000
42,000 39,000 90,000 171,000
51,000 39,000 90,000 180,000
7,200 7,200 21,600 36,000
58,200 46,200 111,600
(61,200)
(3,000) (750) (2,250.00)
45,450 109,350

9. C
A B C
51,000 39,000 90,000 180,000
7,200 7,200 21,600 36,000
58,200 46,200 111,600
(61,200)
(3,000) (750)
- 45,450

10. B
W B L
20% 20% 60%
85,000 65,000 150,000
12,000 12,000 36,000 60,000
97,000 77,000 186,000
117,000
(20,000) (5,000) (15,000)
72,000 171,000
1. Tom and Jerry formed a management consulting partnership on January 1, 2021. The fair value of net
assets invested by each partner follows:

Tom Jerry

Cash 13,000 12,000

Accounts receivable 8,000 6,000

Office 2,000 800

Office equipment 30,000

Land 30,000

Accounts payable 2,000 5,000

Mortgage payable 18,800

During the year, Tom withdrew P15,000 and Jerry withdrew P12,000 in anticipation of operating
profits.Net profit for 2021 was P50,000 which is to be allocated based on the original net capital
investment.

● The capital balance of Tom on December 31, 2021 is

69,553

● The capital balance of Jerry on December 31, 2021 is

29,447

2. Robert, Mico and Aaron formed a partnership on March 1, 2019 with original capital contributions of
P300,000, P100,000, and P400,000, respectively. On April 30, 2019, agreed to invest additional capital
of P100,000 each. On August 1, all partners agreed to have the same level of contributed capital of
P500,000.

● How much is the average capital balance of Mico for the 10-month period ending December 31,
2019?
330,000

● How much is the average capital balance of Robert for the 10-month period ending December
31, 2019?
430,000

● How much is the average capital balance of Mico for the 10-month period ending December 31,
2019?
Robert of P100,000. Mico of P300,000 and nothing from Aaron

3. Dino, Doods, and Dong have the following accounts and their normal balances on January 31, 2021,
the date the partners agreed to liquidate their 3D Partnership:

Cash P20,000 Accounts Payable P10,000

 Accounts Receivable 25,000 Notes Payable 27,000

Allowance for Bad Debts 5,000 Loans due to Dino 5,000

Merchandise Inventory 60,000 Loans due to Doods 7,000

Furniture & Equipment 50,000 Dino, Capital 20,000

Accumulated Depreciation 5,000 Doods, Capital 40,000

Dong, Capital 36,000

The partners divide profit and losses 4:1:5, respectively. Sales proceed follows:
Accounts Receivable P10,000
Merchandise Inventory 30,000
Furniture & Equipment 20,000

● Assuming that Dino is a limited partner, the cash paid to Dong is?
0

● If Dino is a limited partner, the cash paid to Doods is

32500

● Assuming that Dino is a limited partner, how much additional investment should Dong give?
1500

● How much is the non-cash assets?

125000

● Assuming that any deficiency will be immediately paid, the cash paid to Doods
40500

● Assuming that any deficiency is uncollectible, the cash paid to Dong?

2667

● The sale of non-cash assets resulted in a total loss of

65000

● How much is the cash available for distribution to the partners?

43000

● The sale resulted in a capital deficiency for

Dino

4. Felicity and Gregory are partners with capital balances of P700,000 and P500,000, respectively. They
agree to accept Randell who will contribute land costs him P500,000, but with a market value of
P600,000.

Randell will be given 30% interest in the partnership and bonus is to be recognized.
 ● The revised capital of Felicity after the admission of Randell is
P735,000

● Who gives the bonus?

Randell

Randell will be given 40% interest in the partnership.

● Assuming bonus is to be recognized, how much is the bonus?

120,000

● Assuming bonus is to be recognized, who gets the bonus?

Randell

5. Felicity and Gregory are partners with capital balances of P700,000 and P500,000, respectively. They
agree to accept Randell who will contribute land costs him P500,000 but with a market value of
P600,000. Randell will be given 30% interest in the partnership but assets should first be revalued
using Randell’s investment and interest as basis.

● How much is the total agreed capital?

P2,000,000

● How much is the total asset revaluation?

200,000

6. Felicity and Gregory are partners with capital balances of P700,000 and P500,000, respectively. They
agree to accept Randell who will contribute land costs him P500,000 but with a market value of
P600,000. Randell will be given 40% interest in the partnership but assets should first be revalued
using Randell’s investment and interest as basis.

● Total asset revaluation amounts to

P(300,000)

7. Ara, Bea, and Cai agreed to admit a new partner on January 1, 2021 when their capital balances were
250,000, 150,000, and 200,000, respectively. Profit and loss ratio is 2:1:2, respectively. A new partner,
Dell was admitted for cash investment that will give her 25% interest in the partnership.

How much should Dell invest?

200,000

8. Ara, Bea, and Cai agreed to admit a new partner on January 1, 2021 when their capital balances were
250,000, 150,000, and 200,000, respectively. Profit and loss ratio is 2:1:2, respectively.

Ara retired and the partnership paid her P240,000 after the assets were revalued.

● Bea’s capital after Ara’s retirement is

P145,000

Ara retired and the partnership paid her P280,000 after the assets were revalued.
 ● Total capital after Ara’s retirement is
P395,000

9. Ara, Bea, and Cai agreed to admit a new partner on January 1, 2021 when their capital balances were
250,000, 150,000, and 200,000, respectively. Profit and loss ratio is 2:1:2, respectively. A new partner,
Dell was admitted for cash investment of 100,000 for a 20% interest in an agreed capitalization of
700,000. The accountant recognized
Bonus to new partner

10. Ali and Bebe formed a partnership. The partnership agreement stipulates the following:
a. Ali shall contribute non-cash assets with a carrying amount of P60,000 and fair value of
P100,000.
b. Bebe shall contribute cash of P200,000
c. Ali and Bebe have an interest of 80% and 20%, respectively, on both initial and subsequent
partnership profits and losses
d. No outside cash settlement shall be made between the partners. *

● The entry to record the contribution of Bebe includes a credit to Ali’s capital in the amount of
140000

● The total partnership capital after the formation is ________.

300000

● The adjusted capital account of Bebe after the formation is ________.

60000

11. The partners in the ABC partnership have the capital balances as follows:
A - 70 000 ; B - 70, 000 ; C - 105 000
Profits and losses are shared 30%, 20%, 50%, respectively. On this date, C withdraws and the partners
agree to pay him P140,000 out of partnership cash. *

● Using the total revelation of asset method, the revised capital of B after the withdrawal of C is
84000

● Using partial revaluation of asset method, the revised capital of A after the withdrawal of C is
70000

● Using bonus method, the revised capital of A after the withdrawal of C is

91000 49000

12. Jack holds an ownership interest of 63% and Teresa holds an ownership interest of 37% in the J and T
partnership. This year, in order to fully develop the business, Jack contributes an additional P6800 and
Teresa contributes an additional P3200 to the partnership. Which of the following is TRUE of this
scenario
Individual contributions of P6800 by Jack and P3200 by Teresa will be recorded.

13. Assume that after operations and partners’ withdrawals during 20x2 and 20x3, DE partnership has a
book value of P120,000 and profit and loss (P&L) percentage on January 1, 20x4 as follows:
 a. Capital balances of P72,000 and P48,000 for D and E, respectively.
b. P/L ratio of 7:3 to D and E, respectively.

On this date, G is admitted to the partnership. G purchased one-fourth of D’s interest for P21,600 and
one-fourth of E’s interest for P14,400 making direct payment to D and E. The new partner will have a
one-fourth share in the profits and losses. The old partners continue to use their profit and loss ratios.

● The capital of E after the admission of G is _______.

36000

● The revised profit or loss percentage of D is _______.

52.5%

On this date, G is admitted to the partnership. G paid P28,000 directly in exchange for a one-third
interest of D.

● The capital account credit to G is _______.

24,000

14. Rica is a sole proprietor who invested her grocery when she invited Belle to form a new partnership
business. The following are the assets and liabilities of the grocery:

Cash 50,000

Merchandise 30,000 Book Value

P20,000 Market Value

Fixed Asset (100k less Acc. Depn 10K) 90,000 Book Value

70% of cost Market Value

Accounts Payable 20,000

Accrued Expenses 7,000

Belle invested the following:

Cash P60,000

Land (mortgage balance of 200,000 Book Value

P500k plus accrued interest
for 6 mos at 18%)

500,000 Market Value

Store furniture (costing 30,000

P40k less acc depn of 10k)

The total liabilities of the newly formed partnership would be

81,500
15. A statement of financial position of the partnership of X, Y, Z contains the following account balances:

Cash P240,000 Accounts Payable P300,000

Accounts Receivable 280,000 Notes Payable 200,000

Loans to Z 40,000 Loans from Y 20,000

Inventories 400,000 X, Capital 340,000

Property, Plant, and 440,000 Y, Capital 340,000

Equipment

Z, Capital 200,000

In January 2021, the loan to Z, was offset against his capital balance, P200,000 of accounts receivable
were collected and inventories with carrying value of P160,000 were sold for P200,000. Available cash
was distributed. **

X, Y, and Z share profits and losses in the ratio of 5:3:2, respectively.

● After the first distribution of cash, the equity of Y is ________.

220000

● If Z received P30,000 during the first cash distribution, the amount that should have been
received by X is ________.
15000

● If P40,000 cash was withheld for possible liquidation expenses, the amount of cash received by
Y in the first cash distribution is ________.
100000

● If X received a total of P240,000 in full settlement of his interest in the partnership, the total loss
incurred on the liquidation of the partnership is ________.
200000

● The amount of cash available for distribution to partners is ________.

140000

16. Brian Snow and Wendy Waite formed a partnership on July 1, 20x2. Brian invested P20,000 cash,
inventory valued at P15,000, and equipment valued at P67,000. Wendy invested P50,000 cash and
land valued P120,000. The partnership assumed the P40,000 mortgage on the land.

On June 30, 20x3, the partnership reported a net loss of P24,000. The partnership contract specified
that income and losses were to be allocated by allowing 10% interest on the original capital investment,
salaries of P15,000 to Brian and P20,000 to Wendy, and the remainder to be divided in the ratio of
40:60.
 On July 1, 20x3, Alan Young was admitted into the partnership with a P70,000 cash investment. Alan
was given 30% interest in the partnership because of his special skills. The partners elect to use the
bonus method to record the admission. Any bonus should be divided in the old ratio of 40:60.*

On June 30, 20x4, the partnership reported a net income of P150,000. The new partnership contract
stipulated that income and losses were to be divided a fixed ratio of 20:50:30

On July 2, 20x4, Brian withdrew from the partnership for personal reasons. Brian was given P40,000
cash and a P60,000 note for his capital interest.

● The share of Snow in the net loss for the first year is ________.
(16,320) 7680

● The share of Snow in the net income for the second year is ________.
30000

● The decrease in the capital of Waite upon the admission of Alan is ________.
8040

● Upon formation the amount credited to the capital account of Waite is ________.
130 000

● The entry to record the withdrawal of Snow includes a credit to Waite, Capital in the amount of
11850

17. A 1:3:2 ratio is the same as

⅙:½:⅓

18. Mickey, Donald, and Minnie are partners sharing profit and loss in the ratio of 2:1:1, respectively. Their
capital balances are P400,000 for Mickey, P200,000 for Donald and P100,000 for Minnie. Claims of
suppliers amounted to 500,000 including the loan extended by Minnie, P50,000. The cash balance
amounted to P300,000 and it increased to P1,050,000 as a result of the sale of the non-cash assets.

● How much cash was received by Donald in the final settlement?

162,500

● How much cash was received by Mickey in the final settlement?

325,000

● How much was the non-cash assets of the partnership?

900,000

● How much was the loss from sale of non-cash assets?

150,000

● How much was the cash proceeds from sale of non-cash assets?
750,000

● How much cash will Minnie receive?

 112,500

19. Partnership JB has two partners, Jim and Bill. Jim own 60% of the partnership and Bill owns 40%. In
which of the following transactions will the partnership be held responsible for an individual partners'
actions
Bill signs a contract to buy furniture for official use in the partnership.

20. Carlin and Marley have a partnership agreement which includes the following provisions regarding
sharing net income or net loss.
* A salary allowance of P120,000 to Carlin and P100,000 to Marley.
* An interest allowance of 10% on capital balances at the beginning of the year.
* A bonus of 20% to Carlin,
* The remainder is to be divided 40% to Carlin and 60% to Marley.

The capital balances on January 1, 2018 for Carlin and Marley was P90,000 and P120,000,
respectively. During 2018, the Carlin and Marley partnership had sales of P2,000,000, cost of goods
sold of P1,100,000, and operating expenses of P400,000. Income Tax rate is 30%.

● If bonus is computed based on net income before bonus, salary allowances, and interest on
capital, the total share of C in the partnership is ________.
214600

● If bonus is computed based on net income after bonus, salary allowances, and interest on
capital, the total share of C in the partnership is ________.
183500

21. On January 1, 2021, Am and Boy agreed to form a partnership. The partners’ contribution are as
follows:

Am Boy

Cash 50,000 120,000

AR 360,000 1,080,000

Inventories 216,000 360,000

Land 1,080,000

Building 900,000

Equipment 90,000 90,000

AP 336,000 450,000

Capital 1,460,000 2,100,000

The partners agreed to the following:

A. The recoverable amounts of the partners’ accounts receivable are P300,000 and P760,000 for
and Boy , respectively
B. The inventory contributed by Boy includes obsolete items with a recorded cost of P200,000
 C. The land contributed by Am has an attached mortgage of P180,000. The partnership shall
assume the mortgage
D. The equipment contributed by Boy has a fair value of P130,000
E. Has an unrecorded accounts payable of P100,000. The partnership assumes the obligation of
settling the account *

● The total assets of Amboy Partnership is

3986000

● The adjusted capital balance of Am is

1120000

● The adjusted capital balance of Boy is

1800000

22. Assume that AA and BB partners of AB Partnership (who share net income and loss in 80%:20%)
organize A & B Corporation to take over the net assets of the partnership. The balance sheet of the
partnership on June 20, 20x4, the date of incorporation, is as follows: **

Assets:

Cash 14,400

Trade AR 33,720

Allowance for doubtful accounts (720)

Inventories 30,600

Equipment 72,000

A/D (31,200)

Total Assets 118,800

Liabilities and Partners Capital

Trade AP 42,000

AA, Capital 57,588

BB, Capital 19,212

Total Liabilities and Partners Capital 118,800

After an appraisal of the equipment and an audit of the partnership’s financial statements, the partners
agree that the following adjustments are required to restate the net assets of the partnership to current
fair value:
A. Increase the allowance for doubtful accounts to P1,200
B. Increase the inventories to current replacement cost of P36,000
 C. Increase the equipment to its reproduction cost new, P84,000, less accumulated depreciation on
this basis, P36,600; that is to current fair value , P47,400
D. Recognize accrued liabilities of P1,320
E. Recognize goodwill of P12,000

A & B Corporation is authorized to issue 12,000 shares of P10 par common stock. It issues 9,000
shares of common stock valued at P11 a share to the partnership in exchange for the net assets of the
partnership

● In the books of the corporation, the amount credited to Paid in Capital in Excess of Par is
9000

● The adjusted capital of AA is

75348

● The adjusted capital of BB is

23652

● The total net adjustment is

22200

23. An advantage of the partnership as a form of business

A partnership is created by a mere agreement of the partners

24. Luz, Vi and Minda are partners when the partnership earned a profit of P30,000. Their agreement
provides the following regarding the allocation of profit and losses:
a. 8% interest in partner’s ending capital in excess of P75,000
b. Salaries of P20,000 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 P60,000, P80,000 and P100,000 for partners Luz, Vi and Minda,
respectively. What is the amount of profit allocated for Minda, if each provision of the profit and loss
agreement is satisfied to whatever extent possible using the priority order shown above?
P2,000

25. Partners AA and BB have profit and loss agreement with the following provisions: salaries of P30,000
and P45,000 for AA and BB, respectively; a bonus to AA of 10% of net income after salaries and bonus,
and interest of 10% on average capital balances of P20,000 and P35,000 for AA and BB, respectively.
One-third of any remaining profits will be allocated to AA and the balance to BB.

● If the partnership has net income of P102,500, how much should be allocated to Partner AA?
P41,000

● If the partnership has net income of P102,500, how much should be allocated to Partner BB?
P61,500

● If the partnership had net income of P22,000, how much should be allocated to partner AA,
assuming that the provision of the profit and loss agreement are ranked by order of priority
starting with salaries?
 P8,800

26. Hope & Faith Co. reports net income after 30% tax of P235,000 by the end of 2018. The partnership
agreement provides for division of profit or loss on the ratio of the partners’ capital balances. At the end
of 2017, each partner had a capital balance of P220,000. During 2018, Hope made additional
investment of P50,000 on April 1 and withdrew P70,000 of her capital on September 30. Faith, on the
other hand, made additional investment of P80,000 on October 1.

● The share of Hope in the net profit using the ratio of weighted average capital is ____
P117,500

27. The partnership agreement of Rossi and Olson provides for salary allowances of P45,000 to Rossi and
P35,000 to Olson, with the remaining income or loss to be divided equally. During the year, Rossi and
Olson each withdraw cash equal to 80% of their salary allowances. If partnership net income is
P100,000, Rossi’s equity in the partnership would
Increase more than Olson’s

28. Nancy and Betty enter into a partnership agreement where they decide to share profits according to the
following rules.
● Nancy and Berry will receive salaries of P1700 and P14500 respectively as the from allocation.
● The next allocation is based on 20% of each partner’s capital balances.
● Any remaining profit or loss is to be allocated completely to betty

The partnership net income for the first year is P50,000. Nancy’s capital balance is P83,000 and Betty's
capital is P11,000 at the end of the year. Calculate the share of profit/loss to be allocated to Betty.
P31,700

29. The most appropriate basis for dividing partnership net income when the partners do not plan to take
an active role in daily operation is
On a ratio based average capital balances

30. XYZ Partnership provided for the following in the distribution of profits and losses:
First: X is to receive 10% of net income up to P100,000 and 20% of the amount in excess thereof.
Then: Y and Z are each to receive a 5% of the remaining income in excess of P150,000 after X’s share.
Lastly: The balance is to be distributed equally to the three partners.

● If the partnership income is P250,000, what is the total share of X?

P108,000

31. Tamayo, Banson and Vidal, a partnership formed on january 1, 2018, had the following initial
investments.

Tamayo 100,000

Banson 150,000

Vidal 225,000
 The partnership agreement profits and losses are to be shared equally by the partners after
consideration is made for the following:
a. Salaries allowed to partners: P60,000 for Tamayo; P48,000 for Banson and P36,000 for Vidal.
b. Average partner’s capital balances during the year shall be allowed 10% interest.

Additional information:
A. On June 30,2018, Tamayo invested an additional P60,000.
B. Vidal withrew P70,000 from the partnership on September 30, 2018.
C. Share on the remaining profit was P3,000 for each partner.

● The average capital of Vidal is ________.

207500

● The partnership net profit for 2018 before salaries, interest and partner’s share on the
remainder is _______.
201750

● The average capital of Tamayo is ________.

130000

● Interest on average capital balances of the partners totals

48750

● Total Partnership Capital

666750

32. Mariano and Lucas entered into partnership on March 1, 2018, investing P125,000 and P75,000
respectively. It was agreed that Mariano, the managing partner, was to receive a salary of P12,000 per
year and also 10% bonus on the profit after adjustment for the salary, the balance of the profit was to
be divided in the ratio of the original capital. On December 31, 2018, account balances are as follows:

Cash 70,000 Accounts payable 60,000

Accounts receivable 67,000 Sales 233,000

Furniture and Fixtures 45,000 Mariano, Capital 125,000

Purchases 196,000 Lucas Capital 75,000

Sales returns & allowances 5,000 Mariano Drawing (20,000)

Operating expenses 60,000 Lucas Drawing (30,000)

Inventories on December 31, 2018 were merchandise, P73,000; Supplies P2,500. Prepaid insurance
was P950 and accrued liabilities totaled P1,550. Depreciation on Furniture & Fixtures is to be computed
at 20% per year. Income tax rate is 35%.

● The distribution of net profit to Mariano is _______.

20342
 ● The distribution of net profit to Lucas is _______.
5268

● After closing the net profit and drawing accounts, the capital of Lucas is _______.
50268

● After closing the net profit and drawing accounts, the capital of Mariano is _______.
125342

33. Sison, Torres and Velasco are partners in an accounting firm. Their capital account balances at year-
end were: Sison, P50,000; Torres, P110,000; Velasco, P50,000. They share profits and losses in a
4:4:2 ratio, after the following terms;
a. Partners Velasco is to receive a bonus of 10% of net profit after bonus.
b. Interest of 10% shall be paid on the portion of a partner’s capital in excess of P100,000.
c. Salaries of P10,000 and P12,000 shall be paid to partners Sison and Velasco, respectively.

● Assuming a net profit of P22,000 for the year, the profit share of Sison was ________.
8800

● Assuming a net profit of P22,000 for the year, the profit share of Torres was ________.
(200)

● Assuming a net profit of P22,000 for the year, the profit share of Velasco was ________.
13400

● Assuming a net profit of P44,000 for the year, the profit share of Sison was ________.
16800

● Assuming a net profit of P44,000 for the year, the profit share of Torres was ________.
7800

● Assuming a net profit of P44,000 for the year, the profit share of Velasco was ________.
19400

34. Carlin and Maley have a partnership agreement which includes the following provisions regarding
sharing net income or net loss:
❖ A salary allowance of P120,000 to Carlin and P100,000 to Maley.
❖ An investment allowance of 10% on capital balances at the beginning of the year.
❖ A bonus of 20% Carlin
❖ The remainder to be divided 40% to Carlin and 60% to Maley.

The capital balance on January 1, 2018 for Carlin and Maley was P90,000 and P120,000, respectively.
During 2018, the Carlin and Maley partnership had sales of P2,000,000 cost of goods sold of
P1,100,000 and operating expenses of P400,000. Income tax rate is 30%.

● If bonus is computed based on net income before bonus, salary allowances, and interest on
capital, the total share of C in the partnership is __________.
P214,600
 ● If bonus is computed based on net income after bonus, salary allowances, and interest on
capital, the total share of C in the partnership is __________.
P183,500

35. Which one of the following would not be considered an expense of a partnership in determining income
for the period?
Salary allowance to partners

36. A partners share of net income is recognized in the accounts through

Closing entries

37. Jaime, Madrid and Soriano are partners sharing profits on a 5:3:2 ratio. On January 1, 2018, Matias
was admitted into the partnership with a 20% share in the profits. The old partners continue to
participate in profits proportionate to their original ratios. For the year 2018, the partnership books
showed a net profit of P250,000. It was disclose however, that the errors shown below were made:

● Assuming that income tax rate is 35%, the share of Jaime in the corrected net profit is
________.
96100

● Assuming that income tax rate is 35%, the share of Madrid in the corrected net profit is
________.
57660

● Assuming that income tax rate is 35%, the share of Soriano in the corrected net profit is
________.
38440

● Assuming that income tax rate is 35%, the share of Matias in the corrected net profit is
________.
48050

● The new profit and loss ratio of Jaime is ________.

40%

● The new profit and loss ratio of Madrid is ________.

24%

● The new profit and loss ratio of Soriano is _______.

16%

38. The net income of the Rice and Wynn partnership is P120,000. The partnership agreement specifies
that Rice and Wynn have a salary allowance of P32,000 and P48,000 respectively. The partnership
agreement also specifies an interest allowance of 10% on capital balances at the beginning of the year.
Each partner had a beginning capital balance of P80,000. Any remaining net income or net loss is
shared equally.

● What is Rice’s share of the P120,000 net income?

P52,000
 ● What is the balance of Wynn’s Capital account at the end of the year after net income has been
distributed?
P148,000

39. The BLUE Company, a partnership, was formed on January 1, 2018 with four partners, Belen, Lorna,
and Edna. Capital contributions were as follows:

Belen 100,000

Lorna 50,000

Ursula 50,000

Edna 40,000

The partnership agreement provides that each partner shall receive 5% interest on the amount
of his/her capital contribution. In addition, Belen is to receive a salary of P10,000 and Lorna a salary
of P6,000 per annum which are to be charged as expenses of the business. The agreement further
provides that Ursula shall receive a minimum of P5,000 per annum from the partnership and Edna a
minimum of P12,000 per annum, both including the profits is to be distributed in the following
proportion: Belen 30% Lorna 30% Ursula 20% Edna 20%.

● The amount that must be earned by the partnership during 2018, before any change for interest
on capital or partners salaries in order that Belen may receive an aggregate of P25,000
including interest, salary and share of profits would be _________. (Disregard income tax.
Round your final answer to the nearest peso. Do not use peso sign, comma, and decimal.)
64667

● Using the amount that must be earned by the partnership during 2018, before any change for
interest in capital or partners salaries in order that Belen may receive an aggregate of P25,000,
including interest, salary and share of profits, the total earnings of Ursula would be
_________. (Disregard income tax. Round your final answer to the nearest peso. Do not use
peso sign, comma, and decimal.)
9167

● Using the amount that must be earned by the partnership during 2018, before any change for
interest in capital or partners salaries in order that Belen may receive an aggregate of P25,000,
including interest, salary and share of profits, the total earnings of Lorna would be _________.
(Disregard income tax. Round your final answer to the nearest peso. Do not use peso sign,
comma, and decimal.)
18500

40. On October 31, 2018, Zita and Jones formed a partnership by investing cash of P300,000 and
P200,000, respectively, The partners agreed to receive and annual salary allowance of P360,000 and
to give Zita a bonus 20% of the net income after partner’s salaries, the bonus being treated as an
expense.
 If the profits after salaries and bonuses are to be divided equally, and the profits on December 31,
2018 after partner’s salaries but before bonus of Zita are P360,000, how much is the share of Zita in
the profits?
P270,000

41. RK is trying to decide whether to accept a salary of P40,000 or a salary of P25,000 plus a bonus of
10% of net income after salaries and bonus as a means of allocating profit among partners. Salaries
traceable to the other partners are estimated to be P100,000. What amount of income would be
necessary so that RK would consider choices to be equal?
P290,000

42. A, B, and C are capitalist partners while D is an industrial partner. The partnership reported a net loss of
P100,000. How much is the share of D in the reported net loss?
P-0-

43. A partner’s share of net income is recognized in the accounts through

Closing entries

44. If the partnership agreement does not specify how income is to be allocated, profits and losses should
be allocated
In accordance with their capital contribution

45. Lori and Mike enter into a partnership and decide to share profits and losses as follows:
● The first allocation is a salary allowance with Lori receiving P12,000 and Mike receiving
P25,000.
● The second allocation is 20% of the partners’ capital balances at year end. On December 31,
2019, the capital balances for Lori and Mike are P86,000 and P344,000, respectively.
● Any remaining profit or loss is allocated equally.

For the year ending December 31, 2019, the partnership reported a net loss of P122,000. The journal
entry to record the loss allocation will _______.
Debit Lori, Capital for P93,300

46. The Smith and Jones partnership agreement stipulates that profits and losses will be shared equally
after salary allowances of P120,000 for Smith and P60,000 for Jones. At the beginning of the year,
Smith’s Capital account had a balance of P240,000, while Jones’ Capital account had a balance of
P210,000. Net income for the year was P150,000 The balance of Jones’ Capital account at the end of
the year after closing is
P255,000

47. David, Chris, and John formed a partnership on July 31, 2019. They decided to share profits equally,
but inserted a clause in the partnership agreement where any losses would be allocated in the ratio of
5:2:3, respectively. For the year ended December 31, 2019, the firm earned a net income of P50,000.
However, for the year ended December 31, 2020, the firm incurred a loss of P60,000. Assuming that
John had an initial capital contribution of P43,000 and made no withdrawals, what is the balance of
John’s capital account as of december 30, 2020? (Assume that none of the partners made any further
contributions to their capital accounts. Do not round any percentage calculations. Round all monetary
calculations to the nearest peso)
P41,667
48. DOER partnership was organized on March 1, 2021. On formation date, Dory invested P150,000 and
Erwin invested land and building with fair value of P80,000 and P100,000. Erwin also invested P60,000
cash in the partnership on November 1, 2021 to meet the additional liquidity requirements of the
business. The Article of Co-partnership stipulates the following:
A. Annual salary of P18,000 o Dory and P24,000 to Erwin
B. 10% annual interest on average capital account balance, and the
C. Remainder to be shared 6:4 to Dory and Erwin, respectively.

The annual salary was to be withdrawn by each partner in twelve monthly installments, During the fiscal
year ended, February 28, 2022, DOER had net sales of P500,000, cost of sales of P280,000, and total
operating expenses of P100,000 (excluding salaries and interest on average capital balance of
partners). Each partners made monthly cash drawings in accordance with the agreement.

Assume that the annual salary is to be recognized as operating expenses and the total operating
expenses of P100,000 includes the partners’ salaries but excluding interest on partners’ average capital
account balances.

● The capital balance of Dory at the end of the fiscal year is

216000

● The capital balance of Erwin at the end of the fiscal year is

294000

● The share of Dory in the net income is

66000

● The share of Erwin in the net income is

54000

DOER partnership was organized on March 1, 2021. On formation date, Dory invested P150,000 and
Erwin invested land and building with fair value of P80,000 and P100,000. Erwin also invested P60,000
cash in the partnership on November 1, 2021 to meet the additional liquidity requirements of the
business. The Article of Co-partnership stipulates the following:
D. Annual salary of P18,000 o Dory and P24,000 to Erwin
E. 10% annual interest on average capital account balance, and the
F. Remainder to be shared 6:4 to Dory and Erwin, respectively.

The annual salary was to be withdrawn by each partner in twelve monthly installments, During the fiscal
year ended, February 28, 2022, DOER had net sales of P500,000, cost of sales of P280,000, and total
operating expenses of P100,000 (excluding salaries and interest on average capital balance of
partners). Each partners made monthly cash drawings in accordance with the agreement.

Walang assume that annual salary blablabla.

● The capital balance of Dory at the end of the fiscal year is

190800
49. Mr Chow, Ms. King, Mr. Jolly and Ms. Bee formed a partnership on Jan. 01, 2017 with original capital
contributions of P300,000, P100,000, P200,000 and P400,000, respectively. On Jan. 01, 2019 capital
accounts of Mr. Chow, Ms King, Mr. Jolly and Ms. Bee showed the beginning balance for the year of
P450,000, P300,000, P250,000, and P400,000 , respectively. On Sept. 30 Mr. Chow and Ms. King
invested P100,000 each. Ms. Bee withdrew her investment of P100,000 on Oct. 01 for personal
reasons. The partnership suffered a net loss of P240,000.

● How much is the share of Ms. Jolly on the loss for 2019 if there is no agreement on the
distribution of profit and loss?
(48,000)

● How much is the share of Ms. Chow on the loss for 2019 if there is no agreement on the
distribution of profit and loss?
(72,000)

● How much is the average capital balance of Ms. King for the year 2019?
325,000

● How much is the average capital balance of Mr. Jolly for the year 2019?
250,000

● How much is the average capital balance of Mr. Bee for the year 2019?
375,000

50. YET Partnership began its first year of operations with investment from Y, P143,000, E, P104,000, and
T, P143,000. The Articles of Partnership provides that profit and losses be assigned in the following
manner:
a. Y and T were to be given annual salary of P26,000 and P13,000, respectively,
b. Each partner was to be given interest of 10% on capital balance as of the first day of the year,
c. Remainder was to be distributed on 5:2:3 ratio respectively for Y, E, and T.

Each Partner was allowed to withdraw up to P13,000 each year. For the first year of operation, the
partnership incurred a net loss of P26,000. In the second year, it earned net income of P52,000. Each
partner withdraw the maximum amount from the business each year.*

● E’s share in net loss for the first year is

10400

● The balance of the capital of Y at the end of the first year is

118300

● Y’s share in the net income for the second year is

28080

● The balance of the capital of T at the end of the second year is

132860

51. Assume the following data for GH Partnership:

 Assets Liabilities and Capital

Cash 3,000 Liabilities 9,000

Non-cash Assets 39,000 G, Capital (60%) 24,000

G, Loan 3,000 H, Capital (40%) 12,000

Total 45,000 Total 45,000

The % in parentheses represents the P/L ratio. The partners agree to admit J to the partnership. J must
invest cash of P28,800 equivalent to 37.50% interest in total agreed capital of P76,800. Assets are to
be revalued. *

● The amount of revaluation is

12000

● The revised capital of H after the admission of J is

16800

The % in parentheses represents the P/L ratio. The partners agree to admit J to the Partnership and the
total agreed capital after admission is P48,000. J invests P12,000 for 35% interest in the firm.

● The capital of H after the admission of J is

10,080 12480

● The capital credit of J is

16800

The % in parentheses represent the P/L ratio. The partners agree to admit J to the partnership. J
conveyed a tangible assets with a fair value of P30,000 with an assumed mortgage of P6,000 in
exchange for a 30% interest in capital with bonus being to be recognized, keeping in mind that J would
be acquiring a 1/4 interest in profits.

● The capital of G after the admission of J is

27600

52. Edwin and Darren have decided to form a partnership. Edwin contributes P80,000 cash and
merchandise inventory with a current market value of P20,000. Darren contributes a parcel of land
which was acquired two years ago at P100,000 but with a current value of P130,000. If Darren is to
make additional cash investment to have a 60% in the business, how much cash should he invest?
20000

53. John, Jeff and Jane decided to engage in a real estate venture as a partnership. John invested
P100,000 cash and Jeff provided office equipments that is carried on his books at P82,000. The
partners agree that the equipment has a fair value of P110,000. There is a P30,000 note payable
remaining on the equipment to be assumed by the partnership. Although Jane has non physical assets
to invest in the partnership, both John and Jedd believe that her experience as a real estate appraiser
 is a valuable skill needed by the partnership and is a basis for granting her a capital interest in the
partnership.

Assume that each partner is to receive an equal capital interest in the partnership and an upward
revaluation of assets by P90,000 is to be recorded.

● The capital of Jane upon formation is

90000

Assume that each partner is to receive an equal capital interest in the partnership and bonus method is
applied.
● The amount of capital transferred from John is
40000

● The capital of Jeff upon formation is

60000

54. The partnership of PP, EE and TT asked you to assist in winding up its business. You complete the
following information. The trial balance of the partnership on June 30, 20x4, is:

ACCOUNTS DEBIT CREDIT

Cash 6,000

Accounts receivable (net) 22,000

Inventory 14,000

Plant and equipment (net) 99,000

Accounts payable 17,000

PP, Capital 55,000

EE, Capital 45,000

TT, Capital 24,000

Total 141,000 141,000

The partners share profit and losses as follows: PP, 50 percent; EE, 30 percent; and TT, 20 percent.
Cash is to be distributed to the partners at the end of each month. A summary of the liquidation
transactions follows:

July
1 P16,500 collected on accounts receivable balance is uncollectible
2 P10,000 received for the entire inventory
3 P1,000 liquidation expense paid
4 P17,000 paid to creditors
5 P8,000 cash retained in the business at the end of the month
August
6 P1,500 in liquidation expense paid
7 As part payment of his capital, TT accepted an item that he develop, which had a book value of
P4,000. The part of P10,000 should be placed on this item for liquidation purposes
8 P2,500 cash retained in the business at the end of the month

September
9 P75,000 received on sale of remaining plant and equipment
10 P1,000 liquidation expenses paid. No cash retained in the business

● The amount received by PP in August cash distribution is ______.

0

● In the final cash distribution, the amount received by PP is ______.

41500

● The amount of cash available for distribution to partners in August is _______.

4000

● The amount of cash available for final distribution to partners is ______.

76500

● The amount of cash available for distribution to partners in July is ______.

6500

● In the final cash distribution, the amount received by TT is ______.

8600

● In the final cash distribution, the amount received by EE is ______.

26400

● The amount received by EE in July cash distribution is ______.

6500

The partners share profit and losses as follows: PP, 50 percent; EE, 30 percent; and TT, 20 percent.

The partners are considering an offer of P100,000 for the accounts receivable, inventory and plant and
equipment as of June 30. The P100,000 will be paid to creditors and the partners in installments, the
number and amount of which are to be negotiated.

● The partner who is most vulnerable to losses is

PP

● If the offer to sell the assets is accepted, the amount of cash to be received by TT is
17000

● The partner who first receives cash is

EE
 ● If the offer to sell the assets is accepted, the amount of cash to be received by EE is
34500

● If the offer to sell the assets is accepted, the amount of cash to be received by PP is
37500

55. In the absence of partnership agreement, the law says that income (and loss) should allocated based
on:
The ratio of capital investments

56. In a cash priority program for use in installment liquidation, the partner with the highest loss absorption
balance is the most vulnerable partner. The amount of cash to be distributed to partners in installment
liquidation can be determined by preparing a cash priority program.
Only statement 2 is true

57. Statement 1: A limited partner is liable only to the extent of his her contribution in the partnership.
Statement 2: A limited partner can use the right of offset against his capital deficiency, but he is not
required to make additional contribution out of his/her personal properties.
Only the first statement is true

58. An entry is not required in the liquidation of a partnership to record the

Allocation of a capital deficiency to partners with credit balances when the deficient partner is
solvent

59. Statement 1: In case the partnership is insolvent, the general partners are liable to pay the partnership
creditors from his/her personal properties
Statement 2: A deficient partner may apply the right of offset to a loan balance owing to him or her by
the partnership.
Both statements are true

60. Statement 1: In the event of liquidation, outside creditors has priority claim over the partnership assets.
Statement 2: When a partner becomes insolvent, the claim against his separate properties shall be paid
first to his personal creditors.
Both statements are true

61. A deficiency occurs for a partner when

Hi share in the losses of the partnership is more than his capital balance

62. Statement 1: Liquidation is the process of winding up the affairs of the business towards its termination.
Statement 2: The deficiency of a partner absorbed by the other partners is allocated based on capital
contribution.
Only the first statement is true

63. Statement 1: If A’s capital is deficient but there is a loan payable to B, the right of offset can be applied.
Statement 2: A partner whose personal assets are less than his personal liabilities is deficient.
Both statements are false

64. Partner Morgan is personally insolvent, owing P600,000. Personal assets will only bring P200,000
when liquidated. At the same time, Morgan has a credit capital balance in the partnership of P120,000.
 The capital amounts of the other partners total a credit balance of P250,000. Under the doctrine of
marshalling of assets, how much the personal creditors of Morgan can collect?
P320,000

65. Statement 1: When a partner dies and the remaining partners decide to terminate the business is called
dissolution.
Statement 2: In liquidation, the sale of non-cash assets is called realization.
Only the second statement is true

66. Statement 1: Gain or loss on realization is the difference between the cash proceeds and the book
value of the assets sold.
Statement 2: Loss on realization would decrease the partner’s capital account.
Both statements are true

67. A, B and C decided to liquidate their partnership business. The financial position of the partnership
shows: A, Capital (30%) P210,000; B, Capital (20%) P150,000; C, Capital (50%) P210,000. Upon
liquidation, all of the partnership’s assets are sold and sufficient cash is realized to pay all liabilities
except on for P30,000. All partners are solvent except C.

● By what amount would the capital of A change?

234,000 decrease

● How much is the additional contribution required of B?

6,000

68. ABC Partnership is liquidated and the non-cash assets are considered worthless. A and C are
general partners while B is a limited partner. The creditors will look to whose partner’s personal
assets for settlement of their claims?
The personal assets of Partners A and C

69. Charlize and Megan are partners with capitals of P80,000 and P40,000, respectively. They share profits
in the ratio of 3:1. The partners agree to admit Caleb as a member of the firm.

● If bonus is recognized and Caleb invests P30,000 for a 15% interest in the firm, what is Megan’s
capital after the admission of Caleb?
P41,875

70. 1. All the partners in a general partnership are personally liable for all debts incurred by the partnership.
2. A limited partnership must have at least one general partner.
Both statements are true

71. The accounts of the partnership of R, S and T at the end of the fiscal year November 30, 2020 are as
follows:
Cash 103,750
Non-cash assets 707,500
Loans to R 15,000
Liabilities 262,500
Loans from S 20,000
R, Capital 266,250
 S, Capital 136,250
T, Capital 141,250

R, S and T have been sharing profits and losses in the ratio 5:3:2 respectively.

● If in the first cash distribution, S received 50,000, the amount received by R is _______.
74167

● The most vulnerable among the partners is _______.

R

● If in the first cash distribution, S received 50,000, the amount realized from the first sale of non-
cash assets is _______.
900000 353,333 333333 559167

● If in the first cash distribution, T received P50,000 and assets with carrying value of P300,000
were sold, the gain or loss recognized on the sale of these assets is _______.
(48750)

72. Egay and Egoe who share profits and losses equally have a capital balance of 200,000 and 240,000
respectively. They admit Engyl for a 1/3 interest in partnership capital and profits for an investment of
250,000.

By how much were the net assets undervalued?

60,000

73. Partners Roger, Sergio and Tito, who share profit and loss in the ratio of 3:5:2, respectively have
decided to liquidate their partnership. The Statement of Financial Position of the partnership at the time
of liquidation is shown below:
Assets Liabilities and Capital
Cash P120,000 Accounts Payable P93,000
Other Assets 360,000 Loan from Sergio 30,000
Roger, Capital 108,000
Sergio, Capital 120,000
Tito, Capital 129,000
P480,000 P480,000

The partners desire to prepare an installment distribution schedule showing how cash would be
distributed to partners as assets are realized.

● The schedule of possible losses on capital balances would indicate that the first cash distributed
after the payment of outside creditors would be distributed to
Tito, in the amount of P57,000

● If Roger has received P30,000, how much would Sergio had received?
20,000

● In the schedule of maximum absorbable loss, the maximum absorbable loss for each partner
would be
 Roger, 360,000; Sergio, 300,000; Tito, 645,000

● Assuming that the first sale of other assets having book value of P150,000 realized P45,000
and all available cash is distributed, the partners would receive
Roger, P9,000; Sergio, P0; Tito, P63,00

74. Statement 1: A deficient and insolvent partner will still have a chance to receive cash from the
partnership if there is a loan payable to him which is higher than his capital deficiency.
Statement 2: A deficient and limited partner who has a loan to the partnership can apply the right of
offset to eliminate his deficiency.
Both statements are true
Both statements are false
Only the first statement is true
Only the second statement is true

75. Jurado, Katindig, Lazaro, and Marcelo are partners sharing earnings in the ratio of 3:4:6:8. The balance
of their capital accounts on December 31, 2015 are as follows:
Jurado P1,000
Katinding 25,000
Lazaro 25,000
Marcelo 9,000

The partners decide to liquidate, and they accordingly convert the non-cash assets into P23,200 of
cash. After paying the liabilities amounting to P3,000, they have P22,000 to divide.

● Assume that a debit balance in any of partner’s capital is uncollectible. The share of Jurado in
the loss upon conversion of the non-cash assets into cash was:
P5,400

● Assume that a debit balance in any of partner’s capital is uncollectible. The book value of non-
cash assets amounted to:
P61,000

● Assume that a debit balance in any of partner’s capital is uncollectible. When the P22,200 was
divided, Lazaro got
P8,320

76. The statement of Financial Position for the partnership of Eclavo, Eclara, and Elorda, who share profits
and losses in the ratio 4:5:1, is as follows:
Cash P100,000 Accounts Payable P300,000
Inventory 720,000 Eclavo, Capital 320,000
Eclara, Capital 90,000
Elorda, Capital 110,000
P820,000 P820,000

● Assuming Elorda is a limited partner, and the inventory is sold for P360,000, how much should
she receive upon liquidation of the partnership?
74,000
 ● Assuming Eclara is an insolvent partner, and the inventory is sold for P360,000, how much
should Eclavo receive upon liquidation of the partnership?
104,000

● If the inventory is sold for P600,000, how much should Eclavo receive upon liquidation of the
partnership?
P272,000

77. The following is the priority sequence on which liquidation proceeds will be distributed for a partnership:
Partnership liabilities, partnership loans, partnership capital balances

78. Statement 1: Solvent partners are partners with sufficient remaining personal assets after deducting or
liquidating the personal liabilities.
Statement 2: Right of offset is a legal right to apply a part or all of the amount owing to a partner against
his or her capital deficiency.
Both statements are true

79. Statement 1: A deficient partner has to make an additional investment to make up for his deficiency in
all instances.
Statement 2: Partnership creditors have priority over partnership properties; in the same manner that
the partners’ personal creditors have priority over partners’ personal properties.
Only the second statement is true

80. Iyah, Ayah and Mia operate a business as a partnership and share net income and net loss in a 3:3:4
ratio, respectively. The personal assets and liabilities of the partners, gathered from their personal
records show:

Partner Assets Liabilities

Iyah (General Partner) P470,000 P450,000

Ayah (General Partner) 200,000 280,000

Mia (Limited Partner) 305,000 300,000

The statement of financial position is as shown below. Assets are sold for P175,000. Liabilities are paid
as soon as cash is available. Creditors collect from solvent partners whenever necessary.

Cash P10,000 Accounts Payable P200,000

Non-Cash 375,000 Loan, Mia 5,000

Iyah, Capital 50,000

Ayah, Capital 70,000

Mia, Capital 60,000

● How much cash was received by Mia in the final settlement?

20,000
 5,000
0
10,000

● How much is the capital balance of Iyah after the sale of non-cash assets?
(P10,000)

● How much additional investment was made by Mia?

P0

● How much cash was received by Ayah in the final settlement?

0

● Who among the partners have received the cash in the final settlement?
Mia

● How much is the additional investment made by Ayah?

0

● How much is the share of Mia from the gain (loss) on sale of non-cash assets?
(P80,000)

● How much is the additional investment made by Iyah?

20,000

81. As of December 31, the books of AME Partnership showed capital balances of: A- P40,000; M-
P25,000; E-P5,000. The partners’ profit and loss ratio was 3:2:1, respectively. The partners decided to
dissolve and liquidate. They sold all the non-cash assets for P37,000 cash. After settlement of all
liabilities amounting to P12,000, they still have P28,000 cash left for distribution.

● The loss on the realization of the non-cash assets was

P42,000

● Assuming that any partner’s capital debit balance is uncollectible, the share of A in the 28,000
cash for distribution would be
P17,800

82. The statement of financial position of the partnership A, B, and C shows: Cash, P22,400; Other Assets,
P212,000; Liabilities, P38,400; A, Capital (50%) P76,000; B, Capital (25%) P64,000, and C, Capital
(25%) P56,000.

● If B received a total of P31,000 from partnership liquidation, how much was the loss on
realization?
P127,000

● If C received P10,000 from the first cash distribution, how much was the total cash distributed to
partners?
P28,000
 ● How much is the additional contribution required of B?
P6,000

● The partners realized P56,000 from the first installment sale of non-cash assets with total
carrying amount of P120,000. How much did B receive from the partial liquidation?
P24,000

● If A received a total of P10,000 from partnership liquidation, how much was the proceeds from
the sale of all non-cash assets?
P85,000

83. The order of the liquidation process is

Sell assets, pay liabilities, disburse cash to partners

84. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk
Partnership. The partner’s capital balances are P300,000 and P190,000, respectively.

● Before the realization of non-cash assets, the partnership has a zero balance in its cash
account and a P200,000 balance in its liabilities. If on final settlement of partners’ claims Jack
received P261,000, how much was the net proceeds from the sale of non-cash assets?
P560,000

● If all partnership assets and liabilities are realized and settled at their carrying amounts, how
much would Beans receive from liquidation?
P190,000

● If all partnership assets are realized and all liabilities are settled, the partnership has remaining
cash of P120,000, how much would Beans receive from the liquidation?
None

● If on final settlement of partners’ claims Beans received P99,000, how much did Jack receive?
P261,000

● The partnership has total liabilities of P200,000. If all partnership assets are realized for
P500,000, how much would Jack receive from the liquidation?
243,000

85. The liabilities and capital balances of the partners before the sale of the assets and payments of
liabilities including personal assets and liabilities of the partners were:

Partnership Personal Assets Personal Liabilities

Cash P10,000

Liabilities 70,000

Kath 65,000 P1,200,000 P1,500,000

Pau 20,000 2,500,000 2,490,000

 Jas 15,000 3,000,000 3,200,000

After the assets were sold the capital balances of the partners were as follows: Kath, P48,000; Pau,
P12,000; and Jas, (P10,000)

● How much cash was received by Jas in the final settlement?

P0

● What is the P/L ratio of Jas? [34% - Kath; 16% - Pau]

50%

● How much is the gain/(loss) from sale of non-cash assets?

(P50,000)

● How much is the proceeds from sale of non-cash assets?

P110,000

● How much is the non-cash assets?

P160,000

86. Clyde, Warren and Neil formed a partnership on Jan. 1,2020 with investments of 100,000, 150,000, and
200,000 respectively. For division of income, they agreed the following conditions:
a. interest of 10% of the beginning capital balance each year.
b. annual compensation of 10,000 to Warren and
c. sharing of the remainder of the income or loss in a ratio of 20% for Clyde and 40% each for
Warren and Neil.

Net income was 150,000 in 2020 and 180,000 in 2021. Each partner withdrew 1,000 for personal use
every month during 2020 and 2021.

● The capital balance of Clyde at the end of 2021 is _______.

139420

● The capital balance of Warren at the end of 2021 is _______.

264540

● The capital balance of Neil at the end of 2021 is _______.

304040

● The share of Neil in the net income for 2021 is

70040

● The share of Warren in the net income for 2020 is

63000

● The capital balance of Clyde at the end of 2020 is _______.

117000
87. Chua and Wong are forming a partnership. Chua will invest a building that currently is being used by
another business owned by Chua. The building has a market value of P900,000. Also, the partnership
will assume responsibility for a P300,000 note secured by a mortgage on that building. Wong will invest
P500,000 cash. For the partnership, the amounts to be recorded for the building and for Chua’s Capital
account are:
Building, P900,000 and Chua, Capital, P600,000

88. The partner’s personal account which was collected by the partnership and credited to its accounts
receivable is a violation of the
Business entity concept

89. Partner B is investing in a partnership with Partner A. B contributes as part of his initial investments.
Accounts Receivable of P60,000, an Allowance for Doubtful Accounts of P9,000, Furniture of P30,000
with accumulated depreciation of P8,500 and P6,000 cash. The partners agreed that prepaid expenses
of P2,000 and accrued expenses of P1,800 have to be recognized. The entry that the partnership
makes to record B’s initial contribution includes a
Credit to B, Capital at P78,700

90. Jack holds an ownership interest of 63% and Teresa holds an ownership interest of 37% in the J and T
Partnership. This year, in order to further develop the business, Jack contributes an additional P6800
and Teresa contributes an additional P3200 to the partnership. Which of the following is TRUE of this
scenario?
Individual contributions of P6800 by Jack and P3200 by Teresa will be recorded

91. Partners’ non-cash investments are valued at

Market value

92. 1. One of the partners in a proposed partnership is a multi-millionaire. The stipulation in the articles of
partnership that this partner shall be excluded from sharing in the profits of the partnership is void.
2. A partnership may be established for charity.
Only statement 1 is true.

93. 1. The essence of partnership is that each partner must share in the profits or losses of the venture.
2. As long as the action is within the scope of the partnership, any partner can bind the partnership.
Both statements are true

94. In the absence of a partnership agreement, the law says that income (and loss) should be allocated
based on
The ratio of capital investments

95. Steve owns 64% and Mark owns 36% of a partnership business. They purchase equipment with a
suggested value of P9600. The current market value of the equipment at the time of purchase was
P9100. At the time of the balance sheet preparation, depreciation of P160 was recorded. Based on the
information provided, which of the following is TRUE of the partnership?
The equipment account will be debited at P9100 on the date of purchase

96. 1. A partnership has a limited life because any change in the relationship of the partners dissolves the
partnership.
2. In a limited partnership, the general partner’s liability is limited to his investment.
 Only statement 1 is true

97. 1. All partners in a general partnership are personally liable for all debts incurred by the partnership.
2. A limited partnership must have at least one general partner.
Both statements are true

98. Which of the following statements about partnerships is incorrect?

Right over profits and right over assets represent claims of partners that are allocated based on
partners’ capital accounts.

99. 1. A limited partnership normally has one or more general partners whose liability is unlimited.
2. A partnership is a legal entity separate and apart from its owners.
Both statements are true

100. Airamae and Aimery agreed to form AiAi Partnership. Airamae’s business which amounted to
P500,000 was audited and appraised at 75% of its book value.

● If they agreed that Aimery should invest cash equal to 60% of Airamae’s investment, Aimery
should invest?
P225,000

● If they agreed that Aimery should invest P325,000 cash and that each partner should be
credited for an equal share based on total actual contributions, Airamae’s capital credit should
be
P375,000
P350,000
P412,500
P500,000

● If they agreed that Aimery should invest cash equal to 60% of Airamae’s investment, the total
partnership capitalization would be
P600,000

● If they agreed that Aimery should invest P325,000 cash and that each partner should be
credited for an equal share based on total actual contributions, the bookkeeper should
recognize
Bonus for Aimery

101. Edwin and Darren have decided to form a partnership. Edwin contributes P80,000 cash and
merchandise inventory with a current market value of P17,000. Darren contributes P2400 cash and
office furniture with a current market value of P3200.

● When journalizing these transactions _____

Office Furniture will be debited for P3200

● If the partners decide to have equal interest in the partnership and the total actual contributions
is equal to total agreed capital, which statement is true?
There is bonus
102. Alana & Ansley enter into a partnership agreement in which Alana will be given 60% interest in
capital and profits. Alana contributes the following:
Land - P500,000 ?
Building - 5,000,000 fair value is 60% of its cost
Equipment - 1,000,000 fair value is 75% of its cost
There is P1,000,000 mortgage on the building which the partners agreed to assume.
The partners agreed that the total partnership capitalization should be P6M.

● Alana, Capital should be credited for

P3,600,000

● How much should be Ansley’s agreed capitalization?

P2,400,000

● Land should be recorded in the amount of

P850,000

103. Rica is a sole proprietor who invested her grocery when she invited Belle to form a new
partnership business. The following are the assets and liabilities of the grocery:

Cash P50,000

Merchandise 30,000 (book value)

20,000 (market value)

Fixed assets (P100,000 less Accumulated 90,000 (book value)

Depreciation of P10,000)

70% of cost (market value)

Accounts Payable 20,000

Accrued Expenses 7,000

Belle invested the following:

Cash P60,000

Land (mortgaged with a balance of P50,000 200,000 (book value)

plus accrued interest for 6 months at 18%)

500,000 (market value)

Store furniture (costing P40,000 less 30,000

accumulated depreciation of P10,000)

● The total assets of the newly formed partnership would be

P730,000

● If the mortgage note plus interest is to be assumed by the partnership, Belle. Capital should be
credited for
 P535,500

● The total liabilities of the newly formed partnership would be

P81,500

104. In comparison to a corporation, the owners of a general partnership ___

Have an unlimited personal liability for the debts of the business

105. In comparison to a corporation, the owners of a general professional partnership ___

Have an unlimited personal liability for the debts of the business

106. 1. An advantage of the partnership form of business is that each partner’s potential loss is
limited to that partner’s investment in the partnership.
2. Ownership is easily transferred in a partnership.
Both statements are false

107. 1. There is no income tax imposed on a partnership.

2. Mutual agency means that each partner has the right to bind the partnership to contracts
Only statement 2 is true

108. Partnership capital and drawings accounts are similar to the corporate
Paid in capital, retained earnings, and dividends accounts

109. An advantage of the partnership as a form of business organization would be

A partnership is created by mere agreement of the partners

110. Harold and Dwayne formed Hayne’s Partnership, with Harold investing cash of P150,000.

● If Dwayne is given 60% interest in assets and profits, how much is the partnership total agreed
capitalization?
P375,000

● How much should Dwayne invest for a 60% interest in assets and profits?
P225,000

111. The Metro Fashion partnership owned by Mary and May is terminated when creditor claims
exceed partnership assets by P40,000. Partner May is a millionaire and Mary has no personal assets.
Mary’s partnership interest is 75% and May’s 25%. Creditors
May collect the entire P40,000 from May

112. Jameson and Larry are forming a partnership. Jameson will invest a truck with a book value of
P100,000 and fair market value of P140,000. Larry will invest a building with a book value of P300,000
and a fair market value of P420,000, with a mortgage of P150,000.

● What amount should be recorded in Larry’s capital account?

P270,000

● At what amount should the building be recorded?

P420,000
 ● If it was agreed that both partners will have equal share in the net assets, using the cash
method, how much should be the additional cash investment by Jameson?
P130,000

113. Which of the following is specified in the articles of partnership?

Procedures for withdrawal of assets by the partners

114. Partner B is investing in a partnership with Partner A. B contributes as part of his initial
investments. Accounts Receivable of P60,000, an Allowance for Doubtful Accounts of P9,000; and
P6,000 cash. The entry that the partnership makes to record B’s initial contribution includes a
Credit to B, Capital for P57,000

115. Bob is investing in a partnership with Jerry. Bob contributes equipment that originally cost
P63,000, has a book value of P30,000, and a fair market value of P39,000. The entry that the
partnership makes to record Bob’s initial contribution includes a
Debit to Equipment for P39,000

116. A loan due from a partner is classified in the statement of financial position as a/an
Current assets

117. Tim and Michelle have decided to form a partnership with a 60/40 partnership interest ratio. Tim
contributes P7,500 cash and merchandise inventory with a market value of P1,500. While journalizing
this transaction___.
Tim, Capital will be credited for P9,000

118. Which one of the following would not be considered a disadvantage of the partnership form of
organization?
Ease of Formation

119. Andrea invested the following in the partnership:

Cash P10,000

Accounts receivable 50,000

Allowance for Bad Debts 5,000

Merchandise Inventory 120,000

Furnitures & Fixtures 75,000

Accumulated Depreciation 7,500

● If the Accounts Receivable has a net realizable value of P40,000 and there is an Accounts
Payable amounting to P60,000. How much should be credited to Andrea, Capital?
P177,500

● Accounts Receivable, Merchandise Inventory, and Furniture & Fixtures will respectively be
debited at the Partnership books for:
 45,000; 110,000; 60,000

● If the current fair value of the furniture and fixtures is P60,000 and that of the merchandise
inventory is 110,000, Andrea should be credited for
P225,000

120. 1. A nominal partner actively participates in the management of the business.

2. An ostensible partner is unknown to the public that he/she is a partner.
Both statements are false

121. A firm has two partners: Jim and Bill. Jim owns 60% of the partnership and Bill owns 40%. In
which of the following transactions will the partnership be held responsible for an individual partners’
actions?
Bill signs a contract to buy furniture for official use in the partnership

122. Partnership JB has two partners: Jim and Bill. Jim owns 60% of the partnership and Bill owns
40%. In which of the following transactions will the partnership be held responsible for an individual
partners’ transactions?
Bill signs a contract to buy furniture for official use in the partnership

123. If a partner’s capital account is credited with the amount that he or she contributed in cash,
which of the following financial statements will be affected?
The statement of partners’ equity

124. Edwin and Darren have decided to form a partnership. Edwin contributes P80,000 cash and
merchandise inventory with a current market value of P20,000. Darren contributes a parcel of land
which was acquired two years ago at P100,000 but with a current value of P130,000. If Darren is to
make additional cash investment to have a 60% in the business, how much cash should he invest?
P20,000

125. Rica is a sole proprietor who invested her grocery when she invited Belle to form a new
partnership business. The following are the assets and liabilities of the grocery:

Cash P50,000

Merchandise 30,000 (book value)

20,000 (market value)

Fixed assets (P100,000 less Accumulated 90,000 (book value)

Depreciation of P10,000)

70% of cost (market value)

Accounts Payable 20,000

Accrued Expenses 7,000

● Rica’s Capital account should be credited for

P113,000
126. Which of the following is TRUE of a partnership?
Partnership firms have a limited life

127. The partners have the following rights, except?

Transfer ownership at will

128. A characteristic describing a partnership as a judicial personality which can acquire, sell, or
dispose properties and incur obligations is called
Legal Entity

129. A partnership is a _______

Business with two or more owners that is not organized as a corporation

130. Which of the following is TRUE of a partnership balance sheet?

Each partner’s equity will be shown separately

131. In a partnership, mutual agency means that___

Any partner can bind the business to a contract within the scope of its regular business
operations

132. Blau and Rubi are partners who share profits and losses in the ratio of 6:4, respectively. On May
1, 2018, 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 P40,000. The new partnership began with a total capital of P150,000 immediately after
Lind’s admission, Blau’s capital should be
P54,000

133. When a partner retires and receives in cash less than his capital balance, how should the
difference be treated?
The difference should be credited to the remaining partners in their remaining profit and loss
ratio

134. LOV Partnership decided to admit E, who purchased a 20% interest from L, whose capital
balance was P400,000. E paid her P100,000.

● The effect of this transaction is a/an

Decrease in L’s capital

● The journal entry to record the admission of E will include a

Debit to L, Capital

135. LOV Partnership decided to admit E, who purchased a 30% interest from L, whose capital
balance was P400,000. E paid her P125,000.

● The effect of this transaction is a/an

Increase in E’s capital
 ● The journal entry to record the admission of E will include a:
Credit to E, Capital

136. Which of the following conditions constitutes a legal dissolution of a partnership?

All of the choices given

137. If the new partner is admitted by purchase of interest of an old partner at an amount higher than
its book value, this will result in
No change in partnership’s net assets

138. The capital accounts of the partnership of R and O on January 30, 2014, are as follows:
R, Capital P80,000
O, Capital P40,000

The partners share profits and losses in the ratio of 6:4. The partnership is desperate for cash and they
agreed to admit Y as a new partner with a 1/3 interest in capital and profits upon the latter’s capital
infusion of P30,000.

After Y’s admission, what are the corresponding capital balances of R, O, and Y, respectively, assuming
assets and liabilities are fairly valued?
P68,000; P32,000; P50,000

139. Charlize and Megan are partners with capitals of P80,000 and P40,000, respectively. They
share profits in the ratio of 3:1. The partners agree to admit Caleb as a member of the firm.

● If no bonus is recognized and Caleb invests P80,000 for a 50% interest in the firm, what is
Charlize’s capital after the admission of Caleb?
P65,000

● If no bonus is recognized and Caleb invests P30,000 for a 20% interest in the firm, what is
Megan's capital after the admission of Caleb?
P40,000

● If total agreed capital is based on Caleb’s contribution and Caleb Invests P30,000 for a 15%
interest in the firm, What is Megan’s capital after the admission of Caleb?
P52,500

● If no bonus is recognized and Caleb invests P80,000 for a 50% interest in the firm, what is the
profit sharing ratio of Charlize after the admission of Caleb?
37.5%

140. Charlize and Megan are partners with capitals of P80,000 and P40,000, respectively. They
share profits in the ratio of 2:3. The partners agree to admit Caleb as a member of the firm.
● If no bonus is recognized and Caleb invests P80,000 for a 50% interest in the firm, what is the
profit sharing ratio of Charlize after the admission of Caleb?
20%
141. CAR Partnership decided to admit E who invested P100,000 for a 25% interest in the
partnership with a total capitalization of P500,000.

● The capital credit of E is

P125,000

● The journal entry to record the admission of E will include

A recognition of bonus to E

● The effect of this transaction is a/an

Increase in capital

142. CAR Partnership decided to admit E who invested P120,000 for a 25% interest in the
partnership with a total capitalization of P500,000.

● The capital credit of E is

P100,000

143. Egay and Egoe who share profits and losses equally have capital balances of P200,000 and
P240,000, respectively. They admit Engyl for a 1/3 interest in partnership capital and profits for an
investment of P260,000.

By how much were the net assets undervalued? (Engyl is credited for his capital contribution)
P80,000

144. Which of the following best describes the admission of new partner by investing an amount
more than his capital credit under the bonus method?
Increase on both net assets and total capital

145. The partnership of Lim and Mallorca provides for equal sharing of profits and losses. Prior to the
admission of a third partner Zamora, the capital accounts are Lim, P75,000 and Mallorca, P105,000.
Zamora invests P90,000 for a P75,000 interest and partners agreed that the net assets of the new
partnership would be P270,000. This admission involves
Bonus to old partners of P15,000

146. Peter, Queen and Roy are partners with capital balances of P300,000. P300,000 and P200,000,
respectively, and sharing profits and losses equally. Roy is to retire and it is agreed that he will take
certain office equipment with a second hand value of P50,000 and a note for his interest. The office
equipment carried in the books at P65,000 but brand new would cost P80,000. Roy’s acquisition of the
office equipment would result in
Reduction in capital of P55,000 for Roy

147. On June 30, 2018 the condensed balance sheet for the partnership of Eddy, Fox and Grimm
together with their respective profit and loss sharing percentage was as follows
Assets, net of liabilities P 320,000
Eddy , Capital (50%) P 160,000
Fox, Capital (30%) P 96,000
Grimm, Capital (20%) P 64,000
P 320,000
 ● Eddy decided to retire from the partnership and by mutual agreement is to be paid P180,000 out
of partnership funds for his interest. Total goodwill implicit in the agreement is to be recorded.
After Eddy’s retirement, what are the capital balances of the other partner?
108,000 (Fox) 72,000 (Grimm)

● Assume that Eddy remains in the partnership and that Hamm is admitted as a new partner with
a 25% interest in the capital of the new partnership for a cash payment of P140,000. Total
goodwill implicit in the transaction is to be recorded. Immediately after admission of Hamm,
Eddy’s capital account balance should be
P210,000

148. Matthew, Paulo and Claude share partnership profits in the ratio 2:3:5. On September, 30
Claude opted to retire from the partnership. Prior to Claude’s investment, the capital balances of the
three partners are P25,000 ,P40,000 and P35,000, respectively.

● How much is Paulo’s capital after Claude’s retirement if Claude is paid P30,000 in full settlement
of his partnership interest?
P43,000

● How much is the capital of Matthew after Claude’s retirement if Claude is paid P39,000 in full
settlement of his partnership interest?
P23,400

● How much is the capital of Matthew after Claude’s retirement if Claude is paid P25,000 in full
settlement of his partnership interest?
P31,000
P29,000
P26,600
P23,400

149. When Jill retired from the partnership of Jill, Bill and Hill, the final settlement of her interest
exceeded her capital balance. Under the bonus method, the excess
Reduced the capital balance of Bill and Hill

150. When Jill retired from the partnership of Jill, Bill and Hill, the final settlement of her interest is
less than her capital balance. Under the bonus method, the difference
Increased the capital balance of Bill and Hill

151. Jeric, Ken, and Lemuel are partners sharing profits in the ratio 5:3:2 respectively, as of
December 31, 2013, their capital balances were P95,000 for Julian, P80,000 for Ken and P60,000 for
Lemuel.

On January 1, 2019 the partners admitted Mark as a new partner and according to their agreement
Mark will contribute P80,000 in cash to the partnership and also pay P10,000 for 15% for Ken’s share.
Mark will be given a 20% share in profits. While the original partners’ share will be proportionately the
same as before. After the admission of Mark, the total capital will be P330,000 and Mark’s capital will
be P70,000
 ● The bonus in the admission of Mark would be
P22,000

● The balance of Ken’s Capital after the admission of Mark would be

P79,100

● The amount of asset revaluation is

P15,000

152. Which of the following best characterizes the bonus method of recording a new partner’s
investment in a partnership?
Assuming that recorded assets are properly valued, the book value of the new partner is equal
to the book value of the previous partnership and the investment of the new partner.

153. B and N are partners sharing profits and losses in the ratio 7:3. On January 1,2013 their credit
balance capital accounts are P30,000 for B and P20,000 for N, W is to be admitted as a partner by
buying 50% of B’s interest for P20,000.

The capital balance of B after W’s admission is

P15,000

154. B and N are partners sharing profits and losses in the ratio 7:3. On January 1,2013 their credit
balance capital accounts are P70,000 for B and P30,000 for N, W is to be admitted as a partner by
buying 50% of B’s interest for P40,000.

The capital balance of B after W’s admission is

P35,000

155. Mike and Tess are partners with capital balances of P70,000 and P50,000 respectively. They
share profits and losses in the ratio of 3:1, respectively. Voce is to be admitted in the partnership for a
cash contribution of P60,000 for a ½ interest in the partnership capital and in future profits and losses.

If Voce would be given a capital credit of P90,000, how much would be charged to Mike’s capital
account?
P15,000

156. Mike and Tess are partners with capital balances of P70,000 and P50,000 respectively. They
share profits and losses in the ratio of 3:1, respectively. Voce is to be admitted in the partnership for a
cash contribution of P70,000 for a ½ interest in the partnership capital and in future profits and losses.

If Voce would be given a capital credit of P80,000, how much would be charged to Mike’s capital
account? (no asset revaluation)
P7,500

157. Partner’s Nitz, Pat and Candy share profits and losses 50:30:20 respectively. Capital balances
are P74,000 P130,000 and P96,000 respectively. The carrying values of assets and liabilities are equal
to their fair values. Emmie is to be admitted as a new partner with a 20% capital interest and a 20%
share of profits and losses in exchange for a cash contribution. No bonus is to be effected.
 How much should Emmie contribute?
P75,000

158. J decided to withdraw from the JOY Partnership. A cash settlement was made by the
partnership this will
Decrease Assets

159. The partnership of Noynoy, Manny and Gibo have capital balances as follows: Noynoy -
P35,000, Manny - P50,000, Gibo - P40,000. Their profit and loss ratio are 30% 50% and 20%
respectively, With the consent of Noynoy and Manny, Gibo sold one-half of his interest to Erap for
P30,000 , Gibo was paid in cash by Erap.

● What is the Capital Balance of Noynoy after the admission of Erap to the partnership?
P35,000

● What is the Capital Balance of Manny after the admission of Erap to the partnership?
P50,000

160. An adjustment of the assets and liabilities of the partnership to their fair market values before
dissolution is called
Asset revaluation

161. Paul, Melvin and Elrick are partners sharing profits and losses in the ratio of 2:2:1. On July 31,
2018, their capital balances are as follows: Paul - P700,000; Melvin - P500,000; Elrick - P400,000. The
partners agree to admit Laurence on the following conditions:
A. Laurence is to pay Paul P400,000 for 1/2 of Paul’s interest:
B. Laurence is also to invest P400,000 in the partnership
C. The total interest of Laurence is 25% of the total partnership capital, which is also his share in
the new partnership profit and loss sharing ratio. The old partners are sharing in their old ratio

● How much is Paul’s capital after the admission of Laurence?

P450,000

● What is the percentage of Elrick’s share in the new profit and loss sharing ratio?
15%

162. A partnership agreement most likely will stipulate that assets be reappraised when
A partner retires

163. A partnership agreement most likely will stipulate that assets be reappraised when
New partner is admitted to the partnership

164. The following transactions will affect the balance of the total partnership capital except
Admission by purchase

165. The following transactions will affect the balance of the total partnership capital except
Retirement of a partner by selling interest to another partner
166. Ben and Ric are partners who share profits and losses in the ratio of 6:4, respectively. On May
1, 2019, their respective capital accounts were as follows:
Ben P60,000
Ric P50,000

On that date, Lito was admitted as a partner with a one-third interest in capital and profits for an
investment of P40,000. The new partnership began with a total capital of P150,000. Immediately after
Lito’s admission, Ben’s capital account balance should be
P54,000

167. The admission of a new partner involving bonus will result in

Bonus to either old or new, but not both

168. Statement 1: The admission of new partner through his direct investment in the partnership will
increase the partnership capital even under bonus method
Statement 2: The admission of new partner through purchase of interest of existing partner will increase
partnership capital
Only statement 1 is true

169. Luke and Mark, who share profits and losses equally, agree to take John into the partnership for
a 40% share in capital and profits. Luke and Mark retain 30% interest each. Luke and Mark have
Capital balances of P100,000 and P140,000 respectively before the admission of John. John pays
P120,000 directly to Luke and Mark for his 40% interest. All assets of the partnership, except for land
are fairly valued.

● What would be the capital balance of Mark, immediately after the admission of John?
P102,000

● By how much was land undervalued?

P60,000

170. Dada and Elma are partners with capital balances of P400,000 and P600,000, respectively.
They share profits and losses equally. They decided to admit Jhai as a partner who will invest P200,000
for a 16% interest. Total agreed capital is P1,250,000. Which of the following statements is true?
There is revaluation of assets equal to P50,000

171. On June 30, 2018 the balance sheet for the partnership of Coll, Maduro and Prieto together with
their respective profit and loss ratios was as follows
Assets, at cost 180,000
Coll, Loan 9,000
Coll, Capital (20%) 42,000
Maduro,Capital (20%) 39,000
Prieto, Capital (60%) 90,000
Total 180,000

Coll decided to retire from the partnership by mutual agreement, the assets are to be adjusted to their
fair value of P216,000 at June 30,2018. It was agreed that the partnership would pay Coll P61,200 cash
for Coll’s partnership interest,including Coll loan which is to be repaid in full. No goodwill is to be
recorded. No goodwill is to be recorded.
 After Coll’s retirement, what is the balance of Maduro's capital account?
P45,450

172. Pascual invested P400,000 for a 10% interest in a partnership that has a total capital of
P3,000,000 after admitting Pascual. Which of the following is true?
The original partners received a bonus of P100,000

173. B and N are partners sharing profits and losses in the ratio 7:3. On January 1, 2014 their credit
balance capital accounts are P30,000 for B and P20,000 for N. W is to be admitted for a 25% interest in
the capital directly from the partners for P45,000.

Each partner’s capital account is to be charged pro rata for amounts in their capital ratio that will
provide W with the 25% interest.

The capital balance of B after W’s admission is

P22,500

174. Partnership A has an existing capital of P70,000. Two partners currently own the partnership
and split profits of 50/50. A new partner is to be admitted and will contribute net assets with a fair value
of P90,000. For no goodwill or bonus (depending in whichever method is used) to be recognized, what
is the interest in the partnership granted the new partner?
56.25%

175. Total partners’ equity remains the same if a new partner is admitted by purchase of interest.
In partnership dissolution, bonus is computed as a percentage of net income.
Only statement 1 is true.

176. The capital accounts of Ed, Nick and Vic are presented below with their respective profit and
loss ratio:
Ed P139,000 (½)
Nick 209,000 (⅓)
Vic 96,000 (⅙)

Tony was admitted to the partnership when he purchased directly, for P132,000 a proportionate interest
from Ed and Nick in the net assets and profits of the partnership. As a result, Tony acquired a one-fifth
interest in the net assets and profits of the firm. Assuming no revaluation of net assets is recorded, what
is the combined gain realized by Ed and Nick upon the sale of a portion of their interests in the
partnership to Tony?
P43,200

177. At December 31, Rod and Sol are partners with capital balances of P40,000 and P20,000, and
they share profits and losses in the ratio of 2:1, respectively. On this date Pete invests P17,000 in cash
for a one-fifth interest in the capital and profit of the new partnership. Assuming that assets are not
revalued, how much should be credited to Pete’s capital account on December 31?
P15,400
178. In lump-sum liquidation, capital deficiency resulting from division of loss from realization must be
eliminated before making any payment to partners. Any resulting capital deficiency of an insolvent
partner is eliminated by charging the capital accounts of the remaining partners.
Both statements are true

179. Partners Ray and Allan received a salary of P150,000 and P300,000, and share profit and loss
at 2:1 ratio, respectively. If the partnership suffered a P150,000 loss in 2020, by how much Allan’s
capital account would increase or decrease?
100,000

180. Two sole proprietors, E and J, agreed to form a partnership on January 1, 2021. The trial
balance for each proprietor is shown below as of January 1, 2021.

E E J J

BV FV BV FV

Cash 40,000 40,000 30,000 30,000

AR (net) 60,000 52,000 70,000 56,000

Merchandise 100,000 94,000 100,000 114,000

Inventory

Building (net) 280,000 320,000 250,000 280,000

Furniture and 60,000 64,000 40,000 44,000

fixtures (net)

AP 110,000 110,000 80,000 80,000

Mortgage Payable 200,000 200,000 150,000 150,000

E, Capital 230,000

J, Capital 260,000

The EJ partnership will take over the assets and assume the liabilities of the proprietors as of January
1, 2021.

● The total capital of the partnership amounts to

554000

● The total assets of the partnership amounts to

1094000

● The total liabilities of the partnership amounts to

540000

181. Total partners’ equity changes if a new partner is admitted by purchase of interest.
In partnership dissolution, bonus is computed as a percentage of net income.
Only statement 2 is true
Only statement 1 is true
 Both statements are false
Both statements are true

182. Partner Fe is investing in a partnership with Partner Ann. Fe contributes as part of her initial
investment. Accounts Receivable of P80,000; an Allowance for Doubtful Accounts of P12,000. Accounts
of P8,000 should be written off. The entry that the partnership makes to record Fe’s initial contribution
includes a
Credit to Fe, Capital for P68,000

183. Faith, Hope, and Love are partners sharing profits and losses in the ratio 2:2:1 and have capital
balances of P800,000, P800,000, and P400,000, respectively. Mercy pays P220,000 directly to Love for
½ of her share in the partnership. Partners agree that it is time to revalue the assets of the partnership
using as a basis, the amount Mercy is willing to pay.

● Total partnership capital after the admission of Mercy is

P2,200,000

184. Partner’s Nitz, Pat and Candy share profits and losses 50:30:20 respectively. Capital balances
are P74,000 P130,000 and P96,000 respectively. The carrying values of assets and liabilities are equal
to their fair values. Emmie is to be admitted as a new partner with a 40% capital interest and a 40%
share of profits and losses in exchange for a cash contribution. No bonus is to be effected.

How much should Emmie contribute?

P200,000

185. Mini Partnership was formed on January 2021. According to the partnership agreement, each
partner has an equal capital balance accounted for under goodwill (revaluation of asset) approach.
Partnership net income or loss is allocated 60:40 to Mi and Ni, respectively. Mi originally contributed
assets costing P30,000 with a fair value of P60,000 on January 1, 2021, while Ni invested P20,000 in
cash. Partners’ drawings during 2021 totaled P3,000 by Mi and P9,000 by Ni. Net income for 2021 was
P25,000.**

● The capital credit of Mi upon partnership formation is

60000

● The share of N in the net income for 2021 is

10000

186. Ben and Ric are partners who share profits and losses in the ratio of 6:4, respectively. On May
1, 2019, their respective capital accounts were as follows:
Ben P50,000
Ric P50,000

On that date, Lito was admitted as a partner with a one-third interest in capital and profits for an
investment of P50,000. The new partnership began with a total capital of P150,000. Immediately after
Lito’s admission, Ben’s capital account balance should be
P60,000
P56,667
P54,000
 P50,000

187. Partners Piolo and Jericho received a salary of P400,000 and P600,000 and share in profit and
loss at 60%; 40% ratio, respectively. If the partnership generated a net profit of P540,000 in 2020, by
how much Jericho’s capital account would increase or decrease?
124,000
(276,000)
416,000
(184,000)

188. Statement 1: When a new partner enters into a partnership by purchasing in existing partner’s
interest, the total assets and equity of the business increase.
Statement 2: When a new partner is admitted to a partnership by purchasing an existing partner’s
interest, the business’s accounting records do not record the transfer of cash from the new partner to
the existing partner.
Only statement 2 is true

189. Ace and Hoby formed a partnership on May 29, 2019 by contributing P300,000 and P500,000,
respectively. Ace and hoby agreed to receive 10% interest on capital contribution, and that Ace will
receive a monthly salary of P10,000 starting August 1, 2019. The remaining balance will be divided
according to capital contribution. At the end of the year, the partnership generated a revenue of
P800,000 and expenses of P650,000.

How much is the share of Hoby from the net profit?

80,000
87,500
62,500

How much is the share of Ace from the net profit?

87,500

190. Faith, Hope, and Love are partners sharing profits and losses in the ratio 2:2:1 and have capital
balances of P800,000, P800,000, and P400,000, respectively. Grace purchases half of Faith’s interest
by paying her directly for an amount that earned her a profit of P60,000.

● The entry to record the admission of Grace in the partnership includes a

Credit to Grace, Capital, P400,000

191. Statement 1: A bonus to the remaining partners results when a retiring partner receives
partnership assets which are less than his or her capital balance on the date of withdrawal.
Statement 2: If a new partner invests in a partnership at book value and acquires ¼ interest in total
partnership capital, it indicates that a bonus was paid to the original partners.
Only statement 1 is true

192. The partnership agreement of Adrian and Arzel provides a 5% capital interest on the initial
capital contributions of P300,000 and P500,000 respectively. The agreement also provides a salary
allowance of P200,000 to Adrian. The agreed profit and loss ratio is 40% for Adrian and 60% for Arzel.
The partnership generated a net profit of P180,000 in 2020. How much is the share of Arzel on the
profit?
 (11,000)

193. Bel and May have capital balances of P900,000, and P1,300,000 as of December 31, 2020. Bel
and May share 40% and 60% in the profits and losses. The partners believe that the following assets
should be adjusted:
Accounts receivable - (book value) - P240,000; (market value) - P200,000
Inventory - (book value) - P400,000; (market value) - P450,000

Len is interested in buying 40% interest from anyone of the partner.

● If May is willing to sell 40% of her interest and profit at a price that will earn her a profit of
P25,000. How much will Len pay?
P547,400
P545,000
P520,000
P522,400
● After recording the adjustments, the revised capital of Bel is
P904,000

194. This method of distributing Profit and Loss discourages additional investments
Capital balances, beginning
Capital balances, end
Average capital balances
Original capital contribution

195. The admission of a new partner involving asset revaluation will result in:
Unequal total agreed equity and total capital contribution

196. One of the provisions in the ABC Partnership is for A to receive a 10% interest on her average
capital balance for the year 2021. A first contributed P20,000 of capital on February 1, 2021. On June 1,
she contributed another P20,000. On September 1, she withdrew P15,000 from the partnership.
Withdrawals in excess of P5,000 are charged to the partner’s capital account. The partnership’s fiscal
year ends in December 31.

The amount of interest allocated to A is ____

2667

197. Partners Deeca and Annel received a salary of P280,000 and P320,00, and share profit and
loss at 3:5 ratio, respectively. If the partnership generated a net profit of P440,000 in 2020, by how
much Deeca’s capital account would increase or decrease?
220,000

198. Statement 1: New partners will always be admitted to a partnership at a contribution equal to or
greater than the book value of their interest.
Statement 2: When a partner sells his interest to another party, the journal entry simply credits the
withdrawing partner’s capital account and debits the new partner’s capital.
Both statements are false

199. What are the considerations in determining the best method in distributing profit?
All of the above
200. Which among the following is not correct in the distribution of profit or loss?
Original capital contribution may prove equitable if there are material changes in the capital
accounts during the year

201. Dada and Elma are partners with capital balances of P400,000 and P600,000, respectively.
They share profits and losses equally. They decided to admit Jhai as a partner who will invest P200,000
for a 15% interest. Total agreed capital is P1,250,000. Which of the following statements is true?
Jhai’s capital is credited for P187,500

202. Statement 1: If the proceeds from sale is less than the book value of the non-cash assets sold,
this will increase the partnership assets but decrease the partner’s equity.
Statement 2: The feature of unlimited liability covers all partners except industrial partner
Both statements are false

203. The admission of a new partner effected through purchase of interest in the partnership is
Recorded in the partnership books as a transfer within equity

204. When mill retired from the partnership, the final settlement of Mill’s interest exceeded Mill’s
capital balance. Under the bonus method, the excess
Reduced the capital balances of the remaining partners

205. In the absence of agreement as to distribution of losses but there is an agreement for
distribution of profits, the industrial partner shall share losses based on
Shall not be liable for any losses

206. The most equitable distribution of partnership profit based on capital contributions uses which of
the following capital concept?
Average Capital
QUIZ:
1. The following is the condensed balance sheet of the partnership Jo, Li and Bi who share
profits and losses in the ratio of 4:3:3.

Cash P 180,000 Accounts, payable P 420,000

Other assets 1,660,000 Bi, Loan 60,000
Jo, receivable 40,000 Jo, Capital 620,000
Li, Capital 400,000
__ Bi, Capital 380,000
Total P 1,880,000 Total P1,880,000

Assume that the assets and liabilities are fairly valued on the balance Sheet and the partnership
decides to admit Mac as a new partner, with a 20% interest. No goodwill or bonus is to be
recorded. How much Mac should contribute in cash or other assets?
a. P 350,000
b. P 280,000
c. P 355,000
d. P 284,000

2. Fernando and Jose are partners with capital balances of P30,000 and P70,000, respectively.
Fernando has a 30% interest in profits and losses. All assets of the partnership are at fair
market value except equipment with book value of P300,000 and fair market value of
P320,000.

At this time, the partnership has decided to admit Rosa and Linda as new partners. Rosa
contributes cash of P55,000 for a 20% interest in capital and a 30% interest in profits and losses.
Linda contributes cash of P10,000 and an equipment with a fair market value of P50,000 for a
25% interest in capital and a 35% interest in profits and losses. Linda is also bringing special
expertise and clients contact into the new partnership. Using the bonus method, what is the
amount of bonus?
a. P24,750
b. 18,250
c. 14,000
d. 7,500

3. The capital accounts of the partnership of Nakpil, Ortiz, and Perez on June 1, 2005 are
presented below with their respective profit and loss ratios:

Nakpil P 139,200 1/2

Ortiz 208,800 1/3
Perez 96,000 1/6
P 444,000

On June 1, 2005, Quizon is admitted to the partnership when he purchased, for P 132,000, a
proportionate interest from Nakpil and Ortiz in the net assets and profits of the partnership. As a
result of a transaction, Quizon acquired a one-fifth interest in the net assets and profits of the
firm. Assuming that implied goodwill is not to be recorded, what is the combined gain realized
by Nakpil and Ortiz upon the sale of a portion of their interest in the partnership to Quizon?
a. P 0
b. P 43,200
c. P 62,400
d. P 82,000

4. In the AAA-BBB partnership, AAA and BBB had a capital ratio of 3:1 and a profit and loss

partner. What ratio would be used to allocate, to AAA

a.
b.
c.
d. d loss ratio

5. When Mill retired from the partnership of Mill, Yale, and Lear, 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 Yale and Lear.
d. Had no effect on the capital balances of Yale and Lear.

6. C, D and E are partners with capital balances on December 31, 20x1 of P300,000 and
P200,000 respectively. Profit are shared equally. E wishes to withdraw and it is agreed that
she is to take certain furniture and fixtures with second hand value of P50,000 and note for
the balance of her interest. The furniture and fixtures are carried in the books at P65,000.
s acquisition of the second-hand
furniture will result to:
a. Reduction in capital of P15,000 each for C and D.
b. Reduction in capital of P10,000 for E.
c. Reduction in capital of P5,000 each for C and D and E.
d. Reduction in capital of P7,500 each for C and D.

7. In
capital balances were: Mikee, P600,000; Raul, P600,000; Imelda, P400,000. It was agreed
nd hand value
of P24,000 that cost the partnership P36,000.

If profits and losses are shared equally, what would be the capital balances of the remaining
partners after the retirement of Imelda?
Mikee Raul__
a. P600,000 P600,000
b. 592,000 592,000
c. 608,000 608,000
d. 612,000 612,000

8. On June 30, 1998, the balance sheet for the partnership of Coll, Maduro, and Prieto, together
with their respective profit and loss ratios, was as follows:

Assets, at cost P 180,000

Coll, loan P 9,000

Coll, capital (20%) 42,000
Maduro, capital (20%) 39,000
Prieto, capital (60%) 90,000
Total P 180,000

Coll decided to retire from the partnership. By mutual agreement, the assets are to be adjusted to
their fair value of P 216,000 at June 30, 1998. It was agreed that the partnership would pay Coll

account?
a. P 36,450
b. 39,000
c. 45,450
d. 46,200

9. On June 30, 2009, the balance sheets of the partnership of AAA, BBB and CCC, together
with their respective profit and loss ratios, were as follows:
Assets, at cost P 180,000

AAA, loan P 9,000

AAA, capital (20%) 42,000
BBB. Capital (20%) 39,000
CCC , capital (60%) 90,000
Total P 180,000

AAA has decided to retire from the partnership. By mutual agreement, the assets are to be
adjusted to their fair value of P216,000 at June 30, 2009. It was agreed that the partnership

bal
a. P36,450 c. P45,450
b. P39,000 d. P46,200

10. On June 30, the balance sheet for the partnership of Williams, Brown and Lowe together
with their respective profit and loss ratios was as follows:

Assets, at cost P300,000

Williams, loan P 15,000
Williams, capital (20%) 70,000
Brown, capital (20%) 65,000
Lowe, capital (60%) 150,000
Total P300,000

Williams has decided to retire from the partnership and by mutual agreement the assets are to be
adjusted to their fair value of P360,000 at June 30. It was agreed that the partnership would pay
Williams P102,000 cash for his partnership interest exclusive of his loan which is to be repaid in
full. No goodwill is to be recorded in this transaction. After William's retirement what are the
capital account balances of Brown and Lowe, respectively?
a. P65,000 and P150,000.
b. P72,000 and P171,000.
c. P73,000 and P174,000.
d. P77,000 and P186,000.

your God. I will

(Isaiah 41:10)

- END
SOLUTIONS:

1. A620,000 + 400,000 + 380,000 = 1,400,000 x 80% = 1,750,000 x 20% = 350,000

2. BTotal equity = 100,000 not revalued; Rosa 55,000 for 20%; Linda 60,000 for 25%; for a
total of P215,000. P215,000 x 55% = 118,250 100,000 = 18,250.

3. B444,000 x 1/5 = 88,800; 132,000 88,800 = 43,200

4. D

5. C

6. C 65,000 50,000 = 15,000 impairment loss ÷ 3

7. C
Mikee Raul Imelda
600,000 600,000 400,000 1,600,000
8,000 8,000 8,000 24,000 fully depreciated
(408,000) (372,000)
608,000 608,000 - 1,252,000
1,216,000

8. C
C 20% M 20% P 60%
9,000 - - 9,000
42,000 39,000 90,000 171,000
51,000 39,000 90,000 180,000
7,200 7,200 21,600 36,000
58,200 46,200 111,600
(61,200)
(3,000) (750) (2,250.00)
45,450 109,350

9. C
A B C
51,000 39,000 90,000 180,000
7,200 7,200 21,600 36,000
58,200 46,200 111,600
(61,200)
(3,000) (750)
- 45,450

10. B
W B L
20% 20% 60%
85,000 65,000 150,000
12,000 12,000 36,000 60,000
97,000 77,000 186,000
117,000
(20,000) (5,000) (15,000)
72,000 171,000
Question 1 of 15
1 Point

When is a "Statement of Affairs" used?

Select the correct response:

 only in liquidation
 only in reorganizations
 in preparing a statement of realization and liquidation
 in both liquidations and reorganizations

Question 2 of 15
1 Point

Typically, the estimated amount available for short-term prepayments in a statement of

affairs, is:

Select the correct response:

 current fair value

 zero
 carrying amount
 net realizable value

Correct answer: ZERO

Question 3 of 15
1 Point

What is defined as a condition in which a company is unable to meet debts as the debt
matures?
Select the correct response:

 insolvency
 liability
 credit squeeze
 deficit

Question 4 of 15
1 Point

Which of the following is first-ranked of the unsecured liabilities with priority in

bankruptcy liquidation?

Select the correct response:

 claims for wage, salaries, and commissions, subject to limitations of amount

and time
 claims of governmental entities for various taxes or duties
 none of the given choices
 administrative costs

Question 5 of 15
1 Point

Statement 1: Unsecured creditors whose claims are to be paid in full from the assets of
a debtor in bankruptcy liquidation before any cash is paid to other unsecured creditors
are classified as unsecured creditors having preference.
Statement 2: Creditors having priority under the Bankruptcy Law include creditors
having security interests collateralized by specific assets of the debtor.

Select the correct response:

 Only statement 2 is true.

 Only statement 1 is true.
 Both statements are false.
  Both statements are true.

Question 6 of 15
1 Point

In reporting a company that is to be liquidated, assets are shown at

Select the correct response:

 net realizable value

 historical cost
 book value
 present value calculated using an appropriate effective rate

Question 7 of 15
1 Point

How are liabilities classified in the Statement of Affairs?

Select the correct response:

 monetary and nonmonetary

 historic and futuristic
 current and noncurrent
 secured and unsecured

Question 8 of 15
1 Point

The document used by a trustee to report periodically on the status of fiduciary activities
is called a/an

Select the correct response:

  Statement of Realization and Liquidation
 Statement of Assets and Liabilities
 Legal Statement of Affairs
 Accounting Statement of Affairs

Question 9 of 15
1 Point

Statement 1: Creditors having security interests collateralized by specific assets of a

debtor in bankruptcy liquidation are entitled to obtain satisfaction of their claims from the
free assets of the debtor's estate.
Statement 2: Creditors having security interest collateralized by specific assets of a
debtor in bankruptcy liquidation always have a 100% recovery rate.

Select the correct response:

 Both statements are false.

 Only statement 1 is true.
 Both statements are true.
 Only statement 2 is true.

Question 10 of 15
1 Point

The document used to estimate amounts available to each class of claims is called a/an

Select the correct response:

 Accounting Statement of Affairs

 Statement of Assets and Liabilities
 Statement of Realization and Liquidation
 Legal Statement of Affairs

Question 11 of 15
2 Points

Fill in the blanks:

Fill in the blank the answer to each question. Do not use peso sign, comma, and
centavos.

Goodbye Na Corp. has been undergoing liquidation since January 1. As of March 31, its
condensed statement of realization and liquidation is presented below:

Assets:

P1,375,0
Assets to be realized
00

Assets acquired 750,000

1,200,00
Assets realized
0

1,375,00
Assets not realized
0

Liabilities:

1,87,500
Liabilities liquidated
0

1,700,00
Liabilities not liquidated
0

2,250,00
Liabilities to be liquidated
0

1,625,00
Liabilities assumed
0

Revenue and expenses:

 3,125,00
Supplementary charges/debits
0

2,800,00
Supplementary credits
0

425000

1. The net gain(loss) for the three-month period ending March 31 is .

2. The ending cash balance of cash account assuming that ordinary share capital and
1325000

deficit are P1,500,000 and P500,000, respectively, is .

Question 12 of 15
10 Points

Fill in the blanks:

Fill in the blank the answer to each question. Do not use peso sign, comma, and
centavos. Round answers to whole numbers. Indicate % sign when necessary.
On June 1, 2020, the books of Dreamer Corp. show assets with book values and
realizable values as follows:

Book Realizable
Account
value value
P
Cash P 1,850
1,850
Accounts receivable
17,000
(net) 21,200

Notes receivable 15,000

15,000

Inventory 20,000
41,000
Investment in Calandir
15,000
Stock 5,800
Land and building 92,800
 (net) 98,500

Equipment (net) 8,000

43,000
Total P226,350 P169,650

Dreamer's books show the following liabilities:

Book
Account
value
Accounts payable (50,000 secured by inventory and P
equipment) 90,625

Wages payable (eligible for priority)

3,775

Other accrued liabilities

10,000

Accrued interest on notes payable

375

Accrued interest on mortgage payable

600
Notes payable ( secured by Investment in Calandir
Stock) 10,000

Mortgage payable (secured by land and building)

70,000
Total P185,375

1. The estimated amount available to unsecured creditors (with priority and without
60675
priority)/total free assets is .
2. The estimated amount available to unsecured creditors without priority (net free
56900
assets) is .
72625
3. The amount of unsecured creditors without priority is .
78%
4. The dividend to unsecured creditors without priority is .
80975
5. The estimated payment to fully secured creditors is .
45160
6. The estimated amount to partially secured creditors is .
3775
7. The estimated amount to unsecured creditors with priority is .
 39488
8. The estimated amount to unsecured creditors without priority is .
15725
9. The estimated deficiency to unsecured creditors is .
56700
10. The estimated gain or loss on realization of assets is .

Question 13 of 15
6 Points

Fill in the blanks:

Fill in the blank the answer to each question. Do not use peso sign, comma, and
centavos. Round answers to whole numbers.
On June 1, 2020, the books of Dreamer Corp. show assets with book values and
realizable values as follows:

Book Realizable
Account
value value
P
Cash P 1,850
1,850
Accounts receivable
17,000
(net) 21,200

Notes receivable 15,000

15,000

Inventory 20,000
41,000
Investment in Calandir
15,000
Stock 5,800
Land and building
92,800
(net) 98,500

Equipment (net) 8,000

43,000
Total P226,350 P169,650

Dreamer's books show the following liabilities:

 Book
Account
value
Accounts payable (50,000 secured by inventory and P
equipment) 90,625

Wages payable (eligible for priority)

3,775

Other accrued liabilities

10,000

Accrued interest on notes payable

375

Accrued interest on mortgage payable

600
Notes payable ( secured by Investment in Calandir
Stock) 10,000

Mortgage payable (secured by land and building)

70,000
Total P185,375

Assume further the following information for the period June 1,2020 to June 30,2020:
No subsequent discoveries
Sale of Colandir securities at a market value of P16,000
Collection of notes receivable into cash, P15,000
Sale of equipment at P7,000
Sale of inventory at P22,000
Partial payment of accounts payable, P29,000
Payment of notes payable of P10,375

22475
1. The cash balance on June 30,2020 is .
119700
2. The noncash assets on June 30,2020 is .
70600
3. The balance of fully secured liabilities on June 30,2020 is .
0
4. The balance of partially secured liabilities on June 30,2020 is .
3775
5. The balance of liabilities with priority on June 30,2020 is .
 71625
6. The balance of liabilities without priority on June 30,2020 is .

Question 14 of 15
1 Point

Target Corp. was forced into bankruptcy and is in the process of liquidating assets and
paying claims. Unsecured claims will be paid at the rate of thirty cents on the peso.
Arrow holds a note receivable from Target for P90,000 collateralized by an asset with a
book value of P60,000 and a liquidation value of P30,000. The amount to be realized by
Arrow on this note is

Select the correct response:

 P60,000
 P48,000
 P30,000
 P90,000
(30+((90-30)*0.3)

Question 15 of 15
1 Point

Sparkman Co. filed a bankruptcy petition and liquidated its noncash assets. Sparkman
was paying forty cents on the peso for unsecured claims. Bailey Co. held a mortgage of
P150,000 on land that was sold for P110,000. The total amount of payment that Bailey
should have received is calculated to be

Select the correct response:

 P44,000
 P134,000
 P126,000
 P110,000
 P60,000
1. If the interest acquired is 80%, the non-controlling interest percentage is 20%.

True
2. The two important elements in the definition of business combination under PFRS 3 are
"business" and "combination."

False
3. If the consideration transferred in a business combination is deferred, the consideration may
be measured at present value.

False
4. Non-controlling interests are measured at fair value only.
False
5. A non-current asset (or disposal group) acquired in a business combination that is
classified as held for sale is measured at the acquisition-date fair value.
False
6. The acquisition date in a business combination is normally the closing date.
False
7. A business combination achieved in stages occurs when an investors acquires additional
shares from an investee which it had previously held equity interest and the additional
shares purchased results to the investor obtaining control over the investee.
True
8. A business combination may result to a 100% non-controlling interest.
False
9. If the initial accounting for a business combination is incomplete by the end of the reporting
period in which the combination occurs, the acquirer shall report in its financial statements
provisional amounts for the items for which the accounting is incomplete.
True
10. The acquirer may record an increase in its share premium under business combinations
accomplished through a mere exchange of equity interests between the acquirer and the
acquiree ( or its former owners)
True
11. If as part of a business combination, an acquirer reacquires a right that it had previously
granted to the acquiree, such reacquired right is an identifiable intangible asset that the
acquirer subsumes in goodwill.
False
12. For purposes of applying the 'acquisition method' of PFRS 3 Business Combinations, the
consideration transferred shall include only those that are transferred in a transaction that
is arranged primarily for the benefit of the acquirer or the combined entity.
False
13. In conventional acquisition, consideration transferred is measured at its market value (of the
acquirer)
True
14. Goodwill that arises from a business combination is recognized as an asset. Those arising
from other sources are also recognized.
 False
15. Negative goodwill is treated as a current asset.
False
16. In a business combination accomplished through exchange of equity interests, the acquirer
is usually the entity that issues its equity interests.
True
17. Subsequent expenses on maintaining goodwill are expensed immediately.
True
18. In capitalization of average earnings, the average excess earnings are divided by a pre-
determined capitalization rate to determine goodwill.
False
19. Generally, consolidated statements are to be proposed if one company owns 50% or more
of the voting stocks of another company, thereby having controlling interest
False
20. A parent need not present consolidated financial statements if its debt and equity
instruments are not traded in a public market there are no other requirements.
False
21. In the elimination entries, common stock, APIC, and Retained earnings accounts of the
acquired company are credited.
False
22. IFRS 10 uses control as the single basis for consolidation.
True
23. PFRS 3 permits the recognition of non-controlling interests share of goodwill
True
24. Generally, there is goodwill if fair value of consideration transferred exceeds the book value
of the interest acquired. There are no adjustments to the assets and liabilities of the
acquired company as of date of acquisition.
True
25. In a business combination, how should long-term debt of the acquired company generally
be recognized on acquisition date?
fair value
26. It refers to the entity that obtains control after the business combination
Acquirer
27. According to PFRS 3, it is a transaction or other event in which an acquirer obtains control
of one or more businesses.
business combination
28. Which of the following assets of an acquiree may not included when computing for the
goodwill arising from a business combination?
Goodwill
29. A business combination that is called "step acquisition" is referred to as
achieved in stages
30. Purchase method in business combination means
Acquisition
31. In a business combination in which no consideration is transferred, the acquirer
substitutes the acquisition-date fair value of its interest in the acquiree for the acquisition-
date fair value of the consideration
32. According to PFRS 3, the measurement period
shall not exceed one year from acquisition date
33. When a company purchases another company that has existing goodwill and the
transaction is accounted for as a stock acquisition, the goodwill should be treated in the
following manner.
goodwill is not recorded until all assets are stated at full fair value.
34. Goodwill may arise and be recognized in the accounting records when
it is acquired through the purchase of another business entity.
35. Goodwill arising from business combinations are (use full PFRSs)
not amortized but tested for impairment at least annually in accordance with PAS 36.
36. A majority-owned subsidiary that is in legal reorganization should normally be accounted for
using
the cost method
37. On September 1, 1990, Phillips, Inc. issued common stock in exchange for 20% of Sago,
Inc.'s outstanding common stock. On July 1, 1992, Phillips issued common stock for an
additional 75% of Sago's outstanding common stock. Sago continues in existence as
Phillips' subsidiary. According to PFRS 10 Consolidated Financial Statements, how much of
Sago's 1992 net income should be included in the December 31, 1992 consolidated
statement of profit or loss?
95% of Sago's net income
38. Which of the following statements is true?
all of these statements are true
39. According to PFRS 10, when is a parent exempted from presenting consolidated financial
statements?
all of these
40. According to PFRS 10, which of the following statement is true?
a parent entity is required to consolidate its subsidiaries.

41. ABC Co. owns 36,000 shares representing 40% ownership interest in XYZ, Inc.'s
90,000 outstanding ordinary shares. ABC accounts for the investment under the
equity method.
On January 1, 20x1, XYZ reacquired 30,000 of its own shares from other
investors so that ABC shall obtain control over XYZ. The following were
determined as of acquisition date:
a. The previously held 40% interest has a fair value of P180,000
 b. XYZ's net identifiable assets have a fair value of P1,000,000.
c. ABC elected to measure non-controlling interest at the non-controlling
interest's proportionate share of XYZ's net identifiable assets.
The amount of goodwill is (bargain purchase)
Zero

42. On September 30, 20x1, ABC Co. acquired all of the identifiable assets and
assumed all of the liabilities of XYZ, Inc. By paying cash of P1,000,000. On this
date, the identifiable assets acquired and liabilities assumed have fair values of
P1,600,000 and P900,000, respectively.
ABC engaged an independent valuer to appraise a building acquired from XYZ.
However, the valuation report was not received by the time ABC authorized for
issue its financial statements for the year ended December 31, 20x1. As such
the building was assigned a provisional amount of P700,000. Also, the building
was tentatively assigned an estimate useful life of 10 years from acquisition date.
ABC uses the straight line method of depreciation and recognized three months
depreciation on the building in 20x1.
On July 1, 20x2, ABC finally received the valuation report from the independent
valuer which shows that the fair value of the building on September 30, 20x1 is
P500,000 and the remaining useful from that date is 5 years.
The consideration transferred is
P1,000,000

43. The adjusted goodwill is

P500,000
44. The amount of goodwill recognized on September 31, 20x1 is
P300,000

45. ABC Co. owns 36,000 shares representing 40% ownership interest in XYZ, Inc.'s
90,000 outstanding ordinary shares. ABC accounts for the investment under the
equity method.
On January 1, 20x1, XYZ reacquired 30,000 of its own shares from other
investors so that ABC shall obtain control over XYZ. The following were
determined as of acquisition date:
a. The previously held 40% interest has a fair value of P180,000
b. XYZ's net identifiable assets have a fair value of P1,000,000.
 c. ABC elected to measure non-controlling interest at the non-controlling
interest's proportionate share of XYZ's net identifiable assets.
The consideration transferred is
P1,000,000

46. Tree Co. acquired all the assets and assumed all the liabilities of Plant Co. for
P2,000,000. On acquisition date, Plant's net identifiable assets have carrying
amount and fair value of P2,800,000 and P1,600,000, respectively.
How much is recognized by Tree Co. on the business combination?
Goodwill of P400,000

47. On September 29, 1995, Wall Co. paid P860,000 for all the issued and outstanding
common stock of Hart Corp. On that date, the carrying amounts of Hart's recorded
assets and liabilities were P800,000 and P180,000, respectively. Hart's recorded
assets and liabilities had fair values of P840,000 and P140,000, respectively. In
Wall's September 30, 1995, balance sheet, what amount should be reported as
goodwill?
P160,000

48. Penn Corp. paid P300,000 for the outstanding common stock of Star Co. At that
time, Star had the following condensed balanced sheet:
Carrying amount
Current assets P40,000
Plant and equipment, net 380,000
Liabilities 200,000
Stockholders' equity 220,000
The fair value of the plant and equipment was P60,000 more than its recorded
carrying amount. The fair values and carrying amounts were equal for all other
assets and liabilities. What amount of goodwill, related to Star's acquisition,
should Penn report in its consolidated balance sheet?
P20,000

49. On January 1, 2017, Papa Ltd acquires a 75% interest in the equity capital of Anak
Ltd. On this date, the identifiable assets and liabilities of Anak Ltd are valued at
P200 million. The maintainable profits of Anak Ltd are estimated at P40 million per
year. On the basis of a price-earnings ratio of 10 times, fair value of the ordinary
shares of Anak Ltd. is estimated at P400 million.
 The purchase consideration consists of the following terms:
(i) an initial payment of P100 million on January 1, 2017;
(ii) an amount of P110 million payable on January 1, 2018 contingent on the
achievement of the maintainable profit or P40 million in the first year; and
(iii) an amount of 121 million payable on January 1, 2019 contingent on the
achievement of the maintainable profit of P40 million in the second year.
Anak Ltd's maintainable profits have been averaging about P40 million per year
in the past five years and it is probable that this level of profits would be
maintained in the foreseeable future. At the acquisition date, Papa Ltd's
borrowing cost is 10% per year.
The goodwill on combination is
P200 million

50. During 20X8, Poppy Inc. acquired 100% of Seed Inc. by issuing 250,000 shares of
its common stock. The acquisition was announced on March 31, 20X8, when
Poppy's common stock was selling for P45 per share , and finalized on October 15,
20X8 , when the market price of Poppy's common stock was P50 per share. On
October 15, 20X8, Seed's net assets had a book value of P10,750,000. Book value
equaled fair value for all recognized assets and liabilities, except land, which had a
fair value P500,000 higher than book value. Seed also had unpatented technology
with a fair value of P225,000 and in-process research and development with a fair
value of P365,000. What is the goodwill to be reported on Poppy Inc.'s December
31, 20X8 balance sheet?
P660,000

51. Mask, a private limited company, has arranged for Man, a public limited company, to
acquire it as a means of obtaining a stock exchange listing. Man issues 15 million
shares to acquire the whole of the share capital of Mask (6 million shares). The fair
value of the net assets of Mask and Man are P30 million and P18 million
respectively. The fair value of each of the shares of Mask is P6 and the quoted
market price of Man's shares is P2. The share capital of Man is 25 million shares
after the acquisition.
The book value of shareholders' equity of MAN
P18 million

52. The amount of goodwill upon combination

P6 million

53. The consideration transferred is

 P24 million

54. On July 1, 2017, Sony Company purchased all of the outstanding stock of Aiwa
Company for P4,000,000. At that time, Aiwa Company's statement of financial
position showed net assets of P2,500,000. Aiwa Company's assets and liabilities
had fair market values different from their book values, as follows:
Book Value Fair Value
Property and equipment - net P5,000,000 P5,750,000
Other assets 500,000
350,000
Long-term debt 3,000,000 2,800,000
As a result of the combination above, what amount, if any, will be shown as
goodwill in the July 1, 2017 consolidated statement of financial position of Sony
Company and its wholly owned subsidiary, Aiwa Company?
P700,000

55. On the day of acquisition, Sub Inc. had the following assets and liabilities:
Book Value Fair Value
Current assets P100,000 P100,000
Plant asset (net) 220,000 260,000
Liabilities ( 40,000) ( 40,000)
Pub Company paid P450,000 for 90% of the outstanding voting stock of Sub.
The goodwill in the consolidated statement of financial position at acquisition is:
P180,000

56. Following are pre-acquisition financial balances for PP Company and SS Company
us of December 31. Also included are fair values for SS Company accounts.

PP Company SS Company
Book Values Book Values Fair Values
12/31 12/31 12/31
Cash...................................... P290,000 P120,000 P120,000
Receivables........................... 220,000 300,000 300,000
Inventory................................. 410,000 210,000 260,000
Land......................................... 600,000 130,000 110,000
Building and equipment (net).................. 600,000
270,000 330,000
Franchise agreements............................... 220,000 190,000
220,000
Accounts payable.......................................(190,000) (120,000)
(120,000)
Accrued expenses.................................. (90,000) (30,000)
(30,000)
Long-term liabilities....................................(900,000) (510,000)
(510,000)
Common stock -P20 par value...(600,000)
Common stock - P5 par value................... (210,000)
Additional paid-in capital........... (70,000) (90,000)
Retained earnings, 1/1 ................. (390,000) (240,000)
Revenues...................................... (960,000) (330,000)
Expenses........................................ 920,000 310,000
December 31, PP acquires SS's outstanding stock by paying P360,000 in cash
and issuing 10,000 shares of its own common stock with a value of P40 per
share. PP paid legal and accounting fees of P20,000 as well as P5,000 in stock
issuance costs.

The balance in the Retained Earnings account in the consolidated balance

sheet
P300,000

57. The amount of debit for investment in S Company

P408,000

58. The amount of inventory in the consolidated balance sheet following the acquisition
P210,000
59. The amount of debit to Land in the consolidated balance sheet following the
acquisition
P330,000

60. String Corp. acquired 80% of Wind Corp.'s outstanding shares. The statements of
financial position of both entities immediately after the acquisition are shown below:
Strings Co. Wind Co.
Investment in subsidiary (at cost) 430,000
-
Other assets 1,570,000 750,000
Assets 2,000,000 750,000

Liabilities 750,000 400,000

Ordinary share capital 1,000,000
310,000
Retained earnings 250,000
40,000
Liabilities and stockholders' equity 2,000,000
750,000
At the date of purchase , the fair value of Wind's assets was P50,000 more than
the aggregate carrying amounts. Non-controlling interest is measured under
the proportionate share method.
How much is the goodwill in the consolidated balance sheet prepared
immediately after the acquisition?
P110,000

 Under the cost method, the workpaper entry to establish reciprocity debits
Retained Earnings- P Comp1any- FALSE
 Under the cost method, the investment account is reduced when the
subsidiary incurs a net loss.- FALSE

 If AA Company acquires 80 percent of the stock of BB Company on January 1,

20x2, immediately a3er the acquisi4on consolidated retained earnings will be
equal to the combined retained earnings of the two companies- FALSE

 Consolidated 5nancial statement are designed to provide the result of

opera4ons, cash 6ow, and the balance sheet as if the parent and subsidiary
were a single en4ty.- TRUE

 Presen4ng consolidated 5nancial statements this year when statements of

individual companies were presented last year is the correc4on of an error.-
FALSE

 Consolidated net income for a parent company and its par4ally owned
subsidiary is best de5ned as the parent company’s recorded net income.-FALSE

 A parent buys 32 percent of a subsidiary in one year and then buys an

addi4onal 40 percent in the next year. In a step acquisi4on of this type, the
original 32 percent acquisi4on should be maintained at its ini4al value.-FALSE

 Under the acquisi4on method, indirect cost rela4ng to acquisi4ons should be

expensed as incurred.- TRUE

 An investor adjusts the investment account for the amor4za4on of any

di;erence between cost and book value under the fair value model.- TRUE
 Lisa Co. paid cash for all of the vo4ng common stock of Victoria Corp. Victoria
will con4nue to exist as a separate corpora4on. Entries for the consolida4on of
Lisa and Victoria would be recorded in a worksheet.- TRUE

 When the implied value exceeds the aggregate fair values of iden45able net
assets, the residual di;erence is accounted for as goodwill.- TRUE
 In a business combina4on accounted for as acquisi4on, registra4on costs
related to common stock issued by the parent company are deducted from
other contributed capital.-TRUE

 Goodwill represents the excess of the implied value of an acquired company

over the aggregate fair values of tangible asset less liabili4es assumed.- FALSE
 Goodwill is seldom reported because it is too di?cult to measure.-FALSE
 The use of push-down accoun4ng in some speci5c situa4on. Push-down
accoun4ng result in re6ec4ng fair values on the subdisiary’s separate
accounts.-TRUE
 A company is not required to consolidate a subsidiary in which it holds more
than 50% of the vo4ng stock when the subsidiary is in bankruptcy.-TRUE
 In the prepara4on of a consolidated statement of cash 6ows using the indirect
method of presen4ng cash 6ows from opera4ng ac4vi4es, the amount of the
non-controlling interest in consolidated income deducted from the controlling
interest in consolidated net income.-FALSE
 JJ Company acquired 85% of MR Company on April 1. On its December 31,
consolidated income statement, how should JJ acount for MR’s revenues and
expenses that occurred before April 1 include 100 perent of MR’s revenue and
expenses and deduct the pe-acquisi4on por4on as non-controlling interest in
net income.-FALSE
 Under the economic en4ty concept, consolidated 5nancial statements are
intended primarily for the bene5t of the minority stockholders.-FALSE
 On the consolidated balance sheet, consolidated stockholders’ equity is equal
to the sum of the parent and subsidiary stockholders’ equity.- FALSE
 Majority-owned subsidiaries should be excluded from the consolidated
statements when control does not rest with the majority owner.-TRUE
 The primary bene5ciary of a variable interest en4ty (VIE) must consolidate the
VIE into its 5nancial statements whenever the vo4ng rights are not
propor4onal to the obliga4ons to absorb the expected losses or receive
expected residual returns.- FALSE
 In preparing consolidated working papers, beginning retained earnings of the
parent company will be adjusted in years subsequent to acquisi4on with an
elimina4on entry whenever the cot method has been used only.- FALSE
 Under the economic en4ty concept, consolidated 5nancial statements are
intended primarily for the bene5t of the minority stockholders.- FALSE
 Consolidated 5nancial statements are designated to provide informa4ve
informa4on to all shareholders.- FALSE
 In a mid-year purchase when the subsidiary’s books are not closed un4l the
end of the year, the purchased income account contains the parent’s share of
the subsidiary’s income earned from the date of acquisi4on to the end of the
year.- FALSE
 Goodwill is seldom reported because it is too di5cult to measure.- FALSE
 When a company purchases another company that has exis4ng goodwill and
the transac4on is accounted for as a stock acquisi4on, the goodwill should be
treated in the following manner goodwill on the books of an acquired
company should be disregarded.- FALSE
 When companies employ push-down accoun4ng all consolida4on elimina4on
entries are made on the books of the subsidiary rather than in consolidated
workpapers.- FALSE
EXERCISE 1

False 1. In consolidated 5nancial statements, it is expected that dividends

declared equals the sum of the total parent company's declared dividends and
the total subsidiary's declared dividends.

False 2. The primary bene5ciary of a variable interest en4ty (VIE) must

consolidate the VIE into its 5nancial statements whenever the vo4ng rights are
not propor4onal to the obliga4ons to absorb the expected losses or receive
expected residual returns.

FALSE 3. Goodwill represents the excess of the implied value of an acquired

company over the aggregate fair values of tangible asset less liabili4es assumed.

FALSE 4. The SEC requires the use of push down accoun4ng when the ownership
change is greater than 90%.

FALSE 5. If AA Company acquires 80 percent of the stock of BB Company on

January 1, 20x2, immediately a3er the acquisi4on consolidated retained earnings
will be equal to the combined retained earnings of the two companies.

TRUE 6. In a business combina4on accounted for as an acquisi4on, registra4on

costs related to common stock issued by the parent company are deducted from
other contributed capital.

FALSE 7. Consolidated 5nancial statements are designated to provide informa4ve

informa4on to all shareholders.

TRUE 8. The use of push-down accoun4ng in some speci5c situa4on. Push-down

accoun4ng result in re6ec4ng fair values on the subsidiary's separate accounts.
TRUE 9. An investor adjusts the investment account for the amor4za4on of any
di;erence between cost and book value under the fair value model.

TRUE 10. When the implied value exceeds the aggregate fair values of
iden45able net assets, the residual di;erence is accounted for as goodwill.

FALSE 11. On the consolidated balance sheet, consolidated stockholders' equity is

equal to the sum of the parent and subsidiary stockholders' equity.

FALSE 12. Under the cost method, the investment account is reduced when the
subsidiary incurs a net loss.

FALSE 13. Under the cost method, the workpaper entry to establish reciprocity
debits Retained Earnings - P Company.

FALSE 14. When companies employ push-down accoun4ng all consolida4on

elimina4on entries are made on the books of the subsidiary rather than in
consolidated workpapers.

FALSE 15. In the prepara4on of a consolidated statement of cash 6ows using the
indirect method of presen4ng cash 6ows from opera4ng ac4vi4es, the amount of
the non-controlling interest in consolidated income deducted from the controlling
interest in consolidated net income.

TRUE 16. Consolidated 5nancial statement are designed to provide the result of
opera4ons, cash 6ow, and the balance sheet as if the parent and subsidiary were
a single en4ty.

TRUE 17. The goal of the consolida4on process is for asset acquisi4ons and 100%
stock acquisi4ons to result in the same balance sheet.

FALSE 18. A parent buys 32 percent of a subsidiary in one year and then buys an
addi4onal 40 percent in the next year. In a step acquisi4on of this type, the
original 32 percent acquisi4on should be maintained at its ini4al value.
FALSE 19. Consolidated net income for a parent company and its par4ally owned
subsidiary is best de5ned as the parent company's recorded net income.

FALSE 20. Presenting consolidated financial statements this year when statements
of individual companies were presented last year is the correction of an error
 In a mid-year purchase when the subsidiary's books are not closed un4l the
end of the year, the purchased income account contains the parent's share
of the subsidiary's income earned from the date of acquisi4on to the end of
the year. FALSE

 Consolidated 5nancial statements are designed to provide the result of

opera4ons, cash 6ow, and the balance sheet as if the parent and subsidiary
were a single en4ty. TRUE

 A parent buys 32 percent of a subsidiary in one year then buys an

addi4onal 40 percent in the next year. In a step acquisi4on of this type, the
original 32 percent acquisi4on should be maintained at its ini4al value.
FALSE

 In preparing consolidated working papers, beginning retained earnings of

the parent company will be adjusted in years subsequent to acquisi4on
with an elimina4on entry whenever the cost method has been used only.
FALSE

 The main evidence of control for purpose of consolidated 5nancial

statements involves possessing majority ownership. FALSE
  A company is not required to consolidate an subsidiary in which it holds
more than 50% of the vo4ng stock when the subsidiary is in bankruptcy.
TRUE

 In consolidated 5nancial statements, it is expected that dividends declared

equals the sum of the total parent company's declared dividends and the
total subsidiary's declare dividends. FALSE
If AA Company acquires 80 percent of the stock of BB Company on January 1,
20x2, immediately a3er the
acquisi4on consolidated retained earnings will be equal to the combined retained
earnings of the two
companies. FALSE

On the consolidated balance sheet, consolidated stockholders' equity is equal to

the sum of the parent and
subsidiary stockholders' equity. FALSE

The goal of the consolida4on process is for asset acquisi4ons and 100% stock
acquisi4ons to result in the same
balance sheet. TRUE

When companies employ push-down accoun4ng all consolida4on elimina4on

entries are made on the books
of the subsidiary rather than in consolidated workpapers. FALSE

How is the por4on of consolidated earnings to be assigned to non-controlling

interest in consolidated 5nancial
statements determined the amount of the subsidiary's earnings is mul4plied by
the non- controlling's
percentage ownership and is adjusted for the excess cost amor4za4on applicable
to the NCI.TRUE
In a business combina4on accounted for as an acquisi4on, registra4on costs
related to common stock issuedby the parent company are deducted from other
contributed capital. TRUE

When the implied value exceeds the aggregate fair values of iden45able net
assets, the residual di;erence is accounted for as goodwill. TRUE

Majority-owned subsidiaries should be excluded from the consolidated

statements when control does not rest with the majority owner. TRUE

JJ Company acquired 85% of MR Company on April 1. On its December

31,consolidated income statement, how should JJ account for MR's revenues and
expenses that occurred before April 1 include 100 percent of MR's revenue and
expenses and deduct the pre-acquisi4on por4on as non-controlling interest in net
income. FALSE

Under the economic en4ty concept, consolidated 5nancial statements are

intended primarily for the bene5t of the minority stockholders. FALSE

The primary bene5ciary of a variable interest en4ty (VIE) must consolidate the VIE
into its 5nancial statements whenever the vo4ng rights are not propor4onal to
the obliga4ons to absorb the expected losses or receive expected residual
returns. FALSE

Goodwill represents the excess of the implied value of an acquired company over
the aggregate fair values of tangible asset less liabili4es assumed. FALSE

Goodwill is reported when the fair value of the acquire is greater than the fair
value of the net iden45able assets acquired. TRUE

When a company purchases another company that has exis4ng goodwill and the
transac4on is accounted for as a stock acquisi4on, the goodwill should be treated
in the following manner goodwill on the books of an
acquired company should be disregarded. FALSE
When a company purchases another company that has exis4ng goodwill and the
transac4on is accounted for as a stock acquisi4on, the goodwill should be treated
in the following manner goodwill is not recorded prior to recording 5xed assets.
FALSE

Presen4ng consolidated 5nancial statements this year when statements of

individual companies were presented last year is the correc4on of an error. FALSE

Dividends declared by a subsidiary are eliminated against dividend income

recorded by the parent under theequity method. FALSE

Goodwill is seldom reported because it is too di?cult to measure. FALSE

The SEC requires the use of push down accoun4ng when the ownership change is
greater than 90%. FALSE

A new acquired subsidiary has pre-exis4ng goodwill on its books. The parent
company's consolidated balancesheet will do an impairment test to see if any of it
has been impaired. FALSE

CHAPTER 1 TRUE or FALSE

TRUE 1. When two en44es compe4ng in the same industry combine, it s called a
horizontal business combina4on

FALSE 2 Horizontal business combina4ons are key to occur when management is

aIemp4ng to dominate geographic segment of the market.

TRUE 3. One way that horizontal business combina4on can increase sales for an
en4ty is to expand into new product markets.
TRUE 4. A ver4cal business combina4on generally involves companies aIemp4ng
to improve the e?ciency of opera4ons by purchasing suppliers of inputs or
purchases of outputs

FALSE 5. When a cool clothing store purchases a compe4tor in another city, a

ver4cal combina4on has occurred

TRUE 6. A ver4cal combina4on is one where the en44es have a poten4al buyer
seller rela4onship

FALSE 7. A business combina4on in which a supplier of raw materials acquired s a

conglomerate combina4on

TRUE 8. A conglomerate combina4on is o3en undertaken to help increase income

stability due to diversifying the asset base of an en4ty

TRUE 9. Conglomerate combina4ons are easy for the government to challenge in

court.

TRUE 10. It nego4a4on between management groups leads to a mutually

agreeable business process is caled a friendly takeover.

TRUE 11. An o;er by an acquirer to buy the stock of another company is

commonly called a tender

TRUE 12. A tender o;er that is opposed by the acquiree management is called a
hos4le bid

FALSE 13. Greenmail exists when a company is encouraged to buy a poten4al

acquiree.

FALSE 14 A poison pill is the term used to describe the issuance of a special kind
of conver4ble preferred stock to deter the acquisi4on of the company.

FASLE 15. The sale of the crown jewels defensive maneuver involves the sale of
more assets than does the scorched earth defense.
 TRUE 16. The fatman defensive maneuver involved the acquisi4on of assets by
the poten4al acquiree. if the company is acquired

FALSE 17. Golden parachutes give a bonus to all employees

TRUE 18. The packman defensive maneuverer is where a poten4al acquire

aIempts to purchase the acquirer

TRUE 19. A business combina4on occurs when one en4ty gains control over the
net assets of another en4ty,

FALSE 20. The only way to aIain control over the net assets of another en4ty is to
purchase the net assets.

FALSE 21. In an acquisi4on where the acquirer pays cash for the acquiree assets.
the book value of the acquirer increases

TRUE 22 in an acquisi4on of assets for assets, the ownership structure of the

acquiree does not change

FALSE 23. in an acquisi4on of assets for assets, the ownership structure of the
conqueror changes. does not

tTRUE 24. There is an increase in the total capitaliza4on of an acquirer when the
acquirer issues stock for Acquire assets.

TRUE 25. In an exchange of stock (acquired) for assets (acquiree). the ownership
structure of the acquiree does not change

FALSE 26. in an exchange of stock (acquirer) for assets (acquiree) the acquiree
stockholders become acquirer stockholders acquirer

TRUE 27. Control over the acquiree assets directly achieved in an asset for asset
exchange but indirectly achieved in an asset (acquirer) for stock (acquiree)
exchange.
FALSE 28. A business combina4on that occurs where only one of the original
en44es in existence a3er the combina4on is called a statutory consolida4on.

TRUE 29. The acquiree en4ty is liquidated in a statutory merger

TRUE 30, For a business combina4on to quality as a statutory consolida4on, a

new corpora4on must be formed

FALSE 31. in a statutory consolida4on form of business combina4on. the

Retained Earnings account of the newly formed corpora4on has a balance of zero
immediately a3er the combina4on.

TRUE 32 A3er comple4ng a business combina4on in the form of a statutory

merger or statutory consolida4on There is only one legal en4ty in existence.

TRUE 33. In a business combina4on accomplished as a stock acquisi4on normally

two companies exist a3er the combina4on

FALSE 34 A business combina4on accomplished as a stock acquisi4on must be

accomplished with a week for stock exchange.

TRUE 35. A stock acquisi4on is the only form of business combina4on that might
require the prepara4on of consolidated 5nancial statement

TRUE 36. The substance of statutory mergers. Statutory consolida4ons, and stock
acquisi4ons is the same if income tax considera4ons are ignored.

FALSE 37. There are no uncertain4es when two companies agree on a business
combina4on

TRUE 38. When the acquisi4on price of an acquiree is con4ngent on acquire

future earnings, the acquisi4on price may change?

FALSe 39. When the acquisi4on price of an acquiree is con4ngent on the market
value of the acquirer stock, the acquisi4on price may change?
FALSE 40. For business combina4ons to qualify as reorganiza4ons (for tax
purposes) the acquire stockholders must receive vo4ng common stock of the
acquirer.

TRUE 41. There are di;erent required levels of stock ownership in the acquire for
the three di;erent types of reorganiza4ons for tax purposes.

FALSE 42. One important bene5t in a business combina4on is any net opera4ng
loss carryforward that might exist and be available to the acquirer

Exercise 3

Question 1
In transla4on to currency of repor4ng en4ty per account classi5ca4on , under the current rate method,
all assets and liabili4es should be translated using the current rate.

 True

Question 2
The subsidiary's opera4ons in a foreign country are closely integrated with those of the parent such
that they are deemed to be merely an extension of the parent's domes4c opera4ons, however the
func4onal currency of the subsidiary is its own currency.  False

Question 3
A foreign op era4ons func4onal currency should be all of the following

a. the local currency;

b. the parent's func4onal currency
c. a currency of a third country
 False
Question 4
In the early implementa4on of PAS 21 majority believes that there is only one method required in
transla4ng the 5nancial statements of foreign opera4ons and that is the use of closing rate method
(transla4on from func4onal currency into presenta4on currency).  True

Question 5
A general popula4on that prefers to keep its wealth in monetary assets or in a rela4vely stable foreign
currency is an indicator of hyperin6a4onary economy.

 False

Question 6
Non-monetary assets and liabili4es carried at current exchange prices are translated using the current
/closing exchange rate.

 True

Question 7
Shareholders' equity accounts are normally translated at their historical rates.  True

Question 8
As a result of applying the func4onal currency concept, there is no longer a dis4nc4on between integral
opera4ons and foreign en44es and only one transla4on method is prescribed for foreign opera4ons.

 True
Question 9
In PAS 29, the 5nancial statements of an en4ty whose func4onal currency is the currency of a
hyperin6a4onary economy, whether they are based on a historical cost or a current cost approach, shall
be stated in terms of the measuring unit current at the balance sheet date.

 True

Question 10
All components of the 5nancial statements are measured in the func4onal currency. All transac4ons
entered into in currencies other than the func4onal currency are treated as transac4ons in a local
currency.

 False

Question 11
In transla4on from func4onal to presenta4on currency , assets and liabili4es are translated at
current/closing rates (CR).

 True

Question 12
Accordingly, the peso value of monetary items is a;ected by varia4on in the exchange rate giving rise to
a gain or loss.

 True

Question 13
Dividends declared are translated into pesos using the exchange rate in e;ect as of the date of
declara4on under the temporal method only.

 False

Question 14
Foreign currency transla4on just like conversion does not involve the act of exchanging one currency
from another.

 False

Question 15
IF a subsidiary o; a Philippine parent keeps its accoun4ng records in peso, but its func4onal currency is
the US $, the dollar 5nancial statements of the subsidiary shall 5rst be remeasured in the peso, and then
translated to the US $ for consolida4on.

 False

Question 16
Transla4on di;erences maybe taken either to other comprehensive income or to the income statement.
Depending upon the method used.

 True

Question 17
For a Philippine parent en4ty, it is not necessary that its foreign opera4on must be located in another
country.

 True
Question 18
Transla4on is required at the beginning of the accoun4ng period when a company s4ll holds assets or
liabili4es in its balance sheet which were incurred in a foreign currency.  False

Question 19
One of the indicators of a hyperin6a4onary economy is when prices are quoted in a

stable currency.

 True

Question 20
The increases and decreases in the net asset posi4on are translated using the exchange rate
at the date the transac4ons were assumed to occur.

 True
1. Under the cost method, the workpaper entry to establish reciprocity debits Retained Earnings - P
Company.

Fals
e

Queson 2
1 / 1 pts
Under the cost method, the investment account is reduced when the subsidiary incurs a
net loss.

False

Question 3
1 / 1 pts
If AA Company acquires 80 percent of the stock of BB Company on January 1, 20x2, immediately a3er
the acquisi4on consolidated retained earnings will be equal to the combined retained earnings of the
two companies.

False

Question 4
1 / 1 pts
Consolidated 5nancial statement are designed to provide the result of opera4ons, cash 6ow, and the
balance sheet as if the parent and subsidiary were a single en4ty.orrect!

Tr
ue

Queson 5
1 / 1 pts
Presen4ng consolidated 5nancial statements this year when statements of individual companies were
presented last year is the correc4on of an error.

Fals
e

Queson 6
1 / 1 pts
Consolidated net income for a parent company and its par4ally owned subsidiary is best
de5ned as the parent company's recorded net income.
Fals
e

Question 7
1 / 1 pts
A parent buys 32 percent of a subsidiary in one year and then buys an addi4onal 40 percent in the next
year. In a step acquisi4on of this type, the original 32 percent acquisi4on should be maintained at its
ini4al value.

Fals
e

Queson 8
1 / 1 pts
Under the acquisi4on method, indirect cost rela4ng to acquisi4ons should be expensed
as incurred.

Tr
ue

Queson 9
1 / 1 pts
An investor adjusts the investment account for the amor4za4on of any di;erence between cost and
book value under the fair value model.

Tr
ue

Queson 10
1 / 1 pts
Lisa Co. paid cash for all of the vo4ng common stock of Victoria Corp. Victoria will
con4nue to exist as a separate corpora4on. Entries for the consolida4on of Lisa and Victoria would be
recorded in a worksheet.

True
Question 11
1 / 1 pts
When the implied value exceeds the aggregate fair values of iden45able net assets, the residual
di;erence is accounted for as goodwill.

Tr
ue

Question 12
1 / 1 pts
In a business combina4on accounted for as an acquisi4on, registra4on costs related to common stock
issued by the parent company are deducted from other contributed capital.

Tr
ue

Queson 13
1 / 1 pts
Goodwill represents the excess of the implied value of an acquired company over the
aggregate fair values of tangible asset less liabili4es assumed.

Fals
e

Queson 14
1 / 1 pts
Goodwill is seldom reported because it is too di?cult to measure.

False

Question 15
1 / 1 pts
The use of push-down accoun4ng in some speci5c situa4on. Push-down accoun4ng result in re6ec4ng
fair values on the subsidiary's separate accounts.
True

Question 16
1 / 1 pts
A company is not required to consolidate a subsidiary in which it holds more than 50%
of the vo4ng stock whe n the subsidiary is in bankruptcy.
Tr
ue

Queson 17
1 / 1 pts
In the prepara4on of a consolidated statement of cash 6ows using the indirect method
of presen4ng cash 6ows from opera4ng ac4vi4es, the amount of the non-controlling interest in
consolidated income deducted from the controlling interest in consolidated net income.

False

Question 18
1 / 1 pts
JJ Company acquired 85% of MR Company on April 1. On its December 31,consolidated income
statement, how should JJ account for MR's revenues and expenses that occurred before April 1 include
100 percent of MR's revenue and expenses and deduct the pre-acquisi4on por4on as non-controlling
interest in net income.

Fals
e

Queson 19
1 / 1 pts
Under the economic en4ty concept, consolidated 5nancial statements are intended
primarily for the bene5t of the minority stockholders.

False
Question 20
1 / 1 pts
On the consolidated balance sheet, consolidated stockholders' equity is equal to the sum of the parent
and subsidiary stockholders' equity.

Fals
e

Queson 1
1 / 1 pts
Upon consolida4on, the shareholders' equity accounts of the parent are eliminated, thus carried to the
consolidated column.

Fals
e

Ques4on 2
1 / 1 pts
P Corp. owns 90% of the outstanding common stock of S Company. On December 31,

20x4, S sold equipment to P for an amount greater than the equipment’s book value but less than its
original cost. The equipment should be reported on the December 31, 20x4 consolidated balance sheet
at

P’s original cost.

S’s orginal cost.

Correct!

P’s original cost less S’s recorded gain

P’s original cost less 90% of S’s recorded gain.

Question 3
1 / 1 pts
In an upstream sale of property, plant, and equipment, part of the gain (loss) on the sale is allocated to
the non-controlling interest based on its percentage interest.rect! True

Question 4
1 / 1 pts
Under the equity method, the retained earnings of the parent company may not equal the correct
consolidated retained earnings; some adjustments are s4ll needed. False
 Question
5
1 / 1 pts
To eliminate overstatement in deprecia4on, the debit is to accumulated deprecia4on.

True

Question 6
1 / 1 pts
WW Company owns 80 percent of FF Company’s outstanding common stock. On December 31, 20x9.

FF sold equipment to WW at a price in excess of FF’s carrying amount, but less than its original cost. On
a consolidated balance sheet at December 31, 20x9, the carrying amount of the equipment should be
reported at:

WW’s original cost.

WW’s original cost less 80 percent of FF’s recorded gain.

FF’s original cost.

Correct!

WW’s original cost less FF’s recorded gain.

Question 7
1 / 1 pts
In 20x4, Parrot Company sold land to its subsidiary, Tree Corpora4on, for P12,000. It had a book value of
P10,000. In the next year, Tree sold the land for P18,000 to an una?liated 5rm.

The 20x4 unrealized gain

Correct!

Was eliminated from consolidated net income by a working paper entry that credited
land P2,000.

Was deferred un4l 20x5.

Made consolidated net income P2,000 greater than it would have been had the sale not occurred.

Made consolidated net income P2,00 less than it would have been had the sale not occurred.

Question 8
1 / 1 pts
If the asset sold by parent to subsidiary is subsequently sold to an unrelated party the unamor4zed
balance of the deferred gain (loss) in recognized in pro5t or loss.

True

Question 9
1 / 1 pts
If case of sale of land, the gain on its sale by the parent to the subsidiary is to be recognized
immediately during the year, even if the property is not yet sold by the subsidiary.
 False

Question 10
1 / 1 pts
In 20x4, Parrot Company sold land to its subsidiary, Tree Corpora4on, for P12,000. It had a book value of
P10,000. In the next year, Tree sold the land for P18,000 to an una?liated 5rm.

Which of the following is correct?

A consolida4on working paper entry is required each year un4l the land was held for resale in 20x4.

Correct!

A consolida4on working paper entry is required each year un4l the land is sold outside
the related par4es.

No consolida4on working paper entry was necessary in 20x4.

A consolida4on working paper entry was required only if the subsidiary was less than 100% owned in
20x4. A consolida4on working

Question 11
1 / 1 pts
When preparing consolidated 5nancial statement workpapers, unrealized intercompany gains, as a
result of equipment or inventory sales by a?liates, are allocated propor4onately by percent of
ownership between parent and subsidiary only when the selling a?liate is
 Correct!

The parent and the subsidiary less than wholly owned.

The subsidiary and the is less than wholly owned.

The parent of a wholly owned subsidiary.

A wholly owned subsidiary.

Question 12
1 / 1 pts
In the year of sale, the amount of intercompany gain recorded by the selling a?liate is considered as
realized if the asset sold has a remaining life of one (1) year.

Tr
ue

Question 13
1 / 1 pts
Cost of goods sold account is 5nally debited for the excess of the fair value over the cost of the
inventory, assuming this was sold during the year.

True

Question 14
1 / 1 pts
Gain on sale of equipment based on sale between parent and subsidiary (downstream sale) is added to
the combined equipment account balances since this gain has a posi4ve e;ect on net income.

False

Question 15
1 / 1 pts
From a consolidated point of view, the intercompany gain on a parent company’s sale of a depreciable
plant asset to the subsidiary is realized when:

Correct!

Some other transac4on or event takes place.

The subsidiary abandons the plant asset

The subsidiary resells the plant asset to the parent company.

The parent company sells the plant asset to the subsidiary.

Question 16
1 / 1 pts
PP Inc. Own 100 percent of SS Inc. On January 1, 20x2, PP sold delivery equipment to SS at a gain. PP
had owned the equipment for two years and used a 5ve-year straightline deprecia4on rate with no
residual value. SS is using a three-year straight-line deprecia4on rate with no residual value for the
equipment. In the consolidated income statement, SS’s recorded deprecia4on expense on the
equipment for 20x2 will be decreased by:

20 percent of the gain on sale.

50 percent of the gain on the sale

33 1/3 percent of the gain on the sale.

Correct!

100 percent of the gain on the sale.

Question 17
1 / 1 pts
For companies using the equity method, it is not necessary to equate beginning consolidated retained
earnings with the amount of consolidated retained earnings reported at the end of the prior repor4ng
period.

Tr
ue

Question 18
1 / 1 pts
To adjust the year-end retained earnings of the seller (parent) for the unamor4zed balance of the
deferred gain, the debit is to retained earnings-parent.

True

Question 19
1 / 1 pts
In an upstream sale,the adjustment for the gain(loss) is shared between the controlling interest and NCI,
therefore NCI is not a;ected.

False

Question 20
1 / 1 pts
Discount on bonds payable is amor4zed and debited to interest expense over the life of the bonds.

True

Question 1
1 / 1 pts
In the early implementa4on of PAS 21 majority believes that there is only one method required in
transla4ng the 5nancial statements of foreign opera4ons and that is the use of closing rate method
(transla4on from func4onal currency into presenta4on currency). True
Question 2
1 / 1 pts
A foreign opera4ons func4onal currency should be all of the following a. the local

currency;

b. the parent's func4onal currency

c. a currency of a third country
False

Question 3
1 / 1 pts
Foreign currency transla4on just like conversion does not involve the act of exchanging one currency
from another.

False

Question 4
1 / 1 pts
IF a subsidiary o; a Philippine parent keeps its accoun4ng records in peso, but its func4onal currency is
the US $, the dollar 5nancial statements of the subsidiary shall 5rst be remeasured in the peso, and then
translated to the US $ for consolida4on.

False

Question 5
1 / 1 pts
The subsidiary's opera4ons in a foreign country are closely integrated with those of the parent such
that they are deemed to be merely an extension of the parent's domes4c opera4ons, however the
func4onal currency of the subsidiary is its own currency.

You Answered
Fals
e
Question 6
1 / 1 pts
Shareholders' equity accounts are normally translated at their historical rates.

Correct!
True

Question 7
1 / 1 pts
Accordingly, the peso value of monetary items is a;ected by varia4on in the exchange rate giving rise to
a gain or loss.

Correct!
True

Question 8
1 / 1 pts
For a Philippine parent en4ty, it is not necessary that its foreign opera4on must be located in another
country.

Correct!
Tr
ue

Question 9
1 / 1 pts
A general popula4on that prefers to keep its wealth in monetary assets or in a rela4vely stable foreign
currency is an indicator of hyperin6a4onary economy.

You Answered
False

Question 10
1 / 1 pts
Non-monetary assets and liabili4es carried at current exchange prices are translated using the current
/closing exchange rate.

True

Question 11
1 / 1 pts
In transla4on to currency of repor4ng en4ty per account classi5ca4on , under the current rate method,
all assets and liabili4es should be translated using the current rate.

Correct!
Tr
ue

Question 12
1 / 1 pts
In transla4on from func4onal to presenta4on currency , assets and liabili4es are translated at
current/closing rates (CR).

Correct!
True

Question 13
1 / 1 pts
In PAS 29, the 5nancial statements of an en4ty whose func4onal currency is the currency of a
hyperin6a4onary economy, whether they are based on a historical cost or a current cost approach, shall
be stated in terms of the measuring unit current at the balance sheet date.

True
Question 14
1 / 1 pts
All components of the 5nancial statements are measured in the func4onal currency. All transac4ons
entered into in currencies other than the func4onal currency are treated as transac4ons in a local
currency.

Fals
e

Queson 15
1 / 1 pts
The increases and decreases in the net asset posi4on are translated using
the exchange rate at the date the transac4ons were assumed to occur.

Correct!
Tr
ue
Question 16
1 / 1 pts
Dividends declared are translated into pesos using the exchange rate in e;ect as of the date of
declara4on under the temporal method only.

False

Question 17
1 / 1 pts
Transla4on is required at the beginning of the accoun4ng period when a company s4ll holds assets or
liabili4es in its balance sheet which were incurred in a foreign currency.

You Answered
False

Question 18
1 / 1 pts
As a result of applying the func4onal currency concept, there is no longer a dis4nc4on between
integral opera4ons and foreign en44es and only one transla4on method is prescribed for foreign
opera4ons.

Correct!
True

Question 19
1 / 1 pts
One of the indicators of a hyperin6a4onary economy is when prices are quoted in a

stable currency.

True
Question 20
1 / 1 pts
Transla4on di;erences maybe taken either to other comprehensive income or to the income
statement. Depending upon the method used.

Correct! True

Question 26
1 / 1 pts
If case of sale of land, the gain on its sale by the parent to the subsidiary is to be recognized
immediately during the year, even if the property is not yet sold by the subsidiary.

False

Question 27
1 / 1 pts
Any cost incurred by a subsidiary in developing an equipment is charged to the equipment account
since it will make the asset more marketable.

False

Question 28
1 / 1 pts
Cost of goods sold account is 5nally debited for the excess of the fair value over the cost of the
inventory, assuming this was sold during the year.

Correct!
True

Question 29
1 / 1 pts
If the asset sold by parent to subsidiary is subsequently sold to an unrelated party the unamor4zed
balance of the deferred gain (loss) in recognized in pro5t or loss.

Tr
ue
 Question 30
1 / 1 pts
To eliminate overstatement in deprecia4on, the debit is to accumulated deprecia4on.

Tru e

Question 31
1 / 1 pts
Any gain (loss) on intercompany sale of property, plant and equipment is deferred and recorded as
realized income the following year, if the asset is depreciable.

False

Question 32
1 / 1 pts
Discount on bonds payable is amor4zed and debited to interest expense over the life of the bonds.

Correct!
True

Question 33
1 / 1 pts
Upon consolida4on, the shareholders' equity accounts of the parent are eliminated, thus carried to the
consolidated column.

Fals
e
Question 34
1 / 1 pts
In the year of sale, the amount of intercompany gain recorded by the selling a?liate is considered as
realized if the asset sold has a remaining life of one (1) year. True

Queson 35
1 / 1 pts
To eliminate the gain on the intercompany sale, the debit is to retained earnings.

Fals
e
Question 36
1 / 1 pts
When the investment in subsidiary is measured using the equity method, the dividends received from
the subsidiary is recognized as an addi4on to the carrying amount of the investment.

Fals
e

Question 37
1 / 1 pts
In all cases, the dividends received must be eliminated when the consolidated 5nancial statements are
prepared.

True

Question 38
To eliminate the dividend income recognized by the parent, the entry is to debit Dividend Income,
under the equity method.

False

Queson 39
1 / 1 pts
To recognize NCI in post-acquisi4on change in net assets, NCI is credited.

Tr
ue

Queson 40
1 / 1 pts
Investment in subsidiary account is credited upon elimina4on.

Tr
ue
Question 41
1 / 1 pts
Upstream sales of property, plant and equipment a;ect non-controlling interest just like in downstream
sales.

False

Question 42
1 / 1 pts
In any case, the unamor4zed balance of the deferral gain or loss is eliminated when the consolidated
5nancial statements are prepared.

True

Question 43
1 / 1 pts
The gain or loss on an intercompany sale of depreciable asset is ini4ally deferred and subsequently
amor4zed over the remaining life of the asset. The amor4zed is done by elimina4ng the ini4al balance
of the deferred gain as of the date of sale. False

Question 44
1 / 1 pts
When a parent or a subsidiary acquires bonds issued by the other, both the Investment in Bonds and
the Bonds Payable accounts are eliminated.

True
Question 45
1 / 1 pts
If there is an impairment loss on goodwill the balance of goodwill account will decrease.

Correct! True
10/2/2020 Exercise 3: Accoun4ng for Business Combina4ons and Special Transac4ons - Teresita E. CRUCERO

Exercise 3

Due No due date Points 20 Quesons 20

Available Oct 2 at 9:30am - Oct 2 at 9:50am 20 minutes Time Limit 20 Minutes

Instruc ons
You will allowed 20 mins to take the quiz. Check your answers before submiQng your quiz.

This quiz was locked Oct 2 at 9:50am.

hIps://cpu.instructure.com/courses/1311/quizzes/7420 1/11
10/2/2020 Exercise 3: Accoun4ng for Business Combina4ons and Special Transac4ons - Teresita E. CRUCERO

AIempt History
Attempt Time Score
LATEST 18 minutes 11 out of 20

Score for this quiz: 11 out of 20

Submitted Oct 2 at 9:48am
This attempt took 18 minutes.

Question 1 1 / 1 pts

Paid- in -capital accounts are translated using the historical exch ange rate
under:

neither the current rate nor temporal methods

the temporal method only

the current rate method only

Correct!
both the current rate and temporal methods.

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10/2/2020 Exercise 3: Accoun4ng for Business Combina4ons and Special Transac4ons - Teresita E. CRUCERO

Question 2 1 / 1 pts

When a Philippine investor entity acquires interest in a foreign entity with

the payment of foreign currency, the determination of excess is calculated

in pesos if remeasurement (historical rate/ temporal method) is indicated

in pesos

in the foreign currency if translation (current rate/ functional method) is

indicated

Correct!
in the foreign currency

Question 3 1 / 1 pts

Under the temporal method, monetary assets and liabilities are translated
by using the exchange rate existing at the:

date the transaction occurred

none of these

beginning of the current year

Correct!
balance sheet date

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10/2/2020 Exercise 3: Accoun4ng for Business Combina4ons and Special Transac4ons - Teresita E. CRUCERO

Question 4 0 / 1 pts

Assuming no significant inflation, gains resulting from the process of

translating a foreign entity's financial statements from the functional
currency to peso should be included as (n):

extraordinary item (net of tax)

orrect Answer other comprehensive income item.

deferred credit.

ou Answered part of continuing operations.

Queson 10 1 / 1 pts
Question 8 0 / 1 pts

Question 6
hIps://cpu.instructure.com/courses/1311/quizzes/7420 1 / 1 pts 4/11
10/2/2020 Assuming thatExercise
a foreign entity
3: Accoun4ng is deemed
for Business to be
Combina4ons operating
and Special in -an
Transac4ons Teresita E. CRUCERO

environment dominated by the local currency, the entity's assets are

translated usingadjustment that results from translating the financial
The translation
statements of a foreign subsidiary using the current rate method should
be:
Correct!
the current rate

orrect Answer a weighted average rate

included as a separate item in the stockholders' equity section of the
balance sheet.
a simple average rate.

a historical rate.
deferred and amortized over a period not to exceed forty years.

deferral until a subsequently year when a loss occurs and offset against
Question
that loss. 7 1
0 // 1
1 pts
pts
Question 5

ou Answered included in the determination of net income for the period it occurs.
Assuming that a foreign
When the functional entity is
currency is the
deemed to entity's
foreign be operating in an
currency:
environment dominated by the local currency, the entity's capital stock is
translated using
orrect Answer all of the above are correct
Question 9 1 / 1 pts
a weighted average rate
exchange rate changes do not affect the economic well being of the
parent.
a simple average rate
The adjustment resulting from the remeasurement of an entity operating
in a highly inflationary environment would appear
the current rate

Correct! exchange rate changes do not have immediate impact on the cash flows of
the a historical rate
parent
in the stockholders' equity section of the balance sheet

Correct! as an ordinary income statement item

ou Answered the subsidiary operates as an entity, independent of the parent

as an extraordinary item on the income statement.

as a component of other comprehensive income

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10/2/2020 Exercise 3: Accoun4ng for Business Combina4ons and Special Transac4ons - Teresita E. CRUCERO

Gains from remeasuring a foreign subsidiary's financial statements from

the local currency, which is not the functional currency, into the parent
company's currency should be reported as a(n):

extraordinary item (net of tax)

other comprehensive income item.

Correct! part of continuing operations

deferred credit

Question 11 0 / 1 pts

A foreign subsidiary's functional currency is its local currency and inflation

of over 100 percent has been experienced over a three-year period. For
consolidation purposes, PAS 29 requires the use of:

the current rate method only

ou Answered neither the current rate or the temporal method.

the temporal method only

orrect Answer both the current rate and temporal methods.

Queson 12 0 / 1 pts

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10/2/2020 Exercise 3: Accoun4ng for Business Combina4ons and Special Transac4ons - Teresita E. CRUCERO

The objec4ve of remeasurement is to:

produce the same results as if the books were maintained in the currency
of the foreign entity's largest customer.

none of the above

orrect Answer
produce the same results as if the books were maintained solely in the
functional currency.

ou Answered
produce the same results as if the books were maintained solely in the
local currency.

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10/2/2020 Exercise 3: Accoun4ng for Business Combina4ons and Special Transac4ons - Teresita E. CRUCERO

Question 13 1 / 1 pts

The reconciliation of the annual translation adjustment usually includes all

of the following, EXCEPT

change in net assets due capital transactions multiplied by the difference

between the current rate and the rate at the time of the capital transaction

Correct!

change in net assets (excluding capital transactions) multiplied by the

difference between the historical rate and the average rate used to
translate income.

net assets at the beginning of the period multiplies by the change in

exchange rates during the period.

change in net assets (excluding capital transac4ons) mul4plied by the di;erence

between the current rate and the average rate used to translate income.

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10/2/2020 Exercise 3: Accoun4ng for Business Combina4ons and Special Transac4ons - Teresita E. CRUCERO

Question 14 0 / 1 pts

The process of translating the accounts of a foreign entity into its function
currency when they are stated in another currency is called:

none of these

ou Answered translation

orrect Answer remeasurement

verification

Queson 15 0 / 1 pts

In a company's disclosure of foreign currency transac4ons and hedges and transla4on

adjustments, all of the following items should be disclosed except

the aggregate adjustment for the period resul4ng from transla4on adjustment.

Queson 17 1 / 1 pts

ou Answered
the amount of income taxes for the period allocated to translation
adjustments.

hIps://cpu.instructure.com/courses/1311/quizzes/7420 9/11
 the amount transferred from cumulative translation adjustment due to
10/2/2020 changes inExercise
foreign exchange
3: Accoun4ng rates. Combina4ons and Special Transac4ons - Teresita E. CRUCERO
for Business

Question 16 0 / 1 pts
beginning and ending cumulative translation adjustments.

Average exchange rates are used to translate certain items from foreign
financial statements into pesos. Such averages are used in order to:

orrect Answer

approximately the exchange rate in effect when the items were recognized

smooth out large translation gains and losses.

avoid using different exchanges rates for some revenue and expense
accounts

ou Answered
eliminate temporary fluctuation in exchange rates that may be reversed in
the next fiscal period.

If the functional currency is determined to not be the foreign entity's local

currency, translation is done using

Correct!
the remeasurement method

the functional method

the derivative method

the current rate method

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10/2/2020 Exercise 3: Accoun4ng for Business Combina4ons and Special Transac4ons - Teresita E. CRUCERO

Question 18 1 / 1 pts

Exchange gains and losses resulting from translating (not remeasuring)

foreign currency financial statements into U.S. dollars should be included
as a(an):

ordinary gains/loss item in the income statement

extraordinary item in the income statement foe the period in which the rate
changes.

Correct!
a component of other comprehensive income

component of operating income

Queson 19 0 / 1 pts

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10/2/2020 Exercise 3: Accoun4ng for Business Combina4ons and Special Transac4ons - Teresita E. CRUCERO

When the functional currency is identified as the peso, land purchased by

a foreign subsidiary after the controlling interest was acquired by the
parent company should be translated using the:

average exchange rate for the current period

orrect Answer historical rate in effect when the land was purchased

forward rate

ou Answered current rate in effect at the balance sheet date.

Question 20 1 / 1 pts

In preparing consolidated financial statements of a Philippine parent

company and a foreign subsidiary, the foreign subsidiary's functional
currency is the currency:

Correct! in which the subsidiary primarily generates and spends cash.

in which the subsidiary maintains its accounting records.

of the country the parent is located

of the country the subsidiary is located.

hIps://cpu.instructure.com/courses/1311/quizzes/7420 12/11
Quiz Score: 11 out of 20uestion 1
1 / 1 pts
In an upstream sale of property, plant, and equipment, part of the gain (loss) on the sale is allocated to
the non-controlling interest based on its percentage interest.

Correct!

True

False

Question 2
1 / 1 pts
PP Inc. Own 100 percent of SS Inc. On January 1, 20x2, PP sold delivery equipment to SS at a gain. PP
had owned the equipment for two years and used a 5ve-year straightline deprecia4on rate with no
residual value. SS is using a three-year straight-line deprecia4on rate with no residual value for the
equipment. In the consolidated income statement, SS’s recorded deprecia4on expense on the
equipment for 20x2 will be decreased by:

50 percent of the gain on the sale

Correct!

100 percent of the gain on the sale.

33 1/3 percent of the gain on the sale.

20 percent of the gain on sale.

Question 3
0 / 1 pts
In the year of sale, the amount of intercompany gain recorded by the selling a?liate is considered as
realized if the asset sold has a remaining life of one (1) year.

Correct Answer

True

You Answered

False

Question 4
1 / 1 pts
The amount of the adjustment to the non-controlling interest in consolidated net assets is equal to the
non-controlling interest’s percentage of the

Unrealized intercompany gain at the end of the period.

Realized intercompany gain at the end of the period.

Unrealized intercompany gain at the beginning of the period.

Correct!

Realized intercompany gain at the beginning of the period.

Question 5
1 / 1 pts
In an upstream sale,the adjustment for the gain(loss) is shared between the controlling interest and NCI,
therefore NCI is not a;ected.

True

Correct!

False

Question 6
1 / 1 pts
Cost of goods sold account is 5nally debited for the excess of the fair value over the cost of the
inventory, assuming this was sold during the year.

Correct!

True

False

Question 7
1 / 1 pts
For companies using the equity method, it is not necessary to equate beginning consolidated retained
earnings with the amount of consolidated retained earnings reported at the end of the prior repor4ng
period.

Correct!

True

False
Question 8
1 / 1 pts
In 20x4, Parrot Company sold land to its subsidiary, Tree Corpora4on, for P12,000. It had a book value of
P10,000. In the next year, Tree sold the land for P18,000 to an una?liated 5rm.

Which of the following is correct?

Correct!

A consolida4on working paper entry is required each year un4l the land is sold outside the related
par4es.
A consolida4on working paper entry is required each year un4l the land was held for resale in 20x4.

No consolida4on working paper entry was necessary in 20x4.

A consolida4on working paper entry was required only if the subsidiary was less than 100% owned in
20x4. A consolida4on working

Question 9
1 / 1 pts
To eliminate the gain on the intercompany sale, the debit is to retained earnings.

True

Correct!

False

Question 10
1 / 1 pts
In any case, the unamor4zed balance of the deferred gain (loss) is not eliminated when the consolidated
5nancial statement are prepared.

True

Correct!
False

Question 11
1 / 1 pts
If the asset sold by parent to subsidiary is subsequently sold to an unrelated party the unamor4zed
balance of the deferred gain (loss) in recognized in pro5t or loss.

Correct!

True

False

Question 12
1 / 1 pts
To eliminate overstatement in deprecia4on, the debit is to accumulated deprecia4on.

Correct!

True

False

Question 13
0 / 1 pts
Any gain (loss) on intercompany sale of property, plant and equipment is deferred and recorded as
realized income the following year, if the asset is depreciable. You Answered

True
Correct Answer
False

Question 14
1 / 1 pts
To eliminate investment in subsidiary and recognize goodwill, the debits are to Goodwill and to
Investment accounts.

True

Correct!

False

Question 15
1 / 1 pts
Any cost incurred by a subsidiary in developing an equipment is charged to the equipment account since
it will make the asset more marketable.

True

Correct!

False

Question 16
1 / 1 pts
When preparing consolidated 5nancial statement workpapers, unrealized intercompany gains, as a result
of equipment or inventory sales by a?liates, are allocated propor4onately by percent of ownership
between parent and subsidiary only when the selling a?liate is
The subsidiary and the is less than wholly owned.

Correct!

The parent and the subsidiary less than wholly owned.

The parent of a wholly owned subsidiary.

A wholly owned subsidiary.

Question 17
0 / 1 pts
P Corp. owns 90% of the outstanding common stock of S Company. On December 31,

20x4, S sold equipment to P for an amount greater than the equipment’s book value but less than its
original cost. The equipment should be reported on the December 31, 20x4 consolidated balance
sheet at Correct Answer

P’s original cost less S’s recorded gain

You Answered

P’s original cost less 90% of S’s recorded gain.

S’s orginal cost.

P’s original cost.

Question 18
1 / 1 pts
In intercompany saleof property, plant and equipment, either downstream or upstream both a;ect non-
controlling interest.

True

Correct!

False

Question 19
1 / 1 pts
In 20x4, Parrot Company sold land to its subsidiary, Tree Corpora4on, for P12,000. It had a book value of
P10,000. In the next year, Tree sold the land for P18,000 to an una?liated 5rm.

The 20x4 unrealized gain

Made consolidated net income P2,000 greater than it would have been had the sale not occurred.

Was deferred un4l 20x5.

Correct!

Was eliminated from consolidated net income by a working paper entry that credited land P2,000.

Made consolidated net income P2,00 less than it would have been had the sale not occurred.
Question 20
1 / 1 pts
WW Company owns 80 percent of FF Company’s outstanding common stock. On December 31, 20x9.

FF sold equipment to WW at a price in excess of FF’s carrying amount, but less than its original cost. On a
consolidated balance sheet at December 31, 20x9, the carrying amount of the equipment should be
reported at:

FF’s original cost.

Correct!

WW’s original cost less FF’s recorded gain.

WW’s original cost less 80 percent of FF’s recorded gain.

WW’s original cost.

In reference to the downstream or upstream sale of depreciable assets, which of the following
statements is correct?

a. Upstream sales from the subsidiary to the parent company always result in unrealized gains or
losses

b. The ini4al e;ect of unrealized gains and losses from downstream sales of depreciable assets is
di;erent from the sale of non-depreciable assets
c. Gains, but not losses, appear in the parent-company accounts in the year of sale and must be
eliminated by the parent company in determining its investment income under the equity
method of accoun4ng
d. Gains and losses appear in the parent-company accounts in the year of sale and must be
eliminated by the parent company determining its investment income under the equity
method
of
accoun4ng
In the year a subsidiary sells land to its parent company at a gain, a workpaper entry is made debi4ng

1. Retained Earnings – P Co. 2. Retained Earnings – S Co. 3. Gain in Sale of Land a.

1

b. 2
c. 3
d. Both 1 and 2

In years subsequent to the year a 90% owned subsidiary sells equipment to its parent company at a gain,
the non-controlling interest in consolidated income is computed by mul4plying the non-controlling
interest percentage by the subsidiary’s reported net income

a. Minus the net amount of unrealized gain on the intercompany sale

b. Plus the net amount of unrealized gain on the intercompany sale
c. Minus intercompany gain considered realized in the current period
d. Plus intercompany gain considered realized in the current period

Company S sells equipment to its parent company (P) at a gain. In years subsequent to the year of the
intercompany sale, a workpaper entry is made under the cost method debi4ng

a. Retained Earnings – P
b. Non-controlling interest
c. Equipment
d. All of these

P Corp. owns 90% of the outstanding common stock of S Company. On December 31, 20x4, S sold
equipment to P for an amount greater than the equipment’s book value but less than its original cost.
The equipment should be reported on the December 31, 20x4 consolidated balance sheet at

a. P’s original cost less 90% of S’s recorded gain

b. P’s original cost less S’s recorded gain
c. S’s original cost
d. P’s original cost
In the year an 80% owned subsidiary sells equipment to its parent company at a gain, the noncontrolling
interest in consolidated income is calculated by mul4plying the non-controlling interest percentage by
the subsidiary’s reported net income

a. Plus the intercompany gain considered realized in the current period

b. Plus the net amount of unrealized gain on the intercompany sale
c. Minus the net amount of unrealized gain on the intercompany sale
d. Minus the intercompany gain considered realized in the current period

The amount of the adjustment to the non-controlling interest in consolidated net assets is equal to the
non-controlling interest’s percentage of the
 a. Unrealized intercompany gain at the beginning of the period
b. Unrealized intercompany gain at the end of the period
c. Realized intercompany gain at the beginning of the period
d. Realized intercompany gain at the end of the period

In years subsequent to the upstream intercompany sale of non-depreciable assets, the necessary
consolidated workpaper entry under the cost method is to debit the

a. Non-controlling interest and Retained Earnings (Parent) accounts, and credit the nondepreciable
asset
b. Retained Earnings (Parent) account and credit the non-depreciable asset
c. Non-depreciable asset, and credit the Non-controlling interest and Investment in Subsidiary
accounts
d. No entries are necessary

When preparing consolidated 5nancial statement workpapers, unrealized intercompany gains, as a

result of equipment or inventory sales by a?liates, are allocated propor4onately by percent of
ownership between parent and subsidiary only when the selling a?liate is

a. The parent and the subsidiary is less than wholly owned

b. A wholly owned subsidiary
c. The subsidiary and the subsidiary is less than wholly owned
d. The parent of a wholly owned subsidiary

Gain or loss result from an intercompany sale of equipment between a parent and a subsidiary is

a. Recognized in the consolidated statements in the year of the sale

b. Considered to be realized over the remaining useful life of the equipment as an adjustment to
deprecia4on in the consolidated statements
c. Considered to be unrealized in the consolidated statements un4l the equipment is sold to a third
party
d. Amor4zed over a period not less than 2 years and not greater than 40 years

WW Company owns 80% of FF Company’s outstanding common stock. On December 31, 20x9, FF sold
equipment to WW at a price in excess of FF’s carrying amount, but less than its original cost. On a

consolidated balance sheet at December 31, 20x9, the carrying amount of the equipment should
reported at:

a. WW’s original cost

b. FF’s original cost
c. WW’s original cost less FF’s recorded gain
 d. WW’s original cost less 80% of FF’s recorded gain

J Company acquired all of K Company’s outstanding common stock in exchange for cash. The acquisi4on
price exceeds the fair value of net assets requited. How should J Company determine the amounts to be
reported for the plant and equipment and long term debt acquired from K Company??

Plant and Equipment Long-term debt

a. K’s carrying amount K’s carrying amount

b. K’s carrying amount Fair value
c. Fair value K’s carrying amount
d. Fair value Fair value

PP Inc. owns 100% of SS Inc. On January 1, 20x2, PP sold delivery equipment to SS at a gain. PP had
owned the equipment for two years and used a 5ve-year straight-line deprecia4on rate with no residual
value. SS is using a three-year straight-line deprecia4on rate with no residual value for the equipment. In
the consolidated income statement, SS’s recorded deprecia4on expense on the equipment for 20x2 will
be decreased by:

a. 20% of the gain on the sale

b. 33 1/3% of the gain on the sale
c. 50% of the gain on the sale
d. 100% of the gain on the sale

Included in a working paper elimina4on (in journal entry format) for intercompany sales of merchandise
was a debit to Minority Interest in Net Assets of Subsidiary. This debit indicates that:

a. The parent company sold merchandise to a par4ally owned subsidiary

b. A wholly owned subsidiary sold merchandise to a par4ally owned subsidiary
c. A par4ally owned subsidiary sold merchandise to the parent company or to another subsidiary
d. Either a or b took place

From a consolidated point of view, the intercompany gain on a parent company’s sale of a depreciable
plant asset to the subsidiary is realized when:

a. The parent company sells the plant asset to the subsidiary

b. The subsidiary abandons the plant asset
c. The subsidiary resells the plant asset to the parent company
d. Some other transac4on or event takes place
In the measurement of minority interest in net income of a par4ally owned subsidiary, the credit for
Deprecia4on Expense – Parent in the working paper elimina4on (in journal entry format) for
intercompany gain in a depreciable plant asset is aIributed to net income of:

a. The parent company

b. The subsidiary
 c. The consolidated en4ty
d. None of the foregoing

The working paper elimina4on (in journal entry format) for a second year of intercompany sales made at
a markup over subsidiary cost by a par4ally owned subsidiary to the parent company includes:

a. A debit to Retained Earnings – Subsidiary

b. A credit to Minority Interest in Net Assets of Subsidiary
c. A credit to Cost of Goods Sold – Subsidiary
d. None of the foregoing

Which of the following is not an e;ect of a working paper elimina4on for intercompany sales of
merchandise by a parent company to a subsidiary?

a. It eliminates the overstatement of the subsidiary’s Sales ledger account balance

b. The intercompany pro5t por4on of the subsidiary’s Cost of Goods Sold ledger account balance
c. It reduces consolidated inventories to the cost incurred by the consolidated en4ty
d. It eliminates the parent’s Intercompany Sales and Intercompany Cost of Goods Sold ledger
account balances
e. None of the foregoing

If a gain on an intercompany transac4on is aIributable to a par4ally owned subsidiary, working paper

elimina4ons (in journal entry format) for accoun4ng periods subsequent to the period of the
intercompany transac4on will include a debit to Minority Interest in Net Assets of Subsidiary unless the
gain arose from:

a. A sale of plant assets

b. A sale of merchandise
c. An acquisi4on of outstanding bonds in the open market
d. A sale of intangible assets
e. None of the foregoing

The gross pro5t on an intercompany sale of merchandise cos4ng 500,000 at a gross margin rate of 16
2/3% based on selling price is:

a. 100,000
b. 120,000
c. 200,000
d. 240,000
e. Some other amount
Is the non-controlling interest in net income of a par4ally owned subsidiary a;ected by:

> Elimina4on of deprecia4on aIributable to intercompany gain on machinery acquired by parent from
subsidiary?
>Elimina4on of intercompany gain on land sold by parent to subsidiary? a.

>Yes >Yes

b. >Yes >No

c. >No >Yes

d. >No >No

A working paper elimina4on to remove an intercompany pro5t or gain is not relevant for an
intercompany:

a. Sale of merchandise
b. Sale of plant asset or intangible asset
c. Sales-type/capital lease
d. Acquisi4on of an a?liate’s outstanding bonds payable in the open market

Blue Company owns 70% of Black Company’s outstanding common stock. On December 31, 20x4, Black
sold equipment to Blue at a price in excess of Black’s carrying amount, but less than its original cost. On
a consolidated balance sheet at December 31, 20x4, the carrying amount of the equipment should be
reported at:

a. Blue’s original cost

b. Black’s original cost
c. Blue’s original cost less Black’s recorded gain
d. Blue’s original cost less 70% of Black’s recorded gain

A parent and its 80% owned subsidiary have made several intercompany sales of noncurrent assets
during the past two years. The amount of income assigned to the noncontrolling interest for the second
year should include the noncontrolling interest’s share of gains:

a. Unrealized in the second year from upstream sales made in the second year
b. Realized in the second year from downstream sales made in both years
c. Realized in the second year from upstream sales made in both years
d. Both realized and unrealized from upstream sales made in the second year

A wholly owned subsidiary sold land to its parent during the year at a gain. The parent con4nues to hold
the land at the end of the year. The amount to be reported as consolidated net income for the year
should equal:
 a. The parent’s separate opera4ng income, plus the subsidiary’s net income
b. The parent’s separate opera4ng income, plus the subsidiary’s net income, minus the
intercompany gain
c. The parent’s separate opera4ng income, plus the subsidiary’s net income, plus the intercompany
gain
d. The parent’s net income, plus the subsidiary’s net income, plus the intercompany gain

A parent sold land to its par4ally owned subsidiary during the year at a loss. The subsidiary con4nues to
hold the land at the end of the year. The amount to be reported as consolidated net income for the year
should equal:

a. The parent’s separate opera4ng income, plus the intercompany loss

b. The parent’s separate opera4ng income, plus the intercompany loss, plus the subsidiary’s net
income
c. The parent’s separate opera4ng income, minus the intercompany loss
d. The parent’s separate opera4ng income, minus the intercompany loss, plus the subsidiary’s net
income

An intercompany gain or loss on a downstream sale of land should be recognized in consolidated net
income:

I. In the year of the downstream sale

II. Over the period of 4me the subsidiary uses the land III. In the year the
subsidiary sells the land to an unrelated party a. I
b. II
c. III
d. I or II

On November 8, 20x4, Power Corp. sold land to Wood Co., its wholly owned subsidiary. The land cost
P61,500 and was sold to Wood for P89,000. From the perspec4ve of the combina4on, when is the gain
on the sale of the land realized?

a. Propor4onately over a designated period of years

b. When Wood Co. sells the land to a third party
c. No gain can be recognized
d. As Wood uses the land
e. When Wood Co. begins using the land produc4vely

Parent sold land to its subsidiary for a gain in 20x4. The subsidiary sold the land externally for a gain in
20x7. Which of the following statements is true?

a. A gain will be reported on the consolidated income statement in 20x4

 b. A gain will be reported on the consolidated income statement in 20x7
c. No gain will be reported on the 2010 consolidated income statement
d. Only the parent company will report a gain in 20x7
e. The subsidiary will report a gain in 20x4

An intercompany sale took place whereby the transfer price exceeded the book value of a depreciable
asset. Which statement is true for the year following the sale?

a. A worksheet entry is made with a debit to gain for a downstream transfer

b. A worksheet entry is made with a debit to gain for an upstream transfer
c. A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer
when the parent uses the equity method
d. A worksheet entry is made with a debit to retained earnings for a downstream transfer
e. No worksheet entry is necessary

Which of the following statements is true concerning an intercompany transfer of a depreciable asset?

a. Non-controlling interest in subsidiary’s net income is never a;ected by a gain on the transfer
b. Non-controlling interest in subsidiary’s net income is always a;ected by a gain on the transfer
c. Non-controlling interest in subsidiary’s net income is a;ected by a downstream gain only
d. Non-controlling interest in subsidiary’s net income is a;ected only when the transfer is upstream
e. Non-controlling interest in subsidiary’s net income is increased by an upstream gain in the year
of transfer

any gain or loss or intercompany sale or property plant and equipment is deferred as realized income

the following year the income is depreciable.

TRUE

to eliminate the gain on intercompany sale the debit is to retained earning

FALSE

When transla4ng foreign currency 5nancial statements for a company whose func4onal currency is the
peso, which of the following accounts is translated using historical exchange rates?

Notes Payable Equipment

a. Yes Yes
 b. Yes No
c. No No
d. No Yes

Under the temporal method, monetary assets and liabili4es are translated by using the exchange rate
exis4ng at the:

a. Beginning of the current year

b. Date the transac4on occurred
c. Balance sheet date
d. None of these

The process of transla4ng the accounts of a foreign en4ty into its func4onal currency when they are
stated in another currency is called:

a. Veri5ca4on
b. Transla4on
c. Remeasurement
d. None of these

Which of the following would be restated using the average exchange rate under the temporal method?

a. Cost of goods sold

b. Deprecia4on expense
c. Amor4za4on expense
d. None of these

Paid-in capital accounts are translated using the historical exchange rate under:

a. The current rate method only

b. The temporal method only
c. Both the current rate and temporal methods
d. Neither the current rate nor temporal methods

Which of the following would be restated using the current exchange rate under the temporal method?

a. Marketable securi4es carried at cost

b. Inventory carried at market

c. Common stock
d. None of these

The transla4on adjustment that results from transla4ng the 5nancial statements of a foreign subsidiary
using the current rate method should be:
 a. Included as a separate item in the stockholders’ equity sec4on of the balance sheet
b. Included in the determina4on of net income for the period it occurs
c. Deferred and amor4zed over a period not to exceed forty years
d. Deferred un4l a subsequent year when a loss occurs and o;set against that loss

Average exchange rates are used to translate certain items from foreign 5nancial statements into pesos.
Such averages are used in order to:

a. Smooth out large transla4on gains and losses

b. Eliminate temporary 6uctua4on in exchange rates that may be reversed in the next 5scal period
c. Avoid using di;erent exchange rates for some revenue and expense accounts
d. Approximate the exchange rate in e;ect when the items were recognized

When the func4onal currency is iden45ed as the peso, land purchased by a foreign subsidiary a3er the

a. Historical rate in e;ect when the land was purchased

b. Current rate in e;ect at the balance sheet date
c. Forward Rate
d. Average exchange rate for the current period

The appropriate exchange rate for transla4ng a plant asset in the balance sheet of a foreign subsidiary in
which the func4onal currency in the peso is:

a. Current exchange rate

b. Average exchange rate for the current year
c. Historical exchange rate in e;ect when the plant asset was acquired or the date of acquisi4on,
whichever is later
d. Forward Rate

A foreign subsidiary’s func4onal currency is its local currency which has not experienced signi5cant
in6a4on. The weighted average exchange rate for the current year would be the appropriate exchange
rate for transla4ng

Wages expense Sales to customers

a. Yes Yes
b. Yes No
c. No No
d. No Yes

If the func4onal currency is determined to be the peso and its 5nancial statements are prepared in the
local currency, PAS 21, requires which of the following procedures to be followed?

a. Translate the 5nancial statements into pesos using the current rate method
b. Remeasure the 5nancial statements into pesos using the temporal method
c. Translate the 5nancial statements into pesos using the temporal method
 d. Remeasure the 5nancial statements into pesos using the current rate method

P Company acquired 90% of the outstanding common stock of S Company which is a foreign company.
The acquisi4on was accounted for using the acquisi4on method. In preparing consolidated statements,
the paid-in capital of S Company should be converted at the:

a. Exchange rate e;ec4ve when S Company was organized.

b. Exchange rate e;ec4ve on the date of purchase of the stock of S Company by P Company
c. Average exchange rate for the period S Company stock has been upheld by P Company d.
Current exchange rate.

In preparing consolidated 5nancial statements of a Philippine parent company and a foreign subsidiary,
the foreign subsidiary’s func4onal currency is the currency:

a. Of the country the parent is located

b. Of the country the subsidiary is located
c. In which the subsidiary primarily generates and spends cash.
d. In which the subsidiary maintains its accoun4ng records.

Gains from remeasuring a foreign subsidiary's 5nancial statements from the local currency, which is not
the func4onal currency, into the parent company's currency should be reported as a(n):

a. Other comprehensive income item

b. Extraordinary item (net of tax)
c. Part of con4nuing opera4ons.
d. Deferred Credit.

Assuming no signi5cant in6a4on, gains resul4ng from the process of transla4ng a foreign en4ty's
5nancial statements from the func4onal currency to peso should be included as a (n):

a. Other comprehensive income item

b. Extraordinary item (net of tax)
c. Part of con4nuing opera4ons.
d. Deferred Credit.

A foreign subsidiary’s func4onal currency is its local currency and in6a4on of over 100 percent has been
experienced over a three-year period. For consolida4on purposes, PAS 29 requires the use of:

a. The current rate method only

b. The temporal method only
c. Both the current rate and temporal methods
d. Either the current rate or the temporal method
The objec4ve of remeasurement is to:

a. Produce the same results as if the books were maintained in the currency of the foreign en4ty’s
largest customer
b. Produce the same results as if the books were maintained solely in the local currency
c. Produce the same results as if the books were maintained solely in the func4onal currency d.
None of the above

The func4onal currency approach adopted by PAS 21 requires:

a. Separate statements be maintained by the domes4c parent company and the foreign branch
both in their own currencies
b. Separate statements be maintained by the domes4c parent company and the foreign branch
with the foreign branch translated into the func4onal currency
c. Results from foreign currency changes to be ignored
d. A focus on whether the domes4c repor4ng en4ty’s cash 6ows will be indirectly or directly
a;ected by changes in the exchange rates of the foreign en4ty’s currency

In which of the following circumstances surrounding a foreign subsidiary of a Philippine parent, wherein
peso is the most likely to be considered the func4onal currency?

a. Sales are made globally and collected in pesos. Plant uses local materials and labor and pays in
foreign currency. Intercompany transac4on volume is high.
b. The foreign subsidiary sells product only in their country and receives their own currency. The
materials and labor are also secured in foreign country and paid for with foreign currencies
c. The foreign subsidiary receives their debt capital from a Philippine bank in pesos and products
produced are sold globally for pesos
d. Raw materials are acquired from the parent and paid for in pesos. Labor is acquired locally and
paid in foreign currencies. Financing is secured from the parent in pesos

A Philippine 5rm owns 100% of a Japanese automobile manufacturer. The cost of automobile parts is
typically 75% of the 5rm's total product. In which of the following circumstances would neither the peso
nor the Japanese yen be considered the func4onal currency?

a. The Japanese 5rm buys German automobile parts with marks to produce cars sold in La4n
America for pesos.
b. The Japanese 5rm buys German automobile parts with pesos to produce cars sold in La4n
America for pesos.
c. The Japanese 5rm buys German automobile parts with marks to produce cars sold in La4n
America for marks.
 d. The IASB requires that either the parent's or the subsidiary's local currency be used as the
func4onal currency.

When the func4onal currency is the foreign en4ty's currency:

a. Exchange rate changes do not a;ect the economic well-being of the parent
b. The subsidiary operates as an en4ty, independent of the parent
c. Exchange rate changes do not have immediate impact on the cash 6ows of the parent d. All of
the above are correct

The transla4on (remeasurement) adjustment reported in a transla4on when the func4onal currency is
not the foreign currency is included

a. As a separate component of other comprehensive income

b. The current liability sec4on of the balance sheet as deferred revenue
c. The calcula4on of net income
d. None of the above

Assuming that a foreign en4ty is deemed to be opera4ng in an environment dominated by the local
currency, the en4ty's assets are translated using

a. The current rate

b. A simple average rate
c. A weight average rate
d. A historical rate

Assuming that a foreign en4ty is deemed to be opera4ng in an environment dominated by the local
currency, the en4ty's capital stock is translated using

a. The current rate

b. A simple average rate
c. A weight average rate
d. A historical rate

If the func4onal currency is determined to not be the foreign en4ty's local currency, transla4on is done
using

a. The current rate

b. The func4onal method
c. The remeasurement method
d. The deriva4ve method

In most cases, which of the following is NOT a component of translated retained earnings?
 a. Translated retained earnings at the end of the prior period
b. Income from the period translated at the historical rate
c. The value of dividends translated at the exchange rate on the date of declara4on
d. All are components of translated retained earnings

Which of the following is NOT true regarding foreign statement transla4on using the current or temporal
method?

a. All assets and all liabili4es are translated at the current exchange rate at the date of transla4on.
b. Monetary assets and liabili4es are translated at the current exchange rate at the date of
transla4on.
c. Equity accounts other than retained earnings are translated at the historic rate in e;ect on the
date of the investment.
d. Elements of income can be translated at a weighted average rate for the period

Which of the following is NOT considered when directly compu4ng the transla4on adjustment for
foreign 5nancial statements?

a. Beginning amount of net assets held by the domes4c investor

b. Increase or decrease in net assets for the period excluding capital transac4ons
c. Increase or decrease in net asset as a result of capital transac4ons
d. All are considered when directly compu4ng the transla4on adjustment

Exchange rates will not usually directly a;ect the cash 6ows of the parent en4ty in which of the
following cases?

a. The foreign en4ty operates in a currency other than its own.

b. The foreign en4ty operates in its local currency.
c. The foreign en4ty func4ons in a currency other than its local currency.
d. The foreign en4ty func4ons in the parent's currency.

The elimina4ons and adjustment entries necessary to consolidate the parent and subsidiary 5nancial
statements are translated as follows:

a. All balances, pro5ts, and losses at the current exchange rate on the consolida4on date
b. Intercompany balances translate at the rates used for other accounts, pro5ts and losses
translate at an average rate
c. Intercompany balances translate at the current rates, pro5ts and losses translate at an average
rate
d. None of the above are correct

A Philippine parent purchased a foreign subsidiary last year at a price in excess of the subsidiary’s book
value. This excess is assumed to be traceable to undervalued equipment. When the parent company
prepares its elimina4on entries for the excess, which of the following combina4ons of exchange rates
should be used?

Equipment Deprecia4on Expense

a. Historical Current
b. Current Historical
c. Historical Average
d. Current Average
Which of the following is true concerning the accoun4ng for a foreign investment under the cost
method?

a. Investment income is translated at the exchange rate on the dividend declara4on date.
b. Investment income is translated using the average exchange rate for the year.
c. Investment income is based on the investee's net income adjusted for the excess of purchase
price over book value.
d. Investment income is based on the investee's net income without adjus4ng for the excess of
purchase price over book value.

A debit balance in a parent's cumula4ve transla4on adjustment a3er the 5rst year of owning a foreign
subsidiary suggests which of the following is true?

a. The exchange rate has strengthened rela4ve to the peso.

b. The exchange rate has weakened rela4ve to the peso.
c. The foreign en4ty had net income but there was not a change in exchange rates.
d. The foreign en4ty had a net loss but there was not a change in exchange rates.

Which of the following procedures would be necessary when a Swiss subsidiary maintains its books
euros and its func4onal currency is Japanese Yen and its parent is a Philippine company?

a. Remeasurement from euros to pesos

b. Remeasurement from euros to Japanese Yen; translate from Yen to pesos
c. Remeasurement from Yen to euros; translate from euros to pesos
d. None of the above

Assuming that the func4onal currency of a foreign subsidiary is the local currency, which of the following
accounts would be translated at the current rate?

a. Addi4onal Paid-in Capital

b. Retained Earnings
c. Allowance for DoubUul Accounts
d. Cost of Goods Sold

Assuming that the func4onal currency of a foreign subsidiary is not the local currency, which of the
following accounts would be remeasured at the historical rate?
 a. Long-term notes payable
b. Accounts Payable
c. Land
d. Sales Revenue

Which of the following best describes the measurement of a gain or loss from the sale of a depreciable
asset by a foreign subsidiary whose func4onal currency is not the local currency?

a. Reconstruct the journal entry on the date of the sale using the historical rate for cash and the
depreciable asset and its accumulated deprecia4on
b. Reconstruct the journal entry on the date of the sale using the current rate for cash and the
historical rate for the depreciable asset and its accumulated deprecia4on
c. Translate the gain or loss using the historical rate.
d. Translate gains at the current rate and losses at the histori.al rate.

Which of the following best describes the accoun4ng for a foreign en4ty requiring transla4on or
remeasurement if the local economy is classi5ed as highly in6a4onary?

a. The en4ty's 5nancial statements are 5rst adjusted for in6a4on and then translated into the
domes4c currency.
b. The en4ty's 5nancial statements are 5rst adjusted for in6a4on and then remeasured into the
domes4c currency.
c. The unadjusted trial balance is translated if the func4onal currency is the local currency.

The adjustment resul4ng from the remeasurement of an en4ty opera4ng in a highly in6a4onary
environment would appear

a. In the stockholders’ equity sec4on of the balance sheet.

b. As a component of other comprehensive income.
c. As an ordinary income statement item.
d. As an extraordinary item on the income statement.

PAS 21 requires which of the following disclosures from 5rms involved in foreign currency transac4ons?

a. Beginning cumula4ve transla4on adjustments.

b. Ending cumula4ve transla4on adjustments.
c. The amount of income taxes for the period allocated to transla4on adjustments.
d. All are required disclosures.
In a company's disclosure of foreign currency transac4ons and hedges and transla4on adjustments, all of
the following items should be disclosed except

a. Beginning and ending cumula4ve transla4on adjustments.

b. The amount of income taxes for the period allocated to transla4on adjustments
c. The amount transferred from cumula4ve transla4on adjustment due to changes in foreign
exchange rates.
d. The aggregate adjustment for the period resul4ng from transla4on adjustment.

The reconcilia4on of the annual transla4on adjustment usually includes all of the following, EXCEPT

a. Net assets at the beginning of the period mul4plied by the change in exchange rates during the
period.
b. Change in net assets (excluding capital transac4ons) mul4plied by the di;erence between the
current rate and the average rate used to translate income.
c. Change in net assets (excluding capital transac4ons) mul4plied by the di;erence between the
historical rate and the average rate used to translate income.
d. Change in net assets due to capital transac4ons mul4plied by the di;erence between the
current rate and the rate at the 4me of the capital transac4on.

Exchange gains and losses resul4ng from transla4ng (not remeasuring) foreign currency 5nancial
statements into U.S. dollars should be included as a(an): ;

a. A component of other comprehensive income.

b. Extraordinary item in the income statement for the period in which the rate changes.
c. Ordinary gain/loss item in the income statement.
d. Component of opera4ng income.

When Philippine investor en4ty acquires interest in a foreign en4ty with the payment of foreign
currency, the determina4on of excess is calculated

a. In pesos
b. In the foreign currency
c. In pesos if remeasurement (historical rate/temporal method) is indicated
d. In the foreign currency if transla4on (current rate/func4onal method) is indicated

As part of the consolida4on process for a par4ally-held foreign subsidiary, the elimina4on entry to
distribute the excess of cost over book value will include a credit to Cumula4ve Transla4on Adjustment-
Parent
 a. For the amount of excess aIributable to iden45able net assets 4mes the di;erence between
historical and current exchange rates
b. For the amount of excess aIributable to iden45able net assets 4mes the di;erence between
average and current exchange rates
c. For the Parent's por4on of the excess aIributable to iden45able net assets 4mes the di;erence
between historical and current exchange rates
d. For the Parent's por4on of the excess aIributable to iden45able net assets 4mes the di;erence
between average and current exchange rates

Consider the consolida4on process for a foreign subsidiary: When the excess of cost over book value is
aIributable to iden45able assets, those assets are adjusted in the “distribu4on” elimina4on entry by an
amount that is calculated as

a. The di;erence between cost and fair value as measured in the foreign currency
b. The di;erence between cost and fair value as measured in the foreign currency mul4plied by the
historical exchange rate
c. The di;erence between cost and fair value as measured in the foreign currency mul4plied by the
weighted-average exchange rate
d. The di;erence between cost and fair value as measured in the foreign currency mul4plied by the
current exchange rate

What is a subsidiary’s func4onal currency?

a. The parent's repor4ng currency.

b. The currency in which transac4ons are denominated.
c. The currency in which the en4ty primarily generates and expends cash.
d. Always the currency of the country in which the company has its headquarters.

In comparing the transla4on and the remeasurement process, which of the following is true?

a. The reported balance of inventory is normally the same under both methods
b. The reported balance of equipment is normally the same under both methods.
c. The reported balance of sales is normally the same under both methods.
d. The reported balance of deprecia4on expense is normally the same under both methods.

Which of the following statements is true for the transla4on process (as opposed to remeasurement)?

a. A transla4on adjustment can a;ect consolidated net income.

b. Equipment is translated at the historical exchange rate in e;ect at the date of its purchase.
 c. A transla4on adjustment is created by the change in the rela4ve value of a subsidiary's net
assets caused by exchange rate 6uctua4ons.
d. A transla4on adjustment is created by the change in the rela4ve value of a subsidiary’s monetary
assets and monetary liabili4es caused by exchange rate 6uctua4ons.

A subsidiary of BB Corpora4on has one asset (inventory) and no liabili4es. The func4onal currency for
this subsidiary is the foreign currency (FC). The inventory was acquired for 100,000 FC when the
exchange rate was P0.16 = 1 FC. Consolidated statements are to be produced, and the current exchange
rates P0.19 = 1 FC. Which of the following statements is true for the consolidated 5nancial statements?

a. A remeasurement gain must be reported

b. A posi4ve transla4on adjustment must be reported.
c. A nega4ve transla4on adjustment must be reported.
d. A remeasurement loss must be reported.

At what rates should the following balance sheet accounts in foreign statements be translated (rather
than remeasured] into pesos?

Accumulated Deprecia4on—Equipment Equipment

a. Current Current
b. Current Average for year
c. Historical Current
d. Historical Historical

In the translated 5nancial statements, which method of transla4on maintains the underlying valua4on
methods used in the foreign currency 5nancial statements?

a. Current rate method; income statement translated at average exchange rate for the year
b. Current rate method; income statement translated at exchange rate at the balance sheet date c.
Temporal method
d. Monetary/nonmonetary method

Which of the following items is not remeasured using historical exchange rates under the temporal
method?

a. Accumulated deprecia4on on equipment

b. Cost of goods sold
c. Marketable equity securi4es
d. Retained earnings

In accordance with Philippines generally accepted accoun4ng principles, which transla4on combina4on
is appropriate for a foreign opera4on whose func4onal currency is the U.S. dollars?
 Method Treatment of Transla4on adjustment

a. Temporal Other Comprehensive Income

b. Temporal Gain or loss in net income
c. Current rate Other Comprehensive Income
d. Current rate Gain or loss in net income

A foreign subsidiary’s func4onal currency is its local currency, which has not experienced signi5cant
in6a4on. The weighted average exchange rate for the current year is the appropriate exchange rate for
transla4ng

Wages Expense Wages Payable

a. Yes Yes
b. Yes No
c. No Yes
d. No No

The func4onal currency of DZ, Inc.’s Bri4sh subsidiary is the Bri4sh pound. DZ borrowed pounds as a
par4al hedge of its investment in the subsidiary. In preparing consolidated 5nancial statements, DZ’s
nega4ve transla4on adjustment on its investment in the subsidiary exceeded its foreign exchange gain
on its borrowing. How should DZ’s report the e;ects of the nega4ve transla4on adjustment and foreign
exchange gain in its consolidated 5nancial statements?

a. Report the transla4on adjustment in Other Comprehensive Income on the balance sheet and the
foreign exchange gain in the income statement
b. Report the transla4on adjustment in income statement and defer the foreign exchange gain in
Other Comprehensive Income on the balance sheet

c. Report the transla4on adjustment less the foreign exchange gain in Other Comprehensive
Income on the balance sheet
d. Report the transla4on adjustment less the foreign exchange gain in the income statement

Gains from remeasuring a foreign subsidiary’s 5nancial statements from the local currency, which is not
the func4onal currency into the parent’s currency should be reported as a (n)

a. Deferred foreign exchange gain

b. Transla4on adjustment in Other Comprehensive Income
c. Extraordinary item, net of income taxes
d. Part of con4nuing opera4ons

At what rates should the following balance sheet accounts in the foreign currency 5nancial statements
be restated into pesos?
 Equipment Accumulated Deprecia4on of Equipment

a. Current Current
b. Current Average for year
c. Historical Current
d. Historical Historical

A credit-balancing item resul4ng from the process of resta4ng a foreign en4ty’s 5nancial statement from
the local currency unit to pesos should be included as a (an):

a. Separate component of stockholders’ equity

b. Deferred credit
c. Component of income from con4nuing opera4ons
d. Extraordinary item

When remeasuring foreign currency 5nancial statement into the func4onal currency, which of the
following items would be remeasured using a historical exchange rate?

a. Inventories carried at cost.

b. Trading securi4es carried at market values.
c. Bonds payable.
d. Accrued liabili4es
A foreign subsidiary's func4onal currency is its local currency, which has not experienced signi5cant
in6a4on. The weighted-average exchange rate for the current year would be the appropriate exchange
rate tor transla4ng:

Sales to Customers Wages Expenses

a. No No
b. Yes Yes
c. No Yes
d. Yes No

The func4onal currency of DD Inc.'s subsidiary is the European euro. DD borrowed euros as a par4al
hedge of its investment in the subsidiary. In preparing consolidated 5nancial statements, DD's debit
balance of its transla4on adjustment exceeded its exchange gain on the borrowing. How should the
transla4on adjustment and the exchange gain be reported in DD's consolidated 5nancial statements?
a The transla4on adjustment should be neIed against the exchange gain, and the
. excess
transla4on adjustment should be reported in the stockholders’ equity sec4on of the
balance
sheet.
b. The transla4on adjustment should be neIed against the exchange gain, and the excess
transla4on adjustment should be reported in the statement of income in compu4ng net income.
 c. The transla4on adjustment is reported as a component of other comprehensive income and
then accumulated in the stockholders’ equity sec4on of the balance sheet, and the exchange
gain should be reported in the statement of income in compu4ng net income.
d. The transla4on adjustment should he reported in the statement of income, and the exchange
gain should be reported separately in the stockholders’ equity sec4on of the balance sheet.

Which of the following accounts is a monetary item?

a. Cost of Sales
b. Inventory
c. Investment in Common Stock – IBM
d. Addi4onal Paid-in Capital
e. None of the above

Which of the following accounts is a monetary item?

a. Sales
b. Intercompany Bonds Payable
c. Investment in Common Stock – IBM
d. Deferred Income Tax Expense
e. None of the above

Which of the following accounts is a monetary item?

a. Deprecia4on Expense
b. Inventory
c. Investment in Common Stock – Subs
d. Intercompany Payable—Long-term por4on
e. None of the above

Which of the following accounts is not monetary item?

a. Accounts Receivable
b. Inventory
c. Accounts payable
d. Accrued liabili4es
e. None of the above

Which of the following accounts is not a monetary item?

 a. Deferred Income Taxes Payable
b. Intercompany Payables
c. Long-term intercompany payables
d. Investment in Bonds
e. None of the above

Which of the following accounts is a monetary item?

a. Deferred income Taxes Expense.

b. Addi4onal Paid-in Capital
c. Sales
d. Deferred charges
e. None of the above

The term current rate is de5ned

a. As the exchange rate at the balance sheet repor4ng date.

b. As the average exchange rate during the current year.
c. As the exchange rate in e;ect when a current year transac4on occurred.
d. Di;erently for the balance sheet than for the income statement
e. None of the above

Which transla4on procedures are followed under the current rate method of transla4on?

a. All assets and liabili4es are translated at the current exchange rate
b. All income statement accounts are translated at the current exchange rate
c. A combina4on of current and historical exchange rates is used in both 5nancial statements d.
Both a and b
e. None of the above

What occurs in transla4on under the current rate method of transla4on?

a. All income statement accounts are expressed in dollars by using exchange rates in e;ect when
the items were recognized in the income statement
b. The e;ects of exchange rate changes are reported currently in earnings.
c. All assets and liabili4es are translated using exchange rates that produce the U.S. dollar
equivalent at the 4me the transac4ons giving rise to the balance occurred.
d. The temporal method must be used.
e. None of the above.

A foreign subsidiary has the foreign currency as its func4onal currency. The parent enters into an FX
forward to hedge its net investment. What will occur or be the accoun4ng treatment?

a. There will always be an o;seQng e;ect.

 b. There may or may not be an o;seQng e;ect.
c. Any gain or loss on the forward exchange contract must be recognized currently in earnings.
d. Any gain or loss on the forward exchange contract will be deferred on the parent's books and
treated as an adjustment to the Investment in Subsidiary account.
e. None of the above.

A parent owns a foreign subsidiary that has as its func4onal currency the local currency. To avoid
repor4ng a possible nega4ve e;ect in the U.S. dollar 5nancial statements from an adverse change in the
exchange rate, the parent should hedge which of the following items?

a. The net investment (net asset) posi4on.

b. The net monetary asset posi4on.
c. The net monetary liability posi4on.
d. The net monetary posi4on whether it be posi4ve or nega4ve.

How is the e;ect of an exchange rate change reported when the current rate method of transla4on is
used?

a. Report as a deferred gain or loss in the balance sheet.

b. Report currently in earnings. R
c. Report in Other Comprehensive Income.
d. Report in the “Owner Changes in Net Assets” sec4on of the statement of comprehensive
income.
e. None of the above.

How is the e;ect of an exchange rate change for the current year reported under the temporal method
of transla4on?

a. Currently in the income statement.

b. Currently in the income statement as an extraordinary item if material.
c. As a direct charge or credit to stockholders' equity.
d. Deferred in the asset or liability sec4on of the balance sheet.
e. None of the above.

What is the e;ect of an exchange rate change called in each of the following situa4ons?

Func4onal Currency

The Foreign Currency The Philippine Peso

a. Transla4on adjustment FX Transac4on Gain or Loss

b. FX Transac4on Gain or Loss Transla4on adjustment
c. FX Transac4on Gain or Loss FX Transac4on Gain or Loss
d. Transla4on adjustment Transla4on adjustment
Under the temporal method of transla4on, how is the e;ect of an exchange rate change reported?

a. As a deferred gain or loss in the balance sheet.

b. Currently in the income statement.
c. As a direct adjustment to equity.
d. In the “Other Non-owner Changes in Net Assets” sec4on of the statement of comprehensive
income.
e. As an extraordinary item.
The term used to describe the party that is the subject of a bankruptcy proceeding is debtor.
Creditors 5ling an involuntary bankruptcy pe44on must be owed at least P5,000 in total.
The only basis for an involuntary bankruptcy 5ling by creditors is inability to pay debts as they
mature.
The major categories of debt that are given special priority under the bankruptcy statues are: a.

Administra4ve costs

b. Certain posUiling “gap” claims in involuntary 5lings

c. Wages, salaries, and commissions
d. Employee bene5t plans
e. Deposits by individuals
f. Taxes
The appointment of a trustee is infrequent.
A class of creditors has accepted a plan of reorganiza4on if such plan has been accepted by
creditors that hold at least 2/3 in amount and more than 1/2 in number of the allowed claims of
such class of creditors.
A trustee is authorized to void both fraudulent and preferen4al transfers.
In a liquida4on 5ling, if the court desires informa4on that relates the ac4vity of the trustee with
the book balances exis4ng when the trustee was appointed, then a statement of realiza4on and
liquida4on may be prepared.

False----------Creditors having security interest collateralized by speci5c assets of a debtor in

bankruptcy liquida4on are en4tled to obtain sa4sfac4on of their claims from the free assets of
the debtor’s estate.
False-------Unsecured creditors whose claims are to be paid in full from the assets of a debtor in
bankruptcy liquida4on before any cash is paid to other unsecured creditors are classi5ed as
unsecured creditors having preference.
False-------Assets in a statement of a;airs (5nancial statement) are assigned to one of three
categories: assets pledged for fully secured liabili4es, assets pledged for par4ally secured
liabili4es, and priority assets.
True-------Insolvency in the bankruptcy sense is a 5nancial status in which the aggregate current
fair value of the assets of a business enterprise is not su?cient to pay the enterprise’s liabili4es.
False------The 5ling of a debtor’s pe44on in bankruptcy does not operate as an order for relief
by the bankruptcy court.
False------Creditors having priority under the Bankruptcy Law include creditors having security
interests collateralized by speci5c assets of the debtor.
True--------In the accountability technique of accoun4ng used by a trustee for a debtor in
bankruptcy liquida4on, there is no ledger account for owner’s equity.
True-------A railroad corpora4on may not 5le a debtor’s pe44on for bankruptcy.
True-------A debtor in bankruptcy liquida4on will not be discharged within six years of a previous
bankruptcy discharge.
True----------Owner’s equity amounts are not displayed in a statement of a;airs (5nancial
statement).
False--------The bankruptcy court has the op4on of appoin4ng either a trustee or an examiner in
bankruptcy reorganiza4on.
False---------All stockholders of a corpora4on undergoing bankruptcy reorganiza4on must
approve the plan of reorganiza4on before it is con5rmed by the bankruptcy court.

When is a “statement of a;airs” used?

a. Only in liquida4ons
b. Only in reorganiza4ons
c. In both liquida4ons and reorganiza4ons
d. In preparing a statement of realiza4on and liquida4on
e. None of the above
In a “statement of a;airs,”

a. Assets pledge with par4ally secured creditors are shown on the asset side of the
statement and as a deduc4on on the liability side of the statement
b. Assets pledged with fully secured creditors are shown only on the liability side of the
statement
c. Liabili4es owed to fully secured creditors are shown only on the asset side of the
statement
d. Liabili4es owed to par4ally secured creditors are shown only on the asset side of the
balance sheet and as a deduc4on on the liability side of the statement
e. None of the above
In a “statement of a;airs,”

a. Liabili4es with priority are shown on the liability side of the statement and as a
deduc4on on the asset side of the statement
b. Assets pledge with fully secured creditors are shown on the liability side of the
statement and as a deduc4on on the asset side of the statement
c. Liabili4es owed to fully secured creditors are shown on the asset side of the statement
and as a deduc4on on the liability side of the statement
d. Liabili4es owed to par4ally secured creditors are shown on the asset side of the balance
sheet and not as a deduc4on on the liability side of the statement
e. None of the above
A debtor 5ling a debtor’s bankruptcy pe44on will not be discharged if the debtor had received a
prior discharge in bankruptcy within the past:

a. Two years
b. Four years
c. Six years
d. Eight years
Typically, the es4mate amount available for short-term prepayments in a statement of a;airs
(5nancial statement) is:

a. Zero
b. Carrying amount
c. Current fair value
d. Net realizable value
William Bau4sta is star4ng a new business, Bau4sta Enterprises, which will be single
proprietorship selling retail novel4es. Bau4sta recently received a discharge in bankruptcy, but
certain proved claims were unpaid because of insu?cient funds. Which of the following is s4ll a
claim against Bau4sta:

a. The unpaid amounts owed to secured creditors who received less than the full amount
a3er resor4ng to their security interest and receiving their bankruptcy cash payments
b. The unpaid amounts owed to trade creditors for merchandise purchased and sold by
Bau4sta in the ordinary course of his prior business enterprise
c. A personal loan to Bau4sta by his father made in an aIempt to avoid bankruptcy
d. The unpaid amount of income taxes payable to the United States that became due
within three years preceding Bau4sta’s bankruptcy
What is de5ned as a condi4on in which a company is unable to meet debts as the debts
mature?

a. De5cit
b. Liability
c. Insolvency
d. Credit Squeeze
What type of ledge account is the Estate De5cit account used in the trustee’s accoun4ng
records for a debtor in bankruptcy liquida4on?

a. Asset
b. Liability
c. Equity
d. Revenue
e. None of the above
Which of the following is 5rst-ranked of the unsecured liabili4es with priority in bankruptcy
liquida4on?

a. Claims of governmental en44es for various taxes or du4es

b. Administra4ve costs
c. Claims for wages, salaries, and commissions, subject to limita4ons of amount and 4me
d. None of the foregoing
The account equa4on for a trustee in bankruptcy liquida4on is:

a. Assets equal liabili4es plus owner’s equity

b. Assets equal accountability
c. Assets equal liabili4es minus estate de5cit
d. Assets minus liabili4es equals accountability
Nimbus Company has incurred large net losses for the past two years. Because of its inability to
pay current liabili4es, Nimbus has 5led a pe44on for reorganiza4on under the Bankruptcy Law.
The reorganiza4on provisions of the Bankruptcy Law:

a. Require that the bankruptcy court appoint a trustee in all cases

b. Permit Nimbus management to remain in possession of its assets
c. Apply only to creditors’ bankruptcy pe44ons
d. Will apply to Nimbus only if Nimbus is required to register with the Securi4es and
Exchange Commission pursuant to the Philippine securi4es laws
In the journal entry to open the accoun4ng records of a trustee in a Chapter 7 bankruptcy
liquida4on, the debit to the Estate De5cit ledge account is in the statement of a;airs amount of
the:

a. Es4mated de5ciency to unsecured, non-priority creditors

b. Total es4mated amount available
c. Es4mated amount available for unsecured, non-priority creditors
d. Stockholders’ equity of the debtor corpora4on
Under the Bankruptcy Code, do creditors having priority include?
Par4ally Secured Creditors Speci5ed Unsecured Creditors

a. Yes Yes
b. Yes No
c. No Yes
d. No No
What are the objec4ves of the bankruptcy laws in the Philippines?

a. Provide relief for the court system and ensure that all debtors are treated the same
b. Distribute assets fairly and discharge honest debtors from their obliga4ons
c. Protect the economy and s4mulate growth
d. Prevent insolvency and protect shareholders
In a bankruptcy, which of the following statements is true?

a. An order for relief results only from a voluntary pe44on

b. Creditors entering an involuntary pe44on must have debts totaling at least P20,000
c. Secured notes payable are considered liabili4es with priority on a statement of a;airs d.
None
In repor4ng a company that is to be liquidated, assets are shown at:

a. Present value calculated using an appropriate e;ec4ve rate

b. Net realizable value
c. Historical cost
d. Book value
An involuntary bankruptcy pe44on must be 5led by:

a. The insolvent company’s aIorney

 b. The holders of the insolvent company’s debenture bonds
c. Unsecured creditors with total debts of at least P13,475
d. The company’s management

An order for relief

a. Prohibits creditors from taking ac4on to collect from an insolvent company without
court approval
b. Calls for the immediate distribu4on of free assets to unsecured creditors
c. Can be entered only in an involuntary bankruptcy proceeding
d. Gives an insolvent company 4me to 5le a voluntary bankruptcy pe44on
On a statement of 5nancial a;airs, how are liabili4es classi5ed?

a. Current and noncurrent

b. Secured and unsecured
c. Monetary and nonmonetary
d. Historic and futuris4c
What is a debtor in possession?

a. The holder of a note receivable issued by an insolvent company prior to the gran4ng of
an order for relief
b. A fully secured creditor
c. The ownership of an insolvent company that con4nues to control the organiza4on
during a bankruptcy reorganiza4on
d. The stockholders in a bankruptcy proceeding
How are an4cipated administra4ve expenses reported on a statement of 5nancial a;airs?

a. As a footnote un4l actually incurred

b. As a liability with priority
c. As a par4ally secured liability
d. As an unsecured liability
What is an inherent limita4on of the statement of 5nancial a;airs?

a. Many of the amounts reported are only es4ma4ons that might prove to be inaccurate
b. The statement is applicable only to bankruptcy
c. The statement covers only a short 4me, whereas a bankruptcy may last much longer
d. The 5gures on the statement vary as to a voluntary and an involuntary bankruptcy
On a balance sheet prepared for a company during its reorganiza4on, how are liabili4es
reported?

a. As current and long-term

b. As monetary and nonmonetary
c. As subject to compromise and not subject to compromise
d. As equity related and debt related
On a balance sheet prepared for a company during its reorganiza4on, at what balance are
liabili4es reported?

a. At the expected amount of the allowed claims

b. At the present value of the expected future cash 6ows
c. At the expected amount of the seIlement
d. At the amount of the an4cipated 5nal payment
A corpora4on that is unable to pay its debts as they become due is:

a. Bankrupt
b. Overdrawn
c. Insolvent
d. Liquida4ng
To assist the trustee, a debtor must

a. Collect and reduce to money any non-exempt property

b. File progress reports with the courts
c. File a statement of a;airs, consis4ng of answers to a series of ques4ons regarding
debtor’s 5nancial condi4on
d. Pay dividends to creditors with regards to priori4es
Which of the following statements is true?

a. Certain debts are not dischargeable

b. The goal of liquida4on is to give the company a new start
c. All secured claims are paid in full
d. The expenses to administer the estate are paid last because they are unsecured
Which of the following does not describe the accoun4ng statement of a;airs?

a. The emphasis is on asset net realizable value, not historical cost

b. The statement of a;airs is concerned only with the assets of the debtor organiza4on, not
the claims
c. The statement can also be used in a reorganiza4on
 d. The statement of a;airs is based on es4mated values; actual realized values may be
di;erent
The document used to es4mate amounts available to each class of claims is called a(n)

a. Statement of Assets and Liabili4es

b. Legal Statement of A;airs
c. Accoun4ng Statement of A;airs
d. Statement of Realiza4on and Liquida4on
The document used by a trustee to report periodically on the status of 5duciary ac4vi4es is
called a(n)

a. Statement of Assets and Liabili4es

b. Legal Statement of A;airs
c. Accoun4ng Statement of A;airs
d. Statement of Realiza4on and Liquida4on
A3er elimina4ng the de5cit in a reorganiza4on plan, a balance may remain in Reorganiza4on
Capital. On the balance sheet, where would this account appear?

a. Part of the Paid-in Capital

b. Part of the dated balance in Retained Earnings
c. An Intangible Asset if the balance is a debit
d. A deferred credit amor4zed over a period not to exceed 40 years
The ra4o called “dividend to general unsecured creditors” is calculated by which of the
following formulas?

a. Es4mated amount available for unsecured creditors with/without priority divided by

Total claims of all unsecured creditors with/without priority
b. Es4mated realizable value of all debtor assets divided by Book value of debtor assets
c. Es4mated gain/loss on liquida4on divided by Total es4mated net realizable value of
debtor assets
d. Net es4mated proceeds available to unsecured creditors divided by Total claims of
unsecured creditors
In the accoun4ng statement of a;airs, the gains of losses upon liquida4on would equal

a. Net book value of assets minus book values of liabili4es

b. The book value of assets minus their realizable value
c. Total es4mated realizable value of assets minus the amount assigned to secured
creditors
 d. Total es4mated realizable value of assets minus the amount remaining or unsecured
creditors
A corpora4on’s accoun4ng statement of a;airs show a dividend of 40%. The dividend means
that

a. All creditors and stockholders will receive approximately 40% of the book value of their
respec4ve interests
b. All creditors will receive an amount approximately equal to 40% of the book value of
their claims, but stockholders will receive nothing
c. Class 106 unsecured claims will receive 40% of the book value of their respec4ve claims
d. Class 7 unsecured claims will receive 40% of the book value of their respec4ve claims
A corpora4on’s accoun4ng statement of a;airs shows a dividend of 115%. The dividend means
that

a. Secured creditors will receive an amount in excess of the book value of their claims
b. Unsecured creditors will receive an amount in excess of the book value of their claims
c. Stockholders may expect some return on their interests
d. An error was made in the prepara4on of the statement
The Statement of Realiza4on and Liquida4on di;ers from the Statement of A;airs because

a. The Statement of Realiza4on and A;airs reports es4mated realizable values rather than
actual liquida4on results
b. The Statement of Realiza4on and A;airs is a summary of secured debt ac4vity only
c. The Statement of Realiza4on and A;airs is prepared only at 5nal comple4on of the
liquida4on process
d. The Statement of Realiza4on and A;airs reports actual liquida4on results rather than
es4mated realizable values
When a business becomes insolvent, it generally has three possible courses of ac4on. Which of
the following is not one of the three possible courses of ac4on?

a. The debtor and its creditors may enter into a contractual agreement, outside of formal
bankruptcy proceedings
b. The debtor con4nues opera4ng the business in the normal course of the day-to-day
opera4ons
c. The debtor or its creditors may 5le a bankruptcy pe44on, a3er which the debtor is
liquidated
d. The debtor or its creditors may 5le a pe44on for reorganiza4on
A composi4on agreement is an agreement between the debtor and its creditors whereby the
credits agree to:

a. Accept less than the full amount of their claims

b. Delay seIlement of the claim un4l a later date
c. Force the debtor into a liquida4on
d. Accrue interest at a higher rate

A debtor may 5le which type of pe44on when seeking judicial protec4on under the Bankruptcy
Law?

I. Voluntary
II. Involuntary
a. I only
b. II only
c. Either I or II
d. Neither I or II
The du4es of the trustee include:

a. Appoin4ng creditors’ commiIees in liquida4on cases

b. Approving all payments for debts incurred before the bankruptcy 5ling
c. Examining claims and disallowing any that are improper
d. Calling a mee4ng of the debtor’s creditors
True-----When two en44es compe4ng in the same industry combine, it is called a horizontal business

combina4on.

False------ Horizontal business combina4ons are likely to occur when management is aIemp4ng to
dominate a geographic segment of the market.

True------ One way that a horizontal business combina4on can increase sales for an en4ty is to expand
into new product markets.

True------ A ver4cal business combina4on generally involves companies aIemp4ng to improve the
e?ciency of opera4ons by purchasing suppliers of inputs or purchasers of outputs.

False----- When a retail clothing store purchases a compe4tor in another city, a ver4cal combina4on has

occurred.

True----- A ver4cal combina4on is one where the en44es have a poten4al buyer-seller rela4onship.

False------- A business combina4on in which a supplier of raw materials is acquired is a conglomerate

combina4on.

True------- A conglomerate combina4on is o3en undertaken to help increase income stability due to
diversifying the asset base of an en4ty.

True---- Conglomerate combina4ons are easy for the government to challenge in court.

True------- If nego4a4on between management groups leads to a mutually agreeable business

combina4on, the process is called a friendly takeover.

True------ An o;er by an acquirer to buy the stock of another company is commonly called a tender

o;er.

True----- A tender o;er that is opposed by the acquiree management is called a hos4le bid.

False----- Greenmail exists when a company is encouraged to buy a poten4al acquiree.

False------ A poison pill is the term used to describe the issuance of a special kind of conver4ble
preferred stock to deter the acquisi4on of the company.

False------ The sale of the crown jewels defensive maneuver involves the sale of more assets than does
the scorched earth defense.

True------ The fatman defensive maneuver involved the acquisi4on of assets by the poten4al acquiree.

False-------- Golden parachutes give a bonus to all employees if the company is acquired.

True------ The packman defensive maneuver is where a poten4al acquiree aIempts to purchase the

acquirer.

True------ A business combina4on occurs when one en4ty gains control over the net assets of another
en4ty.

False------ The only way to aIain control over the net assets of another en4ty is to purchase the net
assets.
False------- In an acquisi4on where the acquirer pays cash for the acquiree assets, the book value of the
acquirer increases.

True--------- In an acquisi4on of assets for assets, the ownership structure of the acquiree does not
change.

False------- In an acquisi4on of assets for assets, the ownership structure of the acquirer changes.

True----- There is an increase in the total capitaliza4on of an acquirer when the acquirer issues stock for
acquiree assets.

True------- In an exchange of stock (acquirer) for assets (acquiree), the ownership structure of the
acquiree does not change.

False------ In an exchange of stock (acquirer) for assets (acquiree), the acquiree stockholders become
acquirer stockholders.

True-------- Control over the acquiree assets is directly achieved in an asset for asset exchange but
indirectly achieved in an asset (acquirer) for stock (acquiree) exchange.

False------- A business combina4on that occurs where only one of the original en44es in existence a3er
the combina4on is called a statutory consolida4on.

True------- The acquiree en4ty is liquidated in a statutory merger.

True--------- For a business combina4on to qualify as a statutory consolida4on, a new corpora4on must
be formed.

False--------- In a statutory consolida4on form of business combina4on, the Retained Earnings account of
the newly formed corpora4on has a balance of zero immediately a3er the combina4on.

True--------- A3er comple4ng a business combina4on in the form of a statutory merger or statutory
consolida4on, there is only one legal en4ty in existence.
True--------- In a business combina4on accomplished as a stock acquisi4on normally two companies exist
a3er the combina4on.

False------- A business combina4on accomplished as a stock acquisi4on must be accomplished with a

stock for stock exchange.

True------- A stock acquisi4on is the only form of business combina4on that might require the
prepara4on of consolidated 5nancial statements.

True------- The substance of statutory mergers, statutory consolida4ons, and stock acquisi4ons is the
same if income tax considera4ons are ignored.

False--------- There are no uncertain4es when two companies agree on a business combina4on.

True--------- When the acquisi4on price of an acquiree is con4ngent on acquiree future earnings, the
acquisi4on price may change?
False--------- When the acquisi4on price of an acquiree is con4ngent on the market value of the acquirer
stock, the acquisi4on price may change?

False------- For business combina4ons to qualify as reorganiza4ons (for tax purposes), the acquiree
stockholders must receive vo4ng common stock of the acquirer.

True------- There are di;erent required levels of stock ownership in the acquiree for the three di;erent
types of reorganiza4ons for tax purposes.

False------ One important bene5t in a business combina4on is any net opera4ng loss carryforward that
might exist and be available to the acquirer.

Which of the following types of business combina4ons typically occurs when management is aIemp4ng
to monopolize a par4cular industry?

a. Horizontal combina4on

b. Ver4cal combina4on

c. Conglomerate combina4on

d. Market domina4on can be the goal of any type of combina4on

Horizontal business combina4ons occur when one en4ty purchases which of the following? a.

A supplier

b. A customer

c. A compe4tor

d. None of the above

Horizontal business combina4ons help sales increase by all but which of the following?

a. Entering new product markets

b. Taking control of a distribu4on system

c. Increasing produc4on capacity

d. Expanding into new geographic regions

Which of the following types of business combina4ons typically occurs when management is aIemp4ng
to improve the e?ciency of opera4ons?

a. Horizontal combina4on

b. Ver4cal combina4on

c. Conglomerate combina4on

d. Improved e?ciency can be the goal of any type of combina4on

A ver4cal combina4on occurs when one en4ty acquires another en4ty which has the following
characteris4c(s)?

a. The acquiree purchases the acquirer’s outputs

b. The acquiree is a compe4tor of the acquirer

c. The acquiree supplies raw materials to the acquirer

d. Either a. or c.

Which of the following is a ver4cal combina4on?

a. A combina4on where the two en44es are unrelated

b. A combina4on where the two en44es are compe4tors in the same industry

c. A combina4on where the two en44es have a poten4al buyer/seller rela4onship

d. None of the above describes a ver4cal combina4on

Which of the following types of business combina4ons typically occurs when management is aIemp4ng
to diversify its investment?

a. Horizontal combina4on

b. Ver4cal combina4on

c. Conglomerate combina4on

d. Diversi5ca4on can be the goal of any type of combina4on

Management acquires a business in a tangen4ally related industry to the current business. What form of
business combina4on is accomplished?

a. Ver4cal combina4on

b. Conglomerate combina4on
c. Mega combina4on

d. Horizontal combina4on

One reason for conglomerate combina4ons is that management has become more aware that it helps
accomplish which of the following?

a. It helps increase income stability provided by diversifying the asset base of an en4ty

b. It helps increase market share in the industry

c. It helps assure a constant supply of raw materials

d. A conglomerate combina4on helps accomplish all three

Business combina4ons that result in one dominant company in an industry are said to have formed
which of the following?

a. Pure compe44on

b. Monopoly

c. Oligopoly

d. Free market

The business enterprises that enter into a business combina4on are termed the:

a. Merging Companies

b. Joining Companies

c. Cons4tuent Companies

d. Combiner Companies

When an o;er is made to acquire a company and the acquiree management supports the o;er, the o;er
is called which of the following?

a. Friendly takeover

b. Tender o;er

c. Hos4le takeover

d. Defensive measure

The defensive maneuver where a company buys stock from a poten4al acquirer at a premium over the
market price is called which of the following?

a. White knight

b. Shark repellent
c. Greenmail

d. Sale of the crown jewels

The defensive maneuver where a company seeks to be acquired by a company perceived to be a beIer
match than the company making an o;er to buy the poten4al acquiree is called which of the following?
a. Poison pill

b. White knight

c. Golden parachutes

d. Fatman defense

Company A makes a hos4le take-over bid for control of Company B. In response, Company B makes a
counter-o;er to purchase shares from Company A’s shareholders. Which of the following best describes
Company B’s response?

a. Pac-man Defense

b. Selling the crown jewels

c. Poison Pill

d. A Hos4le Defense

Company A has made an o;er to purchase all of the outstanding shares of Company B for P10 per share
(the current market value of the shares). In response to Company’s A o;er, the shareholders of Company
B were given rights to purchase addi4onal shares at P8 per share. Which of the following tac4cs was
employed by Company B to prevent Company A from acquiring control of Company B?

a. Pac-man Defense

b. Selling the crown jewels

c. Poison Pill

d. A Reverse-takeover

What is the term used for the defensive maneuver where management of a poten4al acquiree sells
desirable assets to reduce the company’s value?

a. Sale of the crown jewels

b. Scorched earth defense

c. Fatman defense

d. Greenmail
Shark repellent is a term for administra4ve measures that may make a hos4le takeover more di?cult.
Which of the following is not a form of shark repellent?

a. Staggering board of director terms

b. Residency requirement for board members

c. Issuance of conver4ble preferred stock that converts into common stock of the acquirer if a
takeover is accomplished

d. A supermajority vote is required to approve an acquisi4on

Defensive maneuvers can be internal to the poten4al acquiree (management or stockholders) or may
involve ac4vi4es external to the acquiree. Which of the following is not an internal defensive
maneuver?

a. Residency requirement for board members

b. Golden parachutes

c. Packman defense

d. A supermajority vote is required to approve an acquisi4on

Able Ltd. o;ers to buy shares from the exis4ng shareholders of Wei Co. at a premium price. The current
management and board of directors of Wei have let the Wei shareholders know that they do not
approve of this. This is an example of a(n) ______.

a. Open market purchase

b. Hos4le takeover

c. Poison pill strategy

d. Reverse takeover

Control over an acquiree can be aIained through which of the following?

a. Acquisi4on of the acquiree assets

b. Acquisi4on of the acquiree stock

c. Either acquisi4on of the acquiree assets or stock

d. Neither acquisi4on of the acquiree assets or stock

In an acquisi4on of assets, the acquirer must give up which of the following?

a. Cash

b. Other assets
c. Liabili4es

d. Any of the above can be given

In an acquisi4on where there is an exchange of assets for assets, how does the value of the acquiree net
assets change?

a. The net assets increase

b. The net assets decrease

c. There is no change in net assets

d. The net assets may increase, decrease or remain the same

In an acquisi4on where there is an exchange of assets for assets, how does the ownership structure of
the acquiree change?

a. There is no change in the acquiree ownership structure

b. The acquirer stockholders become the acquiree stockholders

c. The acquirer and acquiree stockholders share ownership of the acquiree

d. It is not possible to determine if there is a change in the acquiree ownership structure

In an acquisi4on where there is an exchange of assets for assets, how does the ownership structure of
the acquirer change?

a. There is no change in the acquirer ownership structure

b. The acquiree stockholders become the acquirer stockholders

c. The acquirer and acquiree stockholders share ownership of the acquirer

d. It is not possible to determine if there is a change in the acquirer ownership structure

In an acquisi4on where there is an exchange of stock (acquirer) for assets (acquiree), how does the value
of the acquiree net assets change?

a. The net assets increase

b. The net assets decrease

c. There is no change in net assets

d. The net assets may increase, decrease or remain the same

In an acquisi4on where there is an exchange of stock (acquirer) for assets (acquiree), how does the
ownership structure of the acquiree change?

a. There is no change in the acquiree ownership structure

b. The acquirer stockholders become the acquiree stockholders

c. The acquirer and acquiree stockholders share ownership of the acquiree

d. It is not possible to determine if there is a change in the acquiree ownership structure

In an acquisi4on where there is an exchange of stock (acquirer) for assets (acquiree), how does the
ownership structure of the acquirer change?

a. There is no change in the acquirer ownership structure

b. The acquiree (company) becomes a stockholder of the acquirer

c. The acquiree stockholders as individuals become owners of the acquirer

d. It is not possible to determine if there is a change in the acquirer ownership structure

Control over acquiree assets is aIained in a business combina4on. Indirect control is aIained in which
type of exchange?

a. Assets for assets

b. Stock (acquirer) for assets (acquiree)

c. Stock for stock

d. Either b or c

Which of the following forms of business combina4on is not subject to state laws speci5c to business
combina4ons?

a. Asset for asset acquisi4on

b. Statutory merger

c. Statutory consolida4on

d. All three are subject to state laws

Which of the following is not a true statement with regard to a statutory merger?

a. One en4ty con4nues to exist

b. One en4ty ceases to exist

c. The name of the new en4ty is not the same as either of the en44es

d. All of the above are true statements with regard to a statutory merger

Which of the following is not true with regard to the statutory consolida4on form of business
combina4on?

a. A new corpora4on must be formed

b. Control of the net assets of the combining en44es must be acquired by the new en4ty

c. The net assets of the combining en44es must be acquired with assets of the new corpora4on
d. The combining en44es both cease to exist a3er the combina4on

Following the comple4on of a business combina4on in the form of a statutory consolida4on, what is the
balance in the new corpora4on’s Retained Earnings account?

a. The acquirer Retained Earnings account balance

b. The acquiree Retained Earnings account balance

c. Zero

d. The sum of the acquirer and acquiree Retained Earnings account balances

Which of the following is not true with regard to a business combina4on accomplished in the form of a
stock acquisi4on?

a. Two companies remain in existence a3er the combina4on

b. A parent-subsidiary rela4onship is said to exist

c. Consolidated 5nancial statements are normally required

d. All of the above statements are true

Which of the following con4ngencies may change the cost of an acquisi4on?

a. Future acquiree earnings

b. Future value of acquiree stock

c. Future value of acquirer stock

d. Future value of acquirer debt

To qualify as a reorganiza4on (for tax purposes), a business combina4on must meet which of the
following criteria?

a. Acquiree stockholders con4nue an indirect ownership interest in the acquiree

b. The acquirer must con4nue the acquiree business or employ a signi5cant por4on of the
acquiree net assets in an ongoing business

c. The combina4on must be for a valid business purpose

d. All of the above criteria are required for a combina4on to qualify as a reorganiza4on

Which of the following is not a business combina4on?

a. Statutory amalgama4on

b. Joint venture

c. A company’s purchase of 100% of another company’s net assets

d. A company’s purchase of 80% of another company’s vo4ng shares

Under PFRS 3, Business Combina4ons, which method must be used to account for business
combina4ons?

a. Purchase method

b. Pooling-of-interests method

c. Acquisi4on method

d. New en4ty method

A3er an exchange of shares in a business combina4on, each group of shareholders held 50% of the
vo4ng rights. Which of the following factors should be considered in determining the acquirer? a.
Head o?ce loca4on

b. Composi4on of the board of directors

c. If there are material transac4ons between the combining companies

d. Which company ini4ated the combina4on

Perez Co. plans to acquire Roo Co. Roo has substan4al depreciable assets that have fair values in excess
of their book values. Considering only the income tax impact, which of the following statements is true?

a. Perez would prefer to purchase Roo’s assets and Roo would prefer to sell its shares to Perez.

b. Perez would prefer to purchase Roo’s shares and Roo would prefer to sell its assets to Perez.

c. Both Perez and Roo would prefer Perez to purchase Roo’s shares.

d. Both Perez and Roo would prefer Perez to purchase Roo’s assets.

Perez Co. acquired Roo Co. in a business combina4on. Roo issued new shares to Perez’s shareholders in
exchange for their outstanding shares. What type of shares exchange is this?

a. Direct exchange

b. Indirect exchange

c. Hos4le takeover

d. Reverse takeover

Perez Co. acquired Roo Co. in a business combina4on. Perez issued new shares to Roo’s shareholders in
exchange for their outstanding shares. What type of share exchange is this?

a. Direct exchange

b. Indirect exchange

c. Hos4le takeover
d. Reverse takeover

Ha Ltd. And Hee Ltd. Exchanged shares in a business combina4on. A3er the share exchange, each
company held the same number of vo4ng shares. Which of the following statements is true?

a. The company with the highest net assets is considered the acquirer

b. The companies must ask the courts to decide which company is the acquirer

c. A number of factors must be considered to determine which company is the acquirer

d. There is no acquirer as this is not a proper business combina4on

How should the transac4on costs of issuing shares in an acquisi4on be recognized?

a. Expensed

b. Capitalized as part of the cost of the shares

c. Deducted in total from shareholders’ equity

d. Deducted from shareholders’ equity, net of related income tax bene5ts

How should the cost of issuing debt in an acquisi4on be recognized?

a. Expensed

b. Amor4zed over the term of the debt

c. Deducted from the value of the debt

d. Deducted from shareholders’ equity

How should accoun4ng fees for an acquisi4on be treated?

a. Expensed in the period of acquisi4on

b. Capitalized as part of the acquisi4on cost

c. Deferred and amor4zed

d. Deferred un4l the company is disposed of or wound-up

Which of the following is not a reason why a private enterprise may be acquired as a bargain purchase?

a. It is a family business and the next genera4on does not want to con4nue the business

b. The owner has health problems and does not have a successor

c. The business only has equity 5nancing and has no debt 5nancing

d. The owner is no longer interested in the business

Which of the following statements about a bargain purchase is true?

a. It is reported on the 5nancial statements as an “excess of fair value over cost of assets acquired.”
b. It is reported as deferred credit on the 5nancial statements called nega4ve goodwill.

c. Assets and liabili4es of the acquired company are reported at net book value.

d. Assets and liabili4es of the acquired company are reported at their fair value.

What is the most common valua4on method used for intangible assets?

a. Market-based

b. Income-based

c. Cost-based

d. Amor4zed cost

How should nega4ve goodwill be shown on the consolidated 5nancial statements of the acquirer?

a. As a gain on the statement of comprehensive income

b. As a loss on the statement on comprehensive income

c. As a liability on the statement of 5nancial posi4on

d. As a separate amount under shareholders’ equity on the statement of 5nancial posi4on

Raj Co. acquired all of Event Ltd.’s common shares. At the date of acquisi4on, Event had P80,000 of
goodwill resul4ng from its acquisi4on of Baker Ltd. A few years ago. At Raj’s date of acquisi4on, what is
the proper treatment of Event’s P80,000 of goodwill?

a. Event’s goodwill is an iden45able asset and should be included as part of Raj’s purchases price
discrepancy (PPD)

b. Event’s goodwill is an iden45able asset but should not be included as part of Raj’s PPD

c. Event’s goodwill is not an iden45able asset but should be included as part of Raj’s PPD

d. Event’s goodwill is not an iden45able asset and should not be included as part of Raj’s PPD

Which of the following does NOT cons4tute a Business Combina4on under PFRS 3?

a. A Corp purchases the net assets of B Corp

b. A Corp enters into a Joint Venture with B Corp

c. A Corp acquires 51% of B Corp’s vo4ng shares for P1,000,000 in Cash

d. A Corp acquires 51% of B Corp’s vo4ng shares for future considera4ons.

What is a statutory merger?

a. A merger approved by the Securi4es and Exchange Commission. b

. An acquisi4on involving the purchase of both stock and assets.

c. A takeover completed within one year of the ini4al tender o;er.

d. A business combina4on in which only one company con4nues to exist as a legal en4ty.

A statutory merger is a(n)

a. Business combina4on in which only one of the two companies con4nues to exist as a legal
corpora4on.

b. Business combina4on in which both companies con4nue to exist.

c. Acquisi4on of a compe4tor.

d .Acquisi4on of a supplier or a customer.

e. Legal proposal to acquire outstanding shares of the target's stock. Liabili4es

assumed in an acquisi4on will be valued at the

a. Es4mated fair value

b. Historical book value

c. Current replacement cost

d. Present value using market interest rates

In reference to the IASB disclosure requirements, which of the following is correct?

a. Informa4on related to several minor acquisi4ons may not be combined.

b. Firms are not required to disclose the business purpose for a combina4on

c. Notes to 5nancial statements of an acquiring corpora4on must disclose that the business
combina4on was accounted for by the acquisi4on method

d. All of the above are correct

Goodwill arising from business combina4on is:

a. Charged to Retained Earnings a3er the acquisi4on is completed.

b. Amor4zed over 40 years or its useful life, whichever is longer

c. Amor4zed over 40 years or its useful life, whichever is shorter

d. Never amor4zed

In reference to interna4onal accoun4ng for goodwill, which of the following statements is correct?

a. US companies have complained that past accoun4ng rules for amor4zing goodwill placed the at
a disadvantage in compe4ng against foreign.

b. Some foreign countries permiIed the immediate write-o; of goodwill to stockholders’ equity

c. The IASB and the FASB are working to eliminate di;erences in accoun4ng for business
combina4ons

d. All of the above are correct

In recording acquisi4on costs, which of the following procedures is correct?

a. Registra4on costs are expensed, and not charged against the fair value of the securi4es issued

b. Indirect costs are charged against the fair value of the securi4es issued

c. Consul4ng fees are expensed

d. None of the above procedures is correct Which one of the following statements is incorrect?

a. In an asset acquisi4on, the books of the acquired company are closed out and its assets and
liabili4es are transferred to the books of the acquirer

b. In many cases, stock acquisi4ons entail lower total cost than asset acquisi4ons

c. Regula4ons pertaining to one of the 5rms do not automa4cally extend to the en4re merged
en4ty in a stock acquisi4on

d. A stock acquisi4on occurs when one corpora4on pays cash, issues stock, or issues debt for all or
part of the vo4ng stock of another company; and the acquired company dissolves and ceases to exist
as
a separate legal
en4ty
Which of the following can be used as a considera4on in a stock acquisi4on

a. Cash

b. Debt

c. Stock

d. Any of the above may be used

Slocum Corpora4on and Merton Company, both publicly owned companies, are planning a merger, with
Slocum being the survivor. Which of the following is a requirement of the merger?

a. The Securi4es and Exchange Commission must approve the merger

b. The common stockholders of Merton must receive common stock of Slocum

c. The creditors of Merton must approve the merger

d. The boards of directors of both Slocum and Merton must approve the merger PFRS 3 requires

that all business combina4ons be accounted for using

a. The pooling of interests method

b. The acquisi4on method

c. Either the acquisi4on or the pooling of interests method

d. Neither the acquisi4on nor the pooling of interests method

Under the acquisi4on method, if the fair values of iden45able net assets exceed the value implied by the
purchase price of the acquired company, the excess should be

a. Accounted for as goodwill

b. Allocated to reduce current and long-lived assets

c. Allocated to reduce current assets and classify any remainder as an extraordinary gain

d. Allocated to reduce any previously recorded goodwill on the seller’s books and classify any
remainder as an ordinary gain

PFRS 3 requires that the acquirer disclose each of the following for each material business combina4on
except the

a. Name and a descrip4on of the acquiree acquired

b. Percentage of vo4ng equity instruments acquired

c. Fair value of the considera4on transferred

d. Each of the above is a required disclosure

When the acquisi4on price of an acquired 5rm is less than the fair value of the iden45able net assets, all
of the following are recorded at fair value except

a. Assumed liabili4es

b. Current assets

c. Long-lived assets

d. Each of the above is recorded at fair value

Under PFRS 3:

a. Both direct and indirect costs are to be capitalized

b. Both direct and indirect costs are to be expensed

c. Direct costs are to be capitalized and indirect costs are to be expensed

d. Indirect costs are to be capitalized and direct costs are expensed

A business combina4on is accounted for properly as an acquisi4on. Which of the following expenses
related to e;ec4ng the business combina4on should enter into the determina4on of net income of the
combined corpora4on for the period in which the expenses are incurred? Security issue costs
Overhead allocated to the merger

a. Yes Yes

b. Yes No

c. No Yes

d. No No

In a business combina4on, which of the following costs are assigned to the valua4on of the security?

Professional or consul4ng fees Security issue costs

a. Yes Yes

b. Yes No

c. No Yes

d. No No

Parental Company and Sub Company were combined in an acquisi4on transac4on. Parental was able to
acquire Sub at a bargain price. The sum of the fair values of iden45able assets acquired less the fair
value of liabili4es assumed exceeded the cost to Parental. A3er elimina4ng previously recorded
goodwill, there was s4ll some “nega4ve goodwill.” Proper accoun4ng treatment by Parental is to report
the amount as

a. Paid-in capital

b. A deferred credit, which is amor4zed

c. An ordinary gain

d. An extraordinary gain

With an acquisi4on, direct and indirect expenses are

a. Expensed in the period incurred

b. Capitalized and amor4zed over a discre4onary period

c. Considered a part of the total cost of the acquired company

d. Charged to retained earnings when incurred

In a business combina4on accounted for as an acquisi4on, how should the excess of fair value of net
assets acquired over the considera4on paid be treated?

a. Amor4zed as a credit to income over a period not to exceed forty years

b. Amor4zed as a charge to expense over a period not to exceed forty years

c. Amor4zed directly to retained earnings over a period not to exceed forty years

d. Recorded as ordinary gain

If the value implied by the purchase price of an acquired company exceeds the fair values of iden45able
net assets, the excess should be

a. Allocated to reduce any previously recorded goodwill and classify any remainder as an ordinary
gain

b. Allocated to reduce current and long-lived assets

c. Allocated to reduce long-lived asset

d. Allocated goodwill

P Co. issued 5,000 shares of its common stock, valued at P200,000, to the former shareholders of S
Company two years a3er S Company was acquired in an all-stock transac4on. The addi4onal shares were
issued because P Company agreed to issue addi4onal shares of common stock if the average post
combina4on earnings over the next two years exceeded P500,000. P Company will treat the issuance of
the addi4onal shares as a (decrease in)

a. Retained earnings

b. Goodwill

c. Paid-in Capital

d. Non-current liabili4es of S Company assumed by P Company

The fair value of assets and liabili4es of the acquired en4ty is to be re6ected in the 5nancial statements
of the combined en4ty. When the acquisi4on takes place over a period of 4me rather than all at once, at
what 4me is the fair value of the assets and liabili4es of the acquired en4ty determined?

a. The date the interest in the acquiree was acquired

b. The date the acquirer obtains control of the acquiree

c. The date of acquisi4on of the largest por4on of the interest in the acquiree

d. The date of the 5nancial statements

Under PFRS 3, what value of the assets and liabili4es is re6ected in the 5nancial statements on the
acquisi4on date of a business combina4on?

a. Carrying value

b. Fair value

c. Book value

d. Average value

What is the appropriate accoun4ng treatment for the value assigned to in-process research and
development acquired in a business combina4on?

a. Expense upon acquisi4on

b. Capitalize as an asset

c. Expense if there is no alterna4ve use for the assets used in the research and development and
technological feasibility has yet to be reached

d. Expense un4l future economic bene5ts become certain and then capitalized as an asset

An acquired en4ty has a long-term opera4ng lease for an o?ce building used for central management.
The terms of the lease are very favorable rela4ve to current market rates. However, the lease prohibits
subleasing or any other transfer of rights. In its 5nancial statements, the acquiring 5rm should report the
value assigned to the lease contract as

a. An intangible asset under the contractual- legal criterion

b. A part of goodwill

c. An intangible asset under the separability criterion

d. A building

Under PFRS 3, when is a gain recognized in consolida4ng 5nancial informa4on?

a. When any bargain purchase is created

b. In a combina4on created in the middle of a 5scal year

c. In an acquisi4on when the value of all assets and liabili4es cannot be determined

d. When the amount of a bargain purchase exceeds the value of the applicable expense (other
than certain excep4ons) held by the acquired company
Company B acquired the net assets of Company S in exchange for cash. The acquisi4on price exceeds the
fair value of the net assets acquired. How should Company B determine the amounts to be reported for
the plant and equipment, and for long-term debt of the acquired Company S?

Plant and Equipment Long-term debt

a. Fair value S’s carrying amount

b. Fair value Fair value

c. S’s carrying amount Fair value

d. S’s carrying amount S’s carrying amount

Goodwill represents the excess cost of an acquisi4on over the

a. Sum of the fair values assigned to intangible assets less liabili4es assumed
b. Sum of the fair values assigned to tangible ad iden45able intangible assets acquired less
liabili4es
assumed
c. Sum of the fair values assigned to intangibles acquired less liabili4es assumed

d. Book value of an acquired company

When an acquisi4on of another company occurs, IASB recommends disclosing all of the following
EXCEPT:

a. Goodwill assigned to each reportable segment

b. Informa4on concerning con4ngent considera4on including a descrip4on of the arrangements

and the range of outcomes

c. Results of opera4ons for the current period if both companies had remained separate

d. A qualita4ve descrip4on of factors that make up the goodwill recognized

Separately iden45ed intangible assets are accounted for by amor4zing:

a. Exclusively by using impairment tes4ng

b. Based upon a paIern that re6ects the bene5ts conveyed by the asset

c. Over the useful economic life less residual value using only the straight-line method

d. Over a period not to exceed a maximum of 40 years

Acquisi4on costs such as the fees of accountants and lawyers that were necessary to nego4ate and
consummate the purchase are

a. Recorded as a deferred asset and amor4zed over a period not to exceed 15 years

b. Expensed if immaterial but capitalized and amor4zed if over 2% of the acquisi4on price

c. Expensed in the period of the purchase

d. Included as part of the price paid for the company purchased

Which of the following income factors should not be factors into an es4ma4on of goodwill?

a. Sales for the period

b. Income tax expense

c. Extraordinary items

d. Cost of goods sold

EXPENSES:
CYAN: DEDUCT FROM RETAINED PINK: DEDUCT FROM APIC (SHARE
EARNINGS; PREMIUM)
Legal fees for the contract of business combina4on

Broker’s fee

Finder’s fee

Accountant’s fee for pre-acquisi4on audit

Other direct cost of acquisi4on

Internal secretarial, general and allocated expenses

Consul4ng, accoun4ng, legal fees

Documentary stamp tax on the new shares

SEC registra4on fee of issued shares

Prin4ng costs of share cer45cates

Stock registra4on fees

Stock exchange lis4ng fee

Indirect costs of combining, including allocated overhead and execu4ve salaries

INTANGIBLES:

HIGHLIGHTED – SHOULD RECOGNIZE AS ASSET

Customer Contracts

In-process Research and Development

Advanced produc4on technology

Contractual obliga4ons – long-term warran4es (LIABILITY)

Non-compe44on agreements

Customer contract

BoIlers’ franchise rights

Signed customer’s contracts for consul4ng projects

Internet domain names

Customer order backlogs

Employment contracts

Registered company name

Well-publicized internet domain name Trade

dress

Proprietary databases of industry data

Trade secrets

Expected expansion into new product lines

Business from prospec4ve customers

Skilled Work force

Poten4al contracts with prospec4ve customers

Future cost savings

Customer rela4onships – not contractual

Recent favorable press reports on a consul4ng 5rm

Long-4me customer rela4onships

CHAPTER 1

INTRODUCTION TO BUSINESS COMBINATIONS

SUMMARY OF ITEMS BY TOPIC

Conceptual Computational
TrueFalse Multiple Multiple Short
Choice Choice Problems Answer
Economic Motivation for 1-11 64-73 133-138
Business Combinations
History of Business 12-20 74-82 139-142
Combinations
Legal Restrictions on 21-27 83-87 143-149
Business Combinations
Takeovers 28-36 88-94
Control 37-38 95-96 150-151
Exchanges 39-45 97-104 152-153
Forms of Business 46-53 105-109 154
Combinations
Substance versus Form 54 116-123 128-130
Contingent 55-57 110 124-127 131-132 155
Consideration
Taxes and Business 58-63 111-115 156-157
Combinations

True-False Statements

1. Internal expansion often takes longer than external expansion.

2. Internal expansion is less risky than external expansion.

3. Internal expansion is often slow because the entity must build new production facilities to
support new products or expanding sales.
4. The increase in the size of an entity resulting from a business combination would result in
a lower cost of capital.

5. External combinations may result in economies of scale.

6. External expansion does not increase the total supply of products in the market place.

7. Internal expansion does not increase the total supply of products in the market place.

8. In a business combination, the investee takes control of the net assets of the investor.

9. All business combinations result in one entity taking control of the net assets of another
entity.

10. An acquisition of net assets result in one entity taking control of the net assets of another
entity while the acquisition of stock does not result in taking control of the net assets of
another entity.

11. The capital budgeting techniques used to determine whether to acquire another entity are
similar to the techniques used to evaluate purchases of equipment.

12. When two entities competing in the same industry combine, it is called a horizontal
business combination.

13. Horizontal business combinations are likely to occur when management is attempting to
dominate a geographic segment of the market.

14. One way that a horizontal business combination can increase sales for an entity is to
expand into new product markets.

15. A vertical business combination generally involves companies attempting to improve the
efficiency of operations by purchasing suppliers of inputs or purchasers of outputs.

16. When a retail clothing store purchases a competitor in another city, a vertical combination
has occurred.

17. A vertical combination is one where the entities have a potential buyer-seller relationship.

18. A business combination in which a supplier of raw materials is acquired is a

conglomerate combination.
19. A conglomerate combination is often undertaken to help increase income stability due to
diversifying the asset base of an entity.

20. Conglomerate combinations are easy for the government to challenge in court.

21. The purpose of the Sherman Act of 1890 was to make illegal any action that would
hinder free competition.

22. The Sherman Act requires the government to prove that trade has been restrained before
it can be used to break up a company.
23. The Sherman Act can prevent a business combination from occurring.

24. The Clayton Act can prevent a business combination from occurring.

25. The government does not have to be notified when a business combination is anticipated.

26. The U.S. government opposes all business combinations because they are viewed as a
threat to competition.

27. The Federal Trade Commission assesses the impact of a proposed business combination
on industry concentration.

28. If negotiation between management groups leads to a mutually agreeable business

combination, the process is called a friendly takeover.

29. An offer by an acquirer to buy the stock of another company is commonly called a tender
offer.

30. A tender offer that is opposed by the acquiree management is called a hostile bid.

31. Greenmail exists when a company is encouraged to buy a potential acquiree.

32. A poison pill is the term used to describe the issuance of a special kind of convertible
preferred stock to deter the acquisition of the company.

33. The sale of the crown jewels defensive maneuver involves the sale of more assets than
does the scorched earth defense.

34. The fatman defensive maneuver involved the acquisition of assets by the potential
acquiree.

35. Golden parachutes give a bonus to all employees if the company is acquired.
36. The packman defensive maneuver is where a potential acquiree attempts to purchase the
acquirer.

37. A business combination occurs when one entity gains control over the net assets of
another entity.

38. The only way to attain control over the net assets of another entity is to purchase the net
assets.

39. In an acquisition where the acquirer pays cash for the acquiree assets, the book value of
the acquirer increases.
40. In an acquisition of assets for assets, the ownership structure of the acquiree does not
change.

41. In an acquisition of assets for assets, the ownership structure of the acquirer changes.

42. There is an increase in the total capitalization of an acquirer when the acquirer issues
stock for acquiree assets.

43. In an exchange of stock (acquirer) for assets (acquiree), the ownership structure of the
acquiree does not change.

44. In an exchange of stock (acquirer) for assets (acquiree), the acquiree stockholders
become acquirer stockholders.

45. Control over the acquiree assets is directly achieved in an asset for asset exchange but
indirectly achieved in an asset (acquirer) for stock (acquiree) exchange.

46. A business combination that occurs where only one of the original entities in existence
after the combination is called a statutory consolidation.

47. The acquiree entity is liquidated in a statutory merger.

48. For a business combination to qualify as a statutory consolidation, a new corporation

must be formed.

49. In a statutory consolidation form of business combination, the Retained Earnings account
of the newly formed corporation has a balance of zero immediately after the combination.

50. After completing a business combination in the form of a statutory merger or statutory
consolidation, there is only one legal entity in existence.
51. In a business combination accomplished as a stock acquisition normally two companies
exist after the combination.

52. A business combination accomplished as a stock acquisition must be accomplished with a

stock for stock exchange.

53. A stock acquisition is the only form of business combination that might require the
preparation of consolidated financial statements.

54. The substance of statutory mergers, statutory consolidations, and stock acquisitions is the
same if income tax considerations are ignored.

55. There are no uncertainties when two companies agree on a business combination.
56. When the acquisition price of an acquiree is contingent on acquiree future earnings, the
acquisition price may change?

57. When the acquisition price of an acquiree is contingent on the market value of the
acquirer stock, the acquisition price may change?

58. Business combinations can qualify as reorganizations (for tax purposes) regardless of
whether accomplished via the acquisition of assets or the acquisition of stock.

59. For business combinations to qualify as reorganizations (for tax purposes), the acquiree
stockholders must receive voting common stock of the acquirer.

60. Only stock for stock exchanges can qualify as reorganizations for tax purposes.

61. When a statutory merger or statutory consolidation is used to accomplish a reorganization

(for tax purposes), the acquirer becomes liable for all known and contingent acquiree
liabilities.

62. There are different required levels of stock ownership in the acquiree for the three
different types of reorganizations for tax purposes.

63. One important benefit in a business combination is any net operating loss carryforward
that might exist and be available to the acquirer.

True-False Statement Solutions

1. T
2. F, Developing and marketing new products is often a difficulty and risky process.
3. T
4. F, All else being equal, the combined entity’s cost of capital may be higher or lower
depending on whether the acquired entity is heavily laden with debt or is relatively debt
free. Also, the amount of debt versus equity issued in the combination will affect the
resulting cost of capital.
5. T
6. T
7. F, Internal expansion results in a particular entity offering more products or the same
products to new consumers. Thus, the total supply of products increases.
8. F, The investor takes control of the net assets of the investee in a business combination.
9. T
10. F, Both the acquisition of the net assets and the acquisition of stock result in control of
the net assets of another entity. The stock acquired represents ownership in the net assets.
11. T
12. T
13. F, A horizontal combination occurs when management attempts to dominate an industry.
14. T
15. T
16. F, A vertical combination exists when an entity purchases another entity that could have a
buyer-seller relationship with the acquirer. The combination described here is a
horizontal combination.
17. T
18. F, A conglomerate combination is one where an unrelated or tangentially related business
is acquired. A vertical combination occurs when a supplier is acquired.
19. T
20. F, Conglomerate combinations are more difficult for the government to challenge in court
because they do not result in market domination in any particular market.
21. T
22. T
23. F, The Sherman Act can only break up a company that has restrained free trade, it cannot
stop a business combination from creating a company.
24. T
25. F, The Hart-Scott Rodino amendment requires that the Antitrust Division and the Federal
Trade Commission be notified of anticipated business combinations.
26. F, The vast majority of combinations are not disallowed because they involve relatively
minor segments of competitive markets and, therefore, would not reduce or control
competition in any significant way.
27. T 28. T 29. T
30. T
31. F, Greenmail is the payment of a price above market value to acquire stock back from a
potential acquirer.
32. T
33. F, The sale of the crown jewels results when a target sells assets that would be
particularly valuable to the potential acquirer. The scorched earth defense results when a
target generally sells large amounts of assets without regard to the specific desirability to
the potential acquirer.
34. T
35. F, Golden parachutes are generally given only to top executives of the acquiree.
36. T
37. T
38. F, Control over the net assets of an entity can be accomplished by purchasing the net
assets or by purchasing the acquiree voting common stock that represents ownership of
the assets.
39. F, The amount of cash will always equal the net assets recorded by the acquirer. As a
result, the acquirer book value will not change due to an acquisition.
40. T
41. F, There is no exchange of stock in an asset for asset acquisition so there cannot be a
change in ownership structure of either entity.
42. T 43. T
44. F, The acquiree corporation becomes an acquirer stockholder, not the acquiree
stockholders.
45. T
46. F, A combination that results in one of the original entities in existence after the
combination is a statutory merger.
47. T
48. T
49. F, The combination results in the stockholders of one entity controlling the other entity.
The Retained Earnings of the entity acquiring control is carried forward to the newly
formed corporation.
50. T
51. T
52. F, The stock of the acquiree company must be purchased by the acquirer, but the value
transferred to the acquiree stockholders does not have to be in stock. Payment may be in
another asset or the issuance of debt.
53. T
54. T
55. F, The consideration to be given by the acquirer is sometimes not completely known
because the consideration is based partially on acquiree future earnings or the market
value of acquirer debt or stock.
56. T
57. F, Any change in the number of shares of acquirer stock given returns the purchase price
to the agreed level. The adjustment is to stock and additional paid-in capital. The
investment account is unchanged.
58. T
59. F, The acquiree stockholders must continue to have an indirect ownership interest in the
acquiree net assets. Preferred stock or a nonvoting class of stock qualifies as an indirect
ownership as well as voting common stock.
60. F, At least 50 percent of the consideration paid to the acquiree stockholders must be in
acquirer stock.
61. T
62. T
63. F, A net operating loss carryforward cannot be acquired. They are only available to the
acquirer if the combination qualifies as a nontaxable exchange.

Conceptual Multiple Choice Questions

64. Which of the following is not a form of internal business expansion?

a. Development of a new product
b. Construction of new production facility
c. Purchase of a competitor
d. Expanding the marketing effort into a new geographic area

65. Which can typically be accomplished more quickly?

a. Internal expansion
b. External expansion
c. Internal and external expansion would likely take the same amount of time
d. There is no general pattern regarding how long either would take

66. Which of the following is a reason that internal expansion is often a slow process?
a. A new distribution system must be developed
b. Demand for the product does not have to be developed
c. Existing production facilities are adequate to meet expanded sales
d. All of the above are reasons that internal expansion is a slow process

67. Which of the following is not an advantage of business combinations when compared to
internal expansion?
a. Combinations generally take longer to accomplish than internal expansion
b. The cost of capital may be reduced as a result of a combination due to increased
entity size
c. The entity may obtain a relatively greater market share
d. All of the above are advantages of business combinations

68. Which of the following is a disadvantage of business combinations when compared to

internal expansion?
 a. Combinations may provide an established, experienced management group
immediately
b. There are some tax advantages to combined corporation entities not available to
one corporation
c. There may be a guaranteed source of raw material or product markets when a
combination is effected
d. None of the above is a disadvantage of business combinations

69. Which of the following is not an advantage of business combinations when compared to
internal expansion?
a. Combinations may lead to economies of scale
b. Combinations do not increase the total supply of goods available from the
industry
c. Diversification accomplished through combinations may provide a less volatile
income stream
d. All of the above are advantages of combinations

70. In a business combination, which of the following occurs?

a. The investee takes control of the investor
b. The investee and investor share control of each other
c. The investor takes control of the investee
d. Neither entity controls the other

71. Which of the following analysis techniques are commonly used when making business
combination decisions?
 a.

Cash flow budgeting

b. Internal rate of return
c. Net present value
d. All of the above techniques are commonly used

72. Which of the following is not a directly observable cash flow resulting from a business
combination?
a. Disposal of redundant facilities
b. Synergies resulting from sales of complementary products
c. Reduced fixed costs from eliminating duplicate operations
d. Savings due to increased coordination when one part of the new entity produces
inputs for another part of the new entity

73. Which of the following is a directly observable cash flow resulting from a business
combination?
a. Savings from production and marketing expertise
b. Acquisition of an established market share for products
c. Disposal of redundant facilities
d. A readily available supply of scarce inputs

74. Which of the following types of business combinations typically occurs when
management is attempting to monopolize a particular industry? a. Horizontal
combination
b. Vertical combination
c. Conglomerate combination
d. Market domination can be the goal of any type of combination

75. Horizontal business combinations occur when one entity purchases which of the
following?
a. A supplier
b. A customer
c. A competitor
d. None of the above

76. Horizontal business combinations help sales increase by all but which of the following?
a. Entering new product markets
b. Taking control of a distribution system
c. Increasing production capacity
d. Expanding into new geographic regions
 a.

77. Which of the following types of business combinations typically occurs when
management is attempting to improve the efficiency of operations? a. Horizontal
combination
b. Vertical combination
c. Conglomerate combination
d. Improved efficiency can be the goal of any type of combination

78. A vertical combination occurs when one entity acquires another entity which has the
following characteristic(s)?
a. The acquiree purchases the acquirer’s outputs
b. The acquiree is a competitor of the acquirer
c. The acquiree supplies raw materials to the acquirer
d. Either a. or c.

79. Which of the following is a vertical combination?

a. A combination where the two entities are unrelated
b. A combination where the two entities are competitors in the same industry
c. A combination where the two entities have a potential buyer/seller relationship
d. None of the above describes a vertical combination

80. Which of the following types of business combinations typically occurs when
management is attempting to diversify its investment? a. Horizontal combination
b. Vertical combination
c. Conglomerate combination
d. Diversification can be the goal of any type of combination

81. Management acquires a business in a tangentially related industry to the current

business.
What form of business combination is accomplished? a.
Vertical combination
b. Conglomerate combination
c. Mega combination
d. Horizontal combination

82. One reason for conglomerate combinations is that management has become more aware that it
helps accomplish which of the following?
a. It helps increase income stability provided by diversifying the asset base of an entity
b. It helps increase market share in the industry
c. It helps assure a constant supply of raw materials
d. A conglomerate combination helps accomplish all three
 a.

83. Business combinations that result in one dominant company in an industry are said to
have formed which of the following? a. Pure competition
b. Monopoly
c. Oligopoly
d. Free market

84. Which of the following is not true with regard to the Sherman Act of 1890?
It is the first legislation that restricts the ability to enter into business
combinations
b. Its basic purpose was to make acts that would hinder free competition illegal
c. The act required the government to show that trade had been restrained as a result
of a combination
d. The act could only be applied after a combination has occurred

85. Which of the following can be used to break up combined entities, but not to prevent the
business combination from occurring? a. Clayton Act
b. Sherman Act
c. Hart-Scott Rodino amendment
d. All of the above can only break up entities that have already combined

86. Which of the following allows the government to prevent proposed business
combinations from occurring if the result of the combination would be the creation of a
monopoly or the lessening of competition? a. Clayton Act
b. Sherman Act
c. Hart-Scott Rodino amendment
d. All of the above can only break up entities that have already combined

87. When regulating business combinations the Federal Trade Commission does not assess
which of the following?
a. The impact of the combination on industry concentration
b. The impact of the combination on barriers to entry into the industry
c. The impact of the combination on restriction of trade
d. The Federal Trade Commission assesses each of the above in regulating business
combinations

88. When an offer is made to acquire a company and the acquiree management supports the
offer, the offer is called which of the following? a. Friendly takeover
b. Tender offer
c. Hostile takeover
d. Defensive measure
 a.

89. The defensive maneuver where a company buys stock from a potential acquirer at a
premium over the market price is called which of the following? a. White knight
b. Shark repellent
c. Greenmail
d. Sale of the crown jewels

90. The defensive maneuver where a company seeks to be acquired by a company perceived
to be a better match than the company making an offer to buy the potential acquiree is
called which of the following? a. Poison pill
b. White knight
c. Golden parachutes
d. Fatman defense

91. Which of the following is not a Kamikaze strategy?

a. Sale of the crown jewels
b. Scorched earth defense
c. Fatman defense
d. All of the above are Kamikaze strategies

92. What is the term used for the defensive maneuver where management of a potential
acquiree sells desirable assets to reduce the company’s value? a. Sale of the crown
jewels
b. Scorched earth defense
c. Fatman defense
d. Greenmail

93. Shark repellent is a term for administrative measures that may make a hostile takeover
more difficult. Which of the following is not a form of shark repellent? a. Staggering
board of director terms
b. Residency requirement for board members
c. Issuance of convertible preferred stock that converts into common stock of the
acquirer if a takeover is accomplished
d. A supermajority vote is required to approve an acquisition

94. Defensive maneuvers can be internal to the potential acquiree (management or

stockholders) or may involve activities external to the acquiree. Which of the following
is not an internal defensive maneuver?
a. Residency requirement for board members
b. Golden parachutes
c. Packman defense
d. A supermajority vote is required to approve an acquisition
 a.

95. Control over an acquiree can be attained through which of the following?
a. Acquisition of the acquiree assets
b. Acquisition of the acquiree stock
c. Either acquisition of the acquiree assets or stock
d. Neither acquisition of the acquiree assets or stock

96. Control enables the acquiring entity to do which of the following?

Direct the use of the controlled entity’s assets by establishing capital and
operating budgets and policies
b. Enforce the budgets and policies by selecting, compensating, and terminating
those responsible for implementing decisions
c. Either a or b will illustrate control
d. Both a and b are required to illustrate control

97. In an acquisition of assets, the acquirer must give up which of the following?
a. Cash
b. Other assets
c. Liabilities
d. Any of the above can be given

98. In an acquisition where there is an exchange of assets for assets, how does the value of
the acquiree net assets change? a. The net assets increase
b. The net assets decrease
c. There is no change in net assets
d. The net assets may increase, decrease or remain the same

99. In an acquisition where there is an exchange of assets for assets, how does the ownership
structure of the acquiree change?
a. There is no change in the acquiree ownership structure
b. The acquirer stockholders become the acquiree stockholders
c. The acquirer and acquiree stockholders share ownership of the acquiree
d. It is not possible to determine if there is a change in the acquiree ownership
structure

100. In an acquisition where there is an exchange of assets for assets, how does the ownership
structure of the acquirer change?
a. There is no change in the acquirer ownership structure
b. The acquiree stockholders become the acquirer stockholders
c. The acquirer and acquiree stockholders share ownership of the acquirer
d. It is not possible to determine if there is a change in the acquirer ownership
structure
 a.

101. In an acquisition where there is an exchange of stock (acquirer) for assets (acquiree),
how does the value of the acquiree net assets change? a. The net assets increase
b. The net assets decrease
c. There is no change in net assets
d. The net assets may increase, decrease or remain the same

102. In an acquisition where there is an exchange of stock (acquirer) for assets (acquiree),
how does the ownership structure of the acquiree change?
 a.
There is no change in the acquiree ownership structure
b. The acquirer stockholders become the acquiree stockholders
c. The acquirer and acquiree stockholders share ownership of the acquiree
d. It is not possible to determine if there is a change in the acquiree ownership
structure

103. In an acquisition where there is an exchange of stock (acquirer) for assets (acquiree), how
does the ownership structure of the acquirer change?
a. There is no change in the acquirer ownership structure
b. The acquiree (company) becomes a stockholder of the acquirer
c. The acquiree stockholders as individuals become owners of the acquirer
d. It is not possible to determine if there is a change in the acquirer ownership
structure

104. Control over acquiree assets is attained in a business combination. Indirect control is
attained in which type of exchange? a. Assets for assets
b. Stock (acquirer) for assets (acquiree)
c. Stock for stock
d. Either b or c

105. Which of the following forms of business combination is not subject to state laws
specific to business combinations?
a. Asset for asset acquisition
b. Statutory merger
c. Statutory consolidation
d. All three are subject to state laws

106. Which of the following is not a true statement with regard to a statutory merger?
a. One entity continues to exist
b. One entity ceases to exist
c. The name of the new entity is not the same as either of the entities
d. All of the above are true statements with regard to a statutory merger

107. Which of the following is not true with regard to the statutory consolidation form of
business combination?
a. A new corporation must be formed
b. Control of the net assets of the combining entities must be acquired by the new
entity
c. The net assets of the combining entities must be acquired with assets of the new
corporation
 a.
d. The combining entities both cease to exist after the combination

108. Following the completion of a business combination in the form of a statutory

consolidation, what is the balance in the new corporation’s Retained Earnings account?
The acquirer Retained Earnings account balance
b. The acquiree Retained Earnings account balance
c. Zero
d. The sum of the acquirer and acquiree Retained Earnings account balances

109. Which of the following is not true with regard to a business combination accomplished in
the form of a stock acquisition?
a. Two companies remain in existence after the combination
b. A parent-subsidiary relationship is said to exist
c. Consolidated financial statements are normally required
d. All of the above statements are true

110. Which of the following contingencies may change the cost of an acquisition?
a. Future acquiree earnings
b. Future value of acquiree stock
c. Future value of acquirer stock
d. Future value of acquirer debt

111. To qualify as a reorganization (for tax purposes), a business combination must be

structured as which of the following? a. Statutory merger
b. Statutory consolidation
c. Stock acquisition
d. All of the above can qualify as reorganizations

112. To qualify as a reorganization (for tax purposes), a business combination must meet
which of the following criteria?
a. Acquiree stockholders continue an indirect ownership interest in the acquiree
b. The acquirer must continue the acquiree business or employ a significant portion
of the acquiree net assets in an ongoing business
c. The combination must be for a valid business purpose
d. All of the above criteria are required for a combination to qualify as a
reorganization

113. Which of the following is not a feature of a Type A form of reorganization for tax
purposes?
a. The acquirer only has to give 50 percent of the consideration in stock
 a.
b. Stockholder approval of the acquiree stockholders is required but not the acquirer
stockholders
c. All known and contingent acquiree liabilities become acquirer liabilities
d. The combination can be structured as a statutory merger or statutory consolidation

114. Which of the following is not a feature of a Type C form of reorganization for tax
purposes?
The acquirer is not responsible for liabilities not expressly accepted as part of the
agreement
b. Acquirer voting common stock must be issued for 100 percent of the
consideration given
c. Approval by acquirer and acquiree stockholders is required
d. The acquiree must distribute the acquirer stock to its shareholders and terminate
operations

115. Which of the following is not a feature of a Type B form of reorganization for tax
purposes?
a. The acquirer takes possession of the acquiree assets
b. Acquirer voting common stock is exchanged for acquiree voting common stock
c. The acquirer must own at least 80 percent of acquiree stock
d. Acquisition of acquiree stock prior to the reorganization can result in denial of
nontaxable exchange status

Conceptual Multiple Choice Question Difficulty and Solutions

64. easy c
65. easy b
66. moderate a
67. easy a
68. easy d
69. easy d
70. easy c
71. easy d
72. moderate b
73. moderate c 74. easy a
75. easy c
76. moderate b 77. easy b
78. moderate d
79. easy c
80. easy c
81. easy b
 a.
82. moderate a
83. easy b 84. easy d
85. easy b
86. easy a
87. moderate d
88. easy a
89. easy c
90. moderate b
91. moderate d
92. easy a
93. moderate c 94. difficult c
95. easy c
96. moderate d 97. easy d
98. moderate d
The change in acquiree net assets will depend on the acquisition price and book value of
the acquiree assets.
99. easy a
100. easy a
101. moderate d
The change in acquiree net assets will depend on the acquisition price and book value of
the acquiree assets.
102. moderate a
103. easy b
104. moderate c
105. easy a
106. easy c
107. easy c
108. moderate a
109. moderate d
110. easy a
111. moderate d
112. moderate d
113. difficult b
114. difficult c
115. difficult a

Computational Multiple Choice Questions

116. Dull and Sharp are the stockholders of Knives Unlimited and Safe and Cracker are the
owners of Quicky Locksmiths. Knives Unlimited purchases all of the assets of Quicky
Locksmiths by paying cash and issuing notes payable. Who are the stockholders of
Knives Unlimited immediately after the above transaction? a. Dull and Sharp
(100%)
b. Safe and Cracker (100%)
c. Dull and Sharp (50%) and Safe and Cracker (50%)
d. Dull and Sharp (50%) and Quicky Locksmiths (50%)

117. Dull and Sharp are the stockholders of Knives Unlimited and Safe and Cracker are the
owners of Quicky Locksmiths. Knives Unlimited purchases all of the assets of Quicky
Locksmiths by paying cash and issuing notes payable. Who are the stockholders of
 Quicky Locksmiths immediately after the above transaction? a. Dull and Sharp
(100%)
b. Safe and Cracker (100%)
c. Dull and Sharp (50%) and Safe and Cracker (50%)
d. Dull and Sharp (50%) and Quicky Locksmiths (50%)

118. Quietkey is owned by Johnson and Video Junction is owned by Housewald. Quietkey
issues new stock to acquire all of the net assets of Video Junction. Quietkey had 12,000
shares of stock outstanding before the acquisition and 16,000 shares outstanding after the
acquisition. Who is (are) the stockholder(s) of Quietkey immediately after the
transaction?
a. Johnson (100%)
b. Housewald (100%)
c. Johnson (75%) and Housewald (25%)
d. Johnson (75%) and Video Junction (25%)

119. Quietkey is owned by Johnson and Video Junction is owned by Housewald. Quietkey
issues new stock to acquire all of the net assets of Video Junction. Quietkey had 12,000
shares of stock outstanding before the acquisition and 16,000 shares outstanding after the
acquisition. Who is (are) the stockholder(s) of Video Junction immediately after the
transaction?
a. Johnson (100%)
b. Housewald (100%)
c. Johnson (75%) and Housewald (25%)
d. Johnson (75%) and Video Junction (25%)

120. Oxford Industries is owned by Stuart and Tom while Samson Gyms is owned by Hank
and Ruben. Oxford uses cash and notes to purchase all of the stock of Samson Gyms.
Who are the stockholders of Oxford Industries immediately after the acquisition? a.
Stuart and Tom (100%)
b. Hank and Ruben (100%)
c. Stuart and Tom (50%) and Hank and Ruben (50%)
d. Stuart and Tom (50%) and Samson Gyms (50%)

121. Oxford Industries is owned by Stuart and Tom while Samson Gyms is owned by Hank
and Ruben. Oxford uses cash and notes to purchase all of the stock of Samson Gyms.
Who is (are) the stockholder(s) of Samson Gyms immediately after the acquisition?
a. Stuart and Tom (100%)
b. Hank and Ruben (100%)
c. Oxford Industries (100%)
d. Stuart and Tom (50%) and Hank and Ruben (50%)
122. Astronaut Aviation is owned by Roberto and Lou and Chill Air Conditioning is owned by
John and Phillip. Astronaut Aviation issues 3,000 new shares of stock to acquire all of
the outstanding stock of Chill Air Conditioning. Astronaut had 9,000 shares of stock
outstanding before the acquisition and 12,000 shares outstanding after the acquisition.
Who are the stockholders of Astronaut Aviation immediately after the acquisition?
a. Roberto and Lou (100%)
b. John and Phillip (100%)
c. Roberto and Lou (75%) and John and Phillip (25%)
d. Roberto and Lou (75%) and Chill Air Conditioning (25%)

123. Astronaut Aviation is owned by Roberto and Lou and Chill Air Conditioning is owned by
John and Phillip. Astronaut Aviation issues 3,000 new shares of stock to acquire all of
the outstanding stock of Chill Air Conditioning. Astronaut had 9,000 shares of stock
outstanding before the acquisition and 12,000 shares outstanding after the acquisition.
Who is (are) the stockholder(s) of Chill Air Conditioning immediately after the
acquisition?
a. Roberto and Lou (100%)
b. John and Phillip (100%)
c. Roberto and Lou (75%) and John and Phillip (25%)
d. Astronaut Aviation (100%)

124. Value Inc. is acquiring High Priced Industries in a stock swap. Each of High Priced’s
100,000 shares is to be exchanged for .75 shares of Value. The current estimated market
value of the two stocks is $10 for Value, an actively traded stock, and $8 for High Priced,
which is family-owned and not actively traded. The managers of High Priced have
negotiated an increased exchange ratio from .75 to .8 shares if return on equity is more
than a targeted value. Determine the investment amount that could be recognized by
Value based on High Prices (1) not meeting the return on equity target, and (2) meeting
the return on equity target.
a. $750,000; $640,000
b. $750,000; $800,000
c. $600,000; $640,000
d. $600,000; $800,000

125. Potters Petroleum is acquiring Deep Well Drilling in a stock swap. Each of Deep Well’s
250,000 shares is to be exchanged for 1.50 shares of Potters. The current market values
of the two stocks are $30 and $45 for Potters Petroleum and Deep Well, respectively. The
managers of Deep Well have negotiated an increased exchange ratio from 1.50 to 1.80
shares if return on assets is more than a targeted value. Assume that the market value of
Potters Petroleum is more objectively determinable in valuing the transaction. Determine
the investment amount that could be recognized by Potters based on Deep Well (1) not
meeting the return on assets target, and (2) meeting the return on assets target.
a. $5,000,000; $13,500,000
 b. $5,000,000; $22,500,000
c. $11,250,000; $13,500,000
d. $11,250,000; $20,250,000

126. Three Kings Games is in the process of combining with Jacks-or-Better Playing Card
Company. The business combination has been negotiated where each of Jacks’ 500,000
shares of stock (market value $42.50) will be exchanged for 1.7 shares of Three Kings
Games (market value $25). This exchange ratio will change if the per share market value
of Three Kings changes by more than 20 percent before the combination is completed.
For example, if the market price of Three Kings decreases 25 percent (from $25 to
$18.75), then the exchange ratio will increase 25 percent from 1.7 shares of Three Kings
per share of Jacks’ to 2.125 shares (1.7 x 1.25). Determine the investment amount
recognized by Jacks-or-Better if Three Kings’ stock price decreases from $25 to $15.
a. $12,750,000
b. $16,612,500
c. $21,250,000
d. $35,416,667

127. Three Kings Games is in the process of combining with Jacks-or-Better Playing Card
Company. The business combination has been negotiated where each of Jacks’ 500,000
shares of stock (market value $42.50) will be exchanged for 1.7 shares of Three Kings
Games (market value $25). This exchange ratio will change if the per share market value
of Three Kings changes by more than 20 percent before the combination is completed.
For example, if the market price of Three Kings decreases 25 percent (from $25 to
$18.75), then the exchange ratio will increase 25 percent from 1.7 shares of Three Kings
per share of Jacks’ to 2.125 shares (1.7 x 1.25). Determine the investment amount
recognized if Three Kings’ stock price increases from $25 to $40.
a. $7,812,500
b. $12,750,000
c. $21,250,000
d. $34,000,000

Computational Multiple Choice Question Difficulty and Solutions

116. easy a
117. easy b
118. moderate d
119. easy b
120. easy a
121. moderate c
122. moderate c
123. moderate d
124. difficult b
 Target not met: 100,000 shares x .75 share x $10 = $750,000
Target met: 100,000 shares x .8 x $10 = $800,000
125. difficult c
Target not met: 250,000 shares x 1.50 share x $30 = $11,250,000
Target met: 250,000 shares x 1.8 x $30 = $13,500,000
126. moderate c
500,000 shares x 1.7 exchange ratio x $25 = $21,250,000
The investment value does not change as a result of a change in the share prices.
127. moderate c
500,000 shares x 1.7 exchange ratio x $25 = $21,250,000
The investment value does not change as a result of a change in the share prices.

Problems

128. (5 Points) easy

Columbia Manufacturing is owned by Louis and Brian. They recently concluded an
agreement to buy all of Bell Manufacturing, owned by Ken and Adam. Columbia will
pay $500,000 in cash and assume $300,000 of Bell’s liabilities in exchange for total
ownership of Bell’s net assets. Identify the stockholders of each company immediately
after the above transaction is concluded.

Answer:
Louis and Brian will own 100 % of Columbia and Ken and Adam will own 100% of Bell.
An asset for asset acquisition does not change the owners of either company.

129. (Part a. 10 Points; Part b. 10 Points) moderate, moderate

The following two cases are independent. Identify the stockholders of each company and
the percentage ownership of each stockholder immediately after the transaction
described. a. The owners of Baylor Incorporated acquire the net assets of Waco
Company by issuing 10,000 new shares of Baylor's stock. Baldwin and Rosco own all
40,000 shares of Baylor's stock prior to the transaction. Wilson and Montgomery own all
of Waco's stock prior to the transaction.
b. Lincoln Enterprises purchase all of Jefferson Corporation's common stock for
$5,000,000 in cash. Prior to this transaction, Ralph and Maureen are the
stockholders of Lincoln while David and Jennifer are the stockholders of
Jefferson. The total market value of Lincoln's and Jefferson's stock is estimated to
be $18,000,000 and $6,000,000, respectively immediately before the acquisition.

Answer:
a. Company Shareholders Percentage Waco Wilson and Montgomery 100%
Baylor Baldwin and Rosco 40,000/50,000 = 80%
Waco 10,000/50,000 = 20%
b. Company Shareholders Percentage Jefferson Lincoln 100%
 Lincoln Ralph and Maureen 100%

130. (10 Points) moderate

John and Andy own all 120,000 outstanding shares of Southern Enterprises while Dan
and Derek own all 25,000 shares of Northern Industries. An agreement was recently
reached whereby Southern Enterprises will issue 40,000 new shares of stock in exchange
for all 25,000 shares of Northern Industries. Identify the owners and their percentage
ownership of each company immediately after the transaction.

Answer:
Company Shareholders Percentage
Southern John and Andy 120,000/160,000 = 75%
Dan and Derek 40,000/160,000 = 25%
Northern Southern 100%

131. (10 Points) moderate

Johnstone Baby Supplies is in the process of acquiring Altez Baby Bottle Company.
Altez is a relatively new company and its income has fluctuated substantially from period
to period. Altez’s owners are concerned that they will not receive adequate compensation
for their stock because of this fluctuation. The current stock for stock exchange ratio
being considered is that each share of Altez stock, par value $1 and market value $15,
would be exchanged for .6 shares of Johnstone stock, par value $.50 and market value
$25. Currently 50,000 shares of Altez stock are outstanding. The owners of Altez have
proposed that the exchange ratio be increased from .6 to .75 share of Johnstone for each
share of Altez if the net income of Altez increases next year by more than 25 percent
above last year. Assuming the market prices of the stock do not change, determine the
amount of the investment account to be recorded on Johnstone’s books assuming that:
a. The net income increase does not occur
b. The net income increase does occur

Answer:
a. 50,000 shares x .6 x $25 = $750,000
b. 50,000 shares x .75 x $25 = $937,500

132. (10 Points) easy

Management of McAfee and Montego are discussing a possible merger. The current
agreement is for McAfee to gain control of Montego by exchanging .75 of its shares for
each Montego share. McAfee stock is trading at $40 per share (near the top of its 52week
range) while Montego is trading at $27. The concern is that the McAfee’s stock price
fluctuates significantly more than Montego’s stock price. Montego’s management is
willing to endorse the proposed merger if the agreement is modified to include the clause
that the exchange ratio will increase by .1 share for every $2 that McAfee’s stock value
falls below $40 at the exchange date. Montego’s management is unwilling to accept a
decrease in the exchange ratio if the stock price of McAfee increases. Montego currently
 has 100,000 shares of stock outstanding. What is the amount of the investment
recognized by McAfee if its stock price:
a. Remains at $40
b. Decreases to $34
c. Increases to $44

Answer:
a. 100,000 shares x .75 x $3,000,000
b. $3,000,000
c. $3,000,000
The investment does not change as a result of a change in the acquirer stock price.
The increase in the number of shares replaces the value that is lost due to the
decrease in the share price. The change in par value that must be recorded is
offset by an adjustment in the Additional Paid-in Capital account.

Short Answer Questions

133. Compare and contrast internal versus external business expansion.

Answer: Internal expansion results from changes within the entity. It is often the result
of an entity undertaking research and development activities that culminate in the
development and marketing of new products. It can also be the expansion of the company
geographically by entering new markets with existing products. External business expansion
occurs when two or more businesses join together and operate as one entity, or related entities,
under the direction and control of one management group. In general, internal expansion is
brought about by changes within an entity while the combining of two entities brings
about external expansion.

134. Internal expansion is viewed as often being a slower process than external expansion.
What are some of the reasons for this perception?

Answer: Internal expansion is often a slow process because the entity may have to
develop a distribution system, generate demand for its new product, and/or build new
production facilities to support new products or expanding sales.

135. Alice Baker and Kathy Reed are co-owners of a profitable local business. The owners
have decided that they have as much market share in the local market as they are likely to
attain. As a result, the owners are considering expanding their business geographically.
Alice wants to buy a company in a nearby town but Kathy is opposed to that strategy.
She indicates that there is no reason to buy someone else when we can buy a building and
set up operations in the other town. You have been asked to prepare a report for Alice
and Kathy explaining the advantages and disadvantages of external expansion. Prepare a
 list of the topics that could be included in the report. A complete writing of the report is
not necessary.

Answer: Advantages will include more rapid expansion, established management, does
not increase total supply of goods, greater market share, positive reputation of existing
company. Disadvantages include defensive measures, negative reputation of existing
company, corporate culture clash.

136. You are a financial advisor to a local corporation. The three primary stockholders in the
corporation (Frank Phillips, Jim Wright, and Fred Bailey) are also the corporate officers.
The corporation is considering expanding. Frank is interested in expanding internally
while Jim favors expanding externally. Fred has no strong opinion on this issue. Frank
and Jim have been trying to influence Fred because he is the deciding vote on this issue.
Prepare a memo to Fred outlining some of the advantages of external expansion.
Answer: Discussion may include the following:
1. Expansion can be achieved more rapidly through combinations. Alternatively, the
time necessary to construct a new facility, staff it and develop a market for the
output is comparatively long,
2. Combinations may provide an established, experienced management group
immediately,
3. Combinations may lead to economies of scale. For example, the same size sales
force or accounting staff may be able to service two corporate structures as well as
one,
4. The overall cost of capital may be reduced as a result of a combination because of
the increased size of the entity,
5. Federal income tax laws provide some advantages to certain combined corporate
entities that are not available to one corporation,
6. External expansion does not increase the total supply of goods available from that
industry, whereas internal expansion may increase supply beyond existing demand
levels,
7. Control over a greater market share may enable the combined entity to become a
price leader in the market,
8. For some combinations, the guaranteed raw material sources and product markets
provided by combinations provide a significant management advantage. In
addition, the profits at each level accrue to the combined entity, and
9. Diversification accomplished through combinations may provide a less volatile
income stream. This reduces the risk level of the entity that, in turn, lowers
borrowing rates.

137. Assume a company primarily produces and sells a single product. This company is
considering expanding geographically. Discuss the difference between internal and
external expansion with regard to the total industry supply of, and demand for, the
product sold by the expanding company.
 Answer: Internal expansion results when a company increases its ability to produce
output by acquiring additional facilities resulting in an overall increase in the supply of
the product. External expansion results when a company attains control over the net
assets of another company. The total productive capacity of the industry does not change
because new productive assets are not added. The only change is in the ownership of
existing productive assets. Neither internal nor external expansion has an impact on
demand for the product.

138. Discuss the similarities between the analysis conducted when acquiring a new piece of
machinery and the analysis conducted when acquiring control over the net assets of
another company.

Answer: The decision by the acquirer to undertake such an investment will involve the
same type of analysis as is performed when deciding whether to make capital
expenditures for other assets. Managers of the acquiring entity may prepare budgets and
perform capital budgeting analysis using techniques such as net present value and internal
rate of return to determine whether the investment is in the best interest of the acquirer.
The difference between the purchase of an individual asset and the acquisition of another
entity is that projecting the future cash flows may be more involved for an entity
acquisition. When purchasing a piece of machinery, the relevant cash flows will be such
items as the change in the operating costs, the tax implications of differences in
depreciation, and the future salvage value of the machine. When considering the
acquisition of another entity, some of the cash flows that may need to be evaluated result
from the disposal of redundant facilities, reduction of fixed costs by eliminating duplicate
operations, and internal coordination of operations when one part of the new entity
produces input for another part of the new entity.

139. Sarah Clammers, a client, is reading newspaper articles on two of the companies in which
stock are held. Some of the terms used in the articles are horizontal combination and
vertical combination. Sarah understands the definition of horizontal and vertical but does
not know what the terms mean in this context. Prepare a brief memo to differentiate
these terms for Sarah.

Answer: A horizontal combination occurs when a company acquires a competitor in the

same industry. A vertical combination occurs when a company acquires an entity that
either provides production inputs or acquires the production output of the company.

140. You are making a presentation to a board of directors. Part of the presentation is a
discussion of a business combination as a means of expansion. One issue that has been
addressed is horizontal combinations. One board member has asked for a clarification of
the advantages of horizontal business combinations as compared to other forms of
business combinations. Prepare a response to this board member.
 Answer: Horizontal combinations exist when an entity acquires a competitor. The result
of such a combination is an increase in market share. A horizontal combination may
result in greater control over the product’s selling price because of the increased market
share. This type of combination can also lead to economies of scale and a reduction in
the number of persons needed to supply some support activities. Other types of
combinations (vertical or conglomerate) may result in management being required to
oversee the activities of business in which they do not have expertise.

141. You are making a presentation to a board of directors. Part of the presentation is a
discussion of a business combination as a means of expansion. One issue that has been
addressed is vertical combinations. One board member has asked for a clarification of
the advantages of vertical business combinations as compared to other forms of business
combinations. Prepare a response to this board member.

Answer: A vertical business combination occurs when an entity purchases a supplier of

inputs or a purchaser of outputs. This type of business combination helps the company to
improve the efficiency of operations. Management of the company has better control
over the products from acquisition of raw materials, through manufacturing and
distribution, to final sale to customers. Other types of business combinations (horizontal
and conglomerate) leave other entities in control of more aspects of production and
distribution.

142. You are making a presentation to a board of directors. Part of the presentation is a
discussion of a business combination as a means of expansion. An issue that has been
addressed is conglomerate combinations. One board member has asked for a clarification
of the advantages of conglomerate business combinations as compared to other forms of
business combinations. Prepare a response to this board member.

Answer: A conglomerate form of business combination occurs when one entity acquires
a company in unrelated or tangentially related businesses. Conglomerate combinations
have two general advantages over other types of combinations (horizontal and vertical).
Conglomerate combinations help improve income stability provided by diversifying the
asset base of an entity. Another advantage is that it has been considerably more difficult
for the government to challenge a conglomerate business combination on the basis of
antitrust regulations.

143. Discuss the reason the Sherman Act was not sufficient to address the problems that exist
as a result of business combinations.

Answer: The Sherman Act of 1890 only permits the government to break up a company
after the government has proven that the company has restrained free trade. It does not
give the government the power to prevent the creation of a company that would endanger
free trade.
144. Discuss how the Clayton Act broadens the government’s ability to oversee business
combinations as compared to the Sherman Act.

Answer: The Clayton Act can prevent a business combination from taking place if the
anticipated result is a lessening of competition or the creation of a monopoly while the
Sherman Act only permits the government to break up a company after the government
has proven that the company restrained free trade.

145. The Wall Street Journal has articles almost daily in which business combinations are
announced. How can there be so many business combinations when the Federal Trade
Commission assesses the impact of proposed combinations on such issues as industry
concentration, barriers to entry, and restriction of trade?

Answer: The vast majority of combinations are not disallowed because they involve
relatively minor segments of competitive markets and, therefore, would not reduce or
control competition in any significant way.

146. Richard, a friend, was reading in the newspaper about an attempted takeover that did not
succeed. The reason given for the acquirer stopping the acquisition was that greenmail
was paid. Richard does not understand the meaning of the term greenmail. Prepare a
brief note to Richard explaining this concept.

Answer: Greenmail exists when the potential acquiree management buys acquiree stock
back from a potential acquirer for a price above the price paid by the potential acquirer.

147. A poison pill is one maneuver an entity can employ to avoid a takeover attempt. Explain
how a poison pill can accomplish this objective and discuss the major potential problem
with undertaking this maneuver.

Answer: A poison pill involves the issuance of preferred stock that is convertible into
common stock of the unwanted acquirer allowing preferred stockholders to regain control
by converting into common stock. The problem is that it can deter friendly acquirers as
well as hostile acquirers.

148. Your company is attempting to take over another entity. One of the board members has
suggested that the target may attempt to sell the crown jewels or undertake a scorched
earth defense. Another board member is unaware of the meaning of these terms and has
requested your input. Prepare a brief memo outlining the similarities and differences
between the two concepts.

Answer: The sale of the crown jewels and the scorched earth defense both result in the
target company selling some of its assets. The difference is in the amount of assets sold
and how selective the target is in determining which assets to sell. The sale of the crown
jewels results when a target sells assets that would be particularly valuable to the
 potential acquirer. The scorched earth defense results when a target generally sells large
amounts of assets without regard to the specific desirability to the potential acquirer. In
both instances, the target’s objective is to reduce its overall value thereby reducing the
potential acquirer interest.

149. Your company is in a takeover struggle with a larger company. Management has
determined that either a scorched earth defense or a fatman defense would most likely be
successful in thwarting the takeover attempt. The CEO has asked for your input. Prepare
a memo outlining the differences between the two measures.

Answer: The scorched earth defense involves a broad-based sale of assets. The proceeds
are distributed to stockholders reducing the potential acquiree value. The fatman defense
results in the acquisition of poorly performing assets. The potential acquiree value is
reduced due to the poor performance of the newly acquired assets.

150. You serve on the board of directors of a large company. A topic of discussion at a recent
meeting is the acquisition of another entity. One board member stated that the company
should purchase 49 percent of the other entity so we would not have to consolidate the
acquiree into our financial statements. Prepare a note to respond to the board member.

Answer: The control of another entity’s assets and operations is the determining factor in
deciding whether consolidated financial statements are required. Purchasing 49 percent
would likely result in control unless the other 51 percent is owned by one or a small
number of stockholders.

151. The Board of Directors of Mesa, Incorporated is discussing the acquisition of a

competitor. One board member is new and has asked for an explanation of the difference
between acquiring all the net assets and acquiring all the stock of the other company. The
CFO has asked you to respond to this question.

Answer: From an economic perspective there is no difference between acquiring all of

the net assets and acquiring all of the stock. Mesa still has control over all the assets.
The difference that exists pertains to the preparation of the financial statements. If Mesa
acquires all the net assets, there is only one economic entity, so consolidation is not
needed. If Mesa acquires all the stock, there are two legal entities and the consolidation
process is used to prepare the financial statements. The financial statements will appear
the same regardless of the manner in which the other company is acquired.

152. Discuss how a business combination accomplished with an exchange of assets for assets
differs from an exchange of stock (acquirer) for assets (acquiree) from the perspective of
the acquirer. Then, discuss the differences from the acquiree perspective.

Answer: From the acquirer perspective, the asset for asset acquisition results in no
change to the net assets and liabilities although the composition of the assets will change.
 The exchange of stock for assets results in an increase in acquirer’s net equity and assets.
From the acquiree perspective, there is a change in the assets owned. Subsequent to the
asset for asset exchange, the acquiree assets owned are likely cash or receivables but
subsequent to the stock for asset exchange the resulting asset owned is an investment in
the acquirer.

153. Jim and Fred are two managers in Clippers Corporation. They are discussing a
combination being planned. Jim states that the other entity (Heads R Us) is being taken
over by Clippers because Clippers’ stock is being issued for Heads R Us stock. Fred says
that he has been reading the paper, and it sounds to him as if Heads R Us is taking over
Clippers. In fact, Fred had an article on his desk that contained the following statement
by the board of directors of Heads R Us, “The synergy that exists between Clippers and
Heads R Us will make Clippers a welcome addition to our corporate family.” Jim and
Fred have asked you to clarify their confusion.

Answer: While the company issuing new shares is normally the acquirer, the stock issued
does not always determine the stockholder group that controls the consolidated entity
after a combination is completed. Control depends on the stock exchange ratio. The
party owning the greater portion of the outstanding stock after the combination is the
controlling entity. For example, if Clippers has 10,000 shares outstanding prior to the
combination, but has to issue 20,000 shares of voting common to the stockholders of
Heads R Us to complete the transaction, then the acquirer is Heads R Us.

154. Ken Sanders has been a classmate of yours for some time. He has come to you with this
question. “Any time a new corporate entity is formed, it begins with zero Retained
Earnings. Why is there a balance in Retained Earnings as soon as an corporate entity is
formed in a statutory consolidation?” Prepare a response to Ken’s question.

Answer: The establishment of a new corporate shell is a matter of legal form. In reality,
the larger corporation is taking control of the smaller corporation, so the Retained
Earnings of the larger corporation is carried forward to the new entity’s balance sheet.

155. Mary Brian is a board member for Big Hats, a company completing an acquisition. The
acquiree, Sombrero Incorporated, is being purchased with stock of Big Hats. The
agreement states that Big Hats will issue 5,000 additional shares of stock if Sombrero’s
income exceeds $2,000,000 for the most recent year. Mary has indicated that the
additional shares of stock would not significantly dilute the ownership of the current
stockholders and that it would have no impact on the acquisition price because the
purchase is being accomplished with a stock for stock swap. Do you agree with Mary?
Support your answer.

Answer: You should not agree with Mary. The additional number of shares of stock
issued is a result in a change in the perceived value of Sombrero because of its additional
contribution to consolidated net income. The total value of the stock being distributed is
 not a result of a change in the value of the stock, it is a result of a change in the value of
the acquiree. Thus, the acquisition cost would increase.

156. Management has asked you to provide input on how to structure a business combination
so it will result in a tax deferred exchange. Prepare a memo indicating the three basic
criteria that must be met to accomplish this objective.

Answer: The answer will include the following:

1. The acquiree’s owners must continue to have an indirect ownership in the
acquiree.
2. The acquirer must continue acquiree business or employ a significant portion of
the acquiree net assets in an ongoing business.
3. The combination must occur for a valid business purpose.

157. When a business combination does not qualify as a tax deferred exchange, the acquirer is
not permitted to take advantage of the acquiree net operating loss carryforward. Given
that the two companies are now one company, why is the net operating loss carryforward
not transferred to the acquirer?

Answer: If the business combination does not qualify as a tax deferred exchange, the
acquirer has purchased the acquiree. It is not possible to purchase tax aspects of an
entity.
As a result, an acquiree’s net operating loss carryforward does not transfer to the acquirer
in a combination that does not qualify as a tax deferred exchange.
At the date of an acquisi4on which is not a bargain purchase, the acquisi4on method

a. Consolidates the subsidiary’s assets at fair value and the liabili4es at book value
b. Consolidates all subsidiary’s assets and liabili4es at book value
c. Consolidated all subsidiary assets and liabili4es at fair value
d. Consolidates all subsidiary assets and liabili4es at fair value
e. Consolidates current assets and liabili4es at book value, long-term assets and liabili4es at fair
value

Lisa Co. paid cash for all of the vo4ng common stock of Victoria Corp. Victoria will con4nue to exist as a
separate corpora4on. Entries for the consolida4on of Lisa and Victoria would be recorded in a. A
worksheet
b. Lisa’s general journal
c. Victoria’s general journal
d. Victoria’s secret consolida4on journal
e. The general journals of both companies

What is the primary accoun4ng di;erence between accoun4ng for when the subsidiary is dissolved and
when the subsidiary retains its incorpora4on?

a. If the subsidiary is dissolved, it will not be operated as a separate division

b. If the subsidiary is dissolved, assets and liabili4es are consolidated at their book values
c. If the subsidiary retains its incorpora4on, there will be no goodwill associated with the
acquisi4on
d. If the subsidiary retains its incorpora4on, assets and liabili4es are consolidated at their book
values
e. If the subsidiary retains its incorpora4on,, the consolida4on is not formally recorded in the
accoun4ng records of the acquiring company

A company is not required to consolidate a subsidiary in which it holds more than 50% of the vo4ng
stock when

a. The subsidiary is located in a foreign country

b. The subsidiary in ques4on is a 5nance subsidiary
c. The company holds more than 50% but less than 60% of the subsidiary’s vo4ng stock
d. The company holds less than 75% of the subsidiary’s vo4ng stock
e. The subsidiary is in bankruptcy
Which one of the following is a characteris4c of a business combina4on that should be accounted for as
an acquisi4on?

a. The combina4on must involve the exchange of equity securi4es only

b. The transac4on establishes an acquisi4on fair value basis for the company being acquired
c. The two companies may be about the same size and it is di?cult to determine the acquired
company and acquiring company
d. The transac4on may be considered to be the uni4ng of the ownership interests of the
companies involved
e. The acquired subsidiary must be smaller in size than the acquiring parent

Which of the following is the best theore4cal jus45ca4on for consolidated 5nancial statements?

a. In form the companies are one en4ty: in substance they are separate
b. In form the companies are separate: in substance they are one en4ty
c. In form and substance the companies are one en4ty
d. In form and substance the companies are separate

What is the appropriate accoun4ng treatment for the value assigned to in-process research and
development acquired in a business combina4on?

a. Expense upon acquisi4on

b. Capitalize as an asset
c. Expense if there is no alterna4ve use for the assets used in the research and development and
technological feasibility has yet to be reached
d. Expense un4l future economic bene5ts becomes certain and then capitalize as an asset

An acquired en4ty has a long-term opera4ng lease for an o?ce building used for central management.
The terms of the lease are very favorable rela4ve to current market rates. However, the lease prohibits
subleasing or any other transfer of rights. In its 5nancial statements, the acquiring 5rm should report the
value assigned to the lease contract as

a. An intangible asset under the contractual-legal criterion

b. A part of goodwill
c. An intangible asset under the separability criterion
d. A building

WW Company obtains all of the outstanding stock of JJ, Inc. in a consolida4on prepared immediately
a3er the takeover, at what value will JJ's inventory be consolidated?

a. At JJ's historical cost

b. A percentage of the acquisi4on cost paid by WW
c. The inventory will be omiIed in the consolida4on
d. At the acquisi4on date fair value
Under PFRS 3, when is a gain recognized in consolida4ng 5nancial informa4on?

a. When any bargain purchase is created

 b. In a combina4on created in the middle of a 5scal year
c. In an acquisi4on when the value of all assets and liabili4es cannot be determined
d. When the amount of a bargain purchase exceeds the value of the applicable liability held by the
acquired company

What is push-down accoun4ng?

a. A requirement that a subsidiary must use the same accoun4ng principles as a parent company
b. Inventory transfers made from a parent company to a subsidiary
c. A subsidiary's recording of the fair-value alloca4ons as well as subsequent amor4za4on
d. The adjustments required for consolida4on when a parent has applied the equity method of
accoun4ng for internal repor4ng purposes

A parent buys 32% of a subsidiary in one year and then buys an addi4onal 40% in the next year. In a step
acquisi4on of this type, the original 32% acquisi4on should be:

a. Maintained at its ini4al value

b. Adjusted to its equity method balance at the date of the second acquisi4on
c. Adjusted to fair value at the date of the second acquisi4on with a resul4ng gain or loss recorded
d. Adjusted to fair value at the date of the second acquisi4on with the resul4ng adjustment to
addi4onal paid-in capital

If AA Company acquires 80% of the stock ofBB company on January 1, 20x2, immediately a3er the
acquisi4on:

a. Consolidated retained earnings will be equal to the combined retained earnings of the two
companies
b. Goodwill will be reported in the consolidated balance sheet
c. AA Company's addi4onal paid-in capital may be reduced to permit the carry forward of BB
Company retained earnings
d. Consolidated retained earnings and AA Company retained earnings will be the same

Which of the following statements is correct?

a. The non-controlling shareholders' claim of the subsidiary's net assets is based on the book value
of the subsidiary's net assets.
b. Only the parent's por4on of the di;erence between book value and fair value of the subsidiary's
assets is assigned to those assets
c. Goodwill represents the di;erences between the book value of the subsidiary's net assets and
the amount paid by the parent to buy ownership
d. Total assets reported by the parent generally will be less than total assets reported on the
consolidated balance sheet.

Which of the following statements is correct?

 a. Foreign subsidiaries do not need to be consolidated if they are reported as a separate opera4ng
group under segment repor4ng
b. Consolidated retained earnings to not include the non-controlling interest's claim on the
subsidiary's retained earnings
c. The non-controlling shareholders' claim should be adjusted for changes in the fair value of the
subsidiary assets but should not include goodwill
d. Consolida4on is expected any 4me the investor hold signi5cant in6uence over the investee

What is the theore4cally preferred method of presen4ng a non-controlling interest in a consolidated

balance sheet?

a. As a separate item within the liability sec4on

b. As a deduc4on from (contra to) goodwill from consolida4on, if any/
c. By means of notes or footnotes to the balance sheet
d. As a separate item within the stockholders' equity sec4on

Presen4ng consolidated 5nancial statements this year when statements of individual companies
represented last year is

a. The correc4on of an error

b. An accoun4ng change that should be reported prospec4vely
c. an accoun4ng change that should be reported by resta4ng the 5nancial statements of all prior
periods presented
d. Not an accoun4ng change

A subsidiary, acquired for cash in a business combina4on, owned equipment with the market value in
excess of book value as of the date of combina4on. A consolidated balance sheet prepared immediately
a3er the acquisi4on would treat this excess as:

a. Goodwill
b. Plant and equipment
c. Retained earnings
d. Deferred credit

Goodwill is:

a. Seldom reported because it is too di?cult to measure

b. Reported when more than book value is paid in purchasing another company
c. Reported when the fair value of the acquire is greater than the fair value of the net iden45able
assets acquired
d. Generally smaller for small companies and increases and amount as the companies acquired
increase in size
Consolidated 5nancial statements are designed to provide:

a. Informa4ve informa4on to all shareholders

b. The results of opera4ons, cash 6ow, and the balance sheet in an understandable and informa4ve
manner for creditors
 c. The results of opera4ons, cash 6ow, and the balance sheet as if the parent and subsidiary were a
single en4ty
d. Subsidiary informa4on for the subsidiary shareholders

Consolidated 5nancial statements or appropriate even without a majority ownership if which of the
following exists:

a. The subsidiary has the right to appoint members of the parent company's board of directors
b. The parent company has the right to appoint a majority of the members of the subsidiary’s
board of directors to a large minority vo4ng interest
c. The subsidiary owns a large minority vo4ng interests in the parent company
d. The parent company has an ability to assume the role of general partner in a limited partnership
with the approval of the subsidiary’s board of directors

The IASB has recommended that a parent corpora4on should consolidate the 5nancial statements of the
subsidiary into its 5nancial statements when it exercises control over the subsidiary, even without
majority ownership. In which of the following situa4ons would control NOT be evident?

a. Access to subsidiary assets is available to all shareholders

b. Dividend policy is set by the parent
c. The subsidiary does not determine compensa4on for its main employees
d. Substan4ally all cash 6ows of the subsidiary 6ow to the controlling shareholders

The goal of the consolida4on process is for:

a. Asset acquisi4ons and 100% stock acquisi4ons to result in the same balance sheet
b. Goodwill to appear on the balance sheet of the consolidated en4ty
c. The assets of the non-controlling interest to be predominately displayed on the balance sheet
d. The investment in the subsidiary to be properly valued on the consolidated balance sheet

Subsidiary was acquired for cash in a business combina4on on December 31, 20x4. The purchase price
exceeded the fair value of iden45able net assets. The acquired company owned equipment with a fair
value in excess of the book value as of the date of the combina4on. A consolidated balance sheet
prepared on December 31, 20x1, would

a. Report the excess of the fair value over the book value of the equipment as part of goodwill
b. Report the excess of the fair value over the book value of the equipment is part of the plant and
equipment account
c. Reduce retained earnings for the excess of the fair value of the equipment over its book value
d. Make no adjustment for the excess of the fair value of the equipment over book value. Instead,
it is an adjustment to expense over the life of the equipment
The investment in a subsidiary should be recorded on the parent’s books at the

a. Underlying book value of the subsidiary’s net assets

b. Fair value of the subsidiary’s net iden45able assets
c. Fair value of the considera4on given
d. Fair value of the considera4on given plus an es4mated value for goodwill
Which of the following costs of a business combina4on can be included in the value charged to paid-in
capital in excess of par?

a. Direct and indirect acquisi4on costs

b. Direct acquisi4on costs
c. Direct acquisi4on costs and stock issue costs if stock is issued as considera4on
d. Stock issue costs if stock is issued as considera4on

When a company purchases another company that has exis4ng goodwill and the transac4on is
accounted for as a stock acquisi4on, the goodwill should be treated in the following manner.

a. Goodwill on the books of an acquired company should be disregarded

b. Goodwill is recorded prior to recording 5xed assets
c. Goodwill is not recorded un4l all assets are stated at full fair value
d. Goodwill is treated consistent with other tangible assets

The SEC requires the use of push-down accoun4ng and some speci5c situa4ons. Push-down accoun4ng
results in:

a. Goodwill be recorded in the parent company separate accounts

b. Elimina4ng subsidiary retained earnings and paid-in capital in excess of par
c. Re6ec4ng fair values on the subsidiary’s separate accounts
d. Changing the consolida4on worksheet procedure because no adjustment is necessary to
eliminate the investment in subsidiary account

A majority owned subsidiary that is in legal reorganiza4on should normally be accounted for using

a. Consolidated 5nancial statements

b. The equity method
c. The market value method
d. The cost method

Under the acquisi4on method, indirect costs rela4ng to acquisi4ons should be

a. Included in the investment cost

b. Expensed as incurred
c. Deducted from other contributed capital
d. None of these
Elimina4ng entries are made to cancel the e;ects of intercompany transac4ons and are made on the a.

Books of the parent company

b. Books of the subsidiary company

c. Workpaper only
d. Books of both the parent company and the subsidiary
One reason a parent company may pay an amount less than the book value of the subsidiary’s stock
acquired is

a. An undervalua4on of the subsidiary’s assets

b. The existence of unrecorded goodwill
c. An overvalua4on of the subsidiary’s liabili4es
d. The existence of unrecorded con4ngent liabili4es

In a business combina4on accounted for as an acquisi4on, registra4on costs related to common stock
issued by the parent company are

a. Expensed as incurred
b. Deducted from other contributed capital
c. Included in the investment cost
d. Deducted from the investment cost

On the consolidated balance sheet, consolidated stockholders’ equity is

a. Equal to the sum of the parent and subsidiary stockholders’ equity

b. Greater than the parent’s stockholders’ equity
c. Less than the parent’s stockholders’ equity
d. Equal to the parent’s stockholders’ equity

Majority-owned subsidiaries should be excluded from the consolidated statements when

a. Control does not rest with the majority owner

b. The subsidiary operates under governmentally imposed uncertainty
c. A foreign subsidiary is domiciled in a country with foreign exchange restric4ons or controls d.
Any of these circumstances exist
Under the economic en4ty concept, consolidated 5nancial statements are intended primarily for the
bene5t of the

a. Stockholders of the parent company

b. Creditors of the parent company
c. Minority stockholders
d. All of the above

Reasons of a parent company may pay more than the book value for the subsidiary company’s stock
include all of the following except

a. The fair value of one of the subsidiary’s assets may exceed its recorded value because of
apprecia4on
b. The existence of unrecorded goodwill
c. Liabili4es may be overvalued
 d. Stockholders’ equity may be undervalued

What is the method of presenta4on required by PFRS 10 of “non-controlling interest” on a consolidated

balance sheet?

a. As a deduc4on from goodwill from consolida4on

b. As a separate item within the long-term liabili4es sec4on
c. As a part of stockholders’ equity
d. As a separate item between liabili4es and stockholders’ equity

Which of the following is a limita4on of consolidated 5nancial statements?

a. Consolidated statements provide no bene5t for the stockholders and creditors of the parent
company
b. Consolidated statements of highly diversi5ed companies cannot be compared with industry
standards
c. Consolidated statements are bene5cial only when the consolidated companies operate within
the same industry
d. Consolidated statements are bene5cial only when the consolidated companies operate in
di;erent industries

When a company purchases another company that has exis4ng goodwill and the transac4on is
accounted for as a stock acquisi4on, the goodwill should be treated in the following manner.

a. Goodwill on the books of an acquired company should be disregarded

b. Goodwill is recorded prior to recording 5xed assets
c. Goodwill is not recorded un4l all assets are stated at full fair value
d. Goodwill is treated consistent with other tangible assets

The use of push-down accoun4ng in some speci5c situa4ons. Push-down accoun4ng results in:

a. Goodwill be recorded in the parent company separate accounts

b. Elimina4ng subsidiary retained earnings and paid-in capital in excess of par
c. Re6ec4ng fair values on the subsidiary’s separate accounts
d. Changing the consolida4on worksheet procedure because no adjustment is necessary to
eliminate the investment in subsidiary account

What is push-down accoun4ng?

a. A requirement that a subsidiary must use the same accoun4ng principles as a parent company.
b. Inventory transfers made from a parent company to a subsidiary
c. A subsidiary’s recording of the fair-value alloca4ons as well as subsequent amor4za4on
d. The adjustments required for consolida4on when a parent has applied the equity method of
accoun4ng for internal repor4ng purposes
A parent buys 32% of a subsidiary in one year and then buys an addi4onal 40% in the next year. In a step
acquisi4on of this type, the original 32% acquisi4on should be

a. Maintained at its ini4al value

b. Adjusted to its equity method balance at the date of the second acquisi4on
c. Adjusted to fair value at the date of the second acquisi4on with a resul4ng gain or loss recorded
d. Adjusted to fair value at the date of the second acquisi4on with the resul4ng adjustment to
addi4onal paid-in capital

A newly acquired subsidiary has pre-exis4ng goodwill on its books. The parent company’s consolidated
balance sheet will:

a. Treat the goodwill the same as other intangible assets of the acquired company
b. Will always show the pre-exis4ng goodwill of the subsidiary at its book value
c. Not show any value for the subsidiary’s pre-exis4ng goodwill
d. Do an impairment test to see if any of it has been impaired

What is push-down accoun4ng?

a. A requirement that a subsidiary must use the same accoun4ng principles as a parent company.
b. Inventory transfers made from a parent company to a subsidiary
c. A subsidiary’s recording of the fair-value alloca4ons as well as subsequent amor4za4on
d. The adjustments required for consolida4on when a parent has applied the equity method of
accoun4ng for internal repor4ng purposes

The main evidence of control for purposes of consolidated 5nancial statement involves

a. Possessing major ownership

b. Having decision-making ability that is not shared with others
c. Being the sole shareholder
d. Having the parent company and the subsidiary par4cipa4ng in the same industry

In which of the following cases would consolida4on be inappropriate?

a. The subsidiary is in bankruptcy

b. Subsidiary’s opera4ons are dissimilar from those of the parent
c. The parent owns 90% of the subsidiary’s common stock, but all of the subsidiary’s nonvo4ng
preferred stock is held by a single investor
d. Subsidiary is foreign
The primary bene5ciary of a variable interest en4ty (VIE) must consolidate the VIE into its 5nancial
statements whenever

a. Substan4ally all of the en4ty’s ac4vi4es are conducted on behalf of an investor who has
dispropor4onally few vo4ng rights
b. The vo4ng rights are not propor4onal to the obliga4ons to absorb the expected losses or receive
expected residual returns
 c. The total equity at risk is not su?cient to permit the en4ty to 5nance its ac4vi4es without
addi4onal subordinated 5nancial support from other par4es
d. The holders of the equity investment at risk have the right to receive the residual returns of the
legal en4ty

If an en4ty is not considered a VIE, the determina4on of consolida4on is based on whether:

a. The vo4ng rights are propor4onal to the obliga4ons to absorb expected losses or receive
expected residual returns
b. The total equity at risk is su?cient to permit the en4ty to 5nance its ac4vi4es without addi4onal
subordinated 5nancial support from other par4es
c. The equity investments or investments in subordinated debt are at risk
d. One of the en44es in the consolidated group directly or indirectly has a controlling 5nancial
interest (usually ownership of a majority vo4ng interest) in the other en44es

PFRS de5nes control as

a. The direct or indirect ability to determine the direc4on of management and policies through
ownership, contract, or otherwise
b. The power to govern the en4ty’s 5nancial and opera4ng policies as to obtain bene5ts from its
ac4vi4es
c. The power to direct the ac4vi4es that impact economic performance, the obliga4on to absorb
expected losses, and the right to receive expected residual returns
d. Having a majority of the ownership interests en4tled to elect management controlling 5nancial
interest (usually ownership of a majority vo4ng interest) in the other en44es.

Consolidated 5nancial statements are designed to provide:

a. Informa4ve informa4on to all shareholders

b. The results of opera4ons, cash 6ow, and the balance sheet in an understandable and informa4ve
manner for creditors
c. The results of opera4ons, cash 6ow, and the balance sheet as if the parent and subsidiary were a
single en4ty
d. Subsidiary informa4on for the subsidiary shareholders

Consolidated 5nancial statements are appropriate even without a majority ownership if which of the
following exists:

a. The subsidiary has the right to appoint members of the parent company's board of directors
b. The parent company has the right to appoint a majority of the members of the subsidiary’s
board of directors to a large minority vo4ng interest
c. The subsidiary owns a large minority vo4ng interests in the parent company
 d. The parent company has an ability to assume the role of general partner in a limited partnership
with the approval of the subsidiary’s board of directors

The IASB has recommended that a parent corpora4on should consolidate the 5nancial statements of the
subsidiary into its 5nancial statements when it exercises control over the subsidiary, even without
majority ownership. In which of the following situa4ons would control NOT be evident?

a. Access to subsidiary assets is available to all shareholders

b. Dividend policy is set by the parent
c. The subsidiary does not determine compensa4on for its main employees
d. Substan4ally all cash 6ows of the subsidiary 6ow to the controlling shareholders

The goal of the consolida4on process is for:

a. Asset acquisi4ons and 100% stock acquisi4ons to result in the same balance sheet
b. Goodwill to appear on the balance sheet of the consolidated en4ty
c. The assets of the non-controlling interest to be predominately displayed on the balance sheet
d. The investment in the subsidiary to be properly valued on the consolidated balance sheet

A subsidiary was acquired for cash in a business combina4on on December 31, 20x1. The purchase price
exceeded the fair value of iden45able net assets. The acquired company owned equipment with a fair
value in excess of the book value as of the date of the combina4on. A consolidated balance sheet
prepared on December 31, 20x1, would

a. Report the excess of the fair value over the book value of the equipment as part of goodwill
b. Report the excess of the fair value over the book value of the equipment is part of the plant and
equipment account
c. Reduce retained earnings for the excess of the fair value of the equipment over its book value
d. Make no adjustment for the excess of the fair value of the equipment over book value. Instead,
it is an adjustment to expense over the life of the equipment

The investment in a subsidiary should be recorded on the parent’s books at the

a. Underlying book value of the subsidiary’s net assets

b. Fair value of the subsidiary’s net iden45able assets
c. Fair value of the considera4on given
d. Fair value of the considera4on given plus an es4mated value for goodwill

Which of the following costs of a business combina4on can be included in the value charged to paid-in
capital in excess of par?

a. Direct and indirect acquisi4on costs

b. Direct acquisi4on costs
c. Direct acquisi4on costs and stock issue costs if stock is issued as considera4on
d. Stock issue costs if stock is issued as considera4on
An investor adjusts the investment account for the amor4za4on of any di;erence between cost and
book value under the

a. cost model
b. equity method
c. fair value method
d. equity method and fair value model

Goodwill is:

a. Seldom reported because it is too di?cult to measure

b. Reported when more than book value is paid in purchasing another company
c. Reported when the fair value of the acquire is greater than the fair value of the net iden45able
assets acquired
d. Generally smaller for small companies and increases in amount as the companies acquired
increase in size

Under the cost method, the workpaper entry to establish reciprocity

a. Debits Retained Earnings – S Company

b. Credits Retained Earnings – S Company
c. Debits Retained Earnings – P Company
d. Credits Retained Earnings – P Company

Under the cost method, the investment account is reduced when

a. There is a liquida4ng dividend

b. The subsidiary declares a cash dividend
c. The subsidiary incurs a net loss
d. None of these

The parent company records it share of a subsidiary’s income by

a. Credi4ng investment in S Company under the par4al equity method

b. Credi4ng Equity in Subsidiary Income under both the cost and par4al equity methods
c. Debi4ng Equity in Subsidiary Income under the cost method
d. None of these

In years subsequent to the year of acquisi4on, an entry to establish reciprocity is made under the a.

Equity method

b. Cost model
c. Fair value model
d. Equity method and fair value model
A parent company received dividends in excess of the parent company’s share of the subsidiary’s
earnings subsequent to the date of the investment. How will the parent company’s investment account
be a;ected by those dividends under each of the following accoun4ng methods?

Cost Method Fair Value Model

a. No e;ect Decrease
b. Decrease No e;ect
c. No e;ect No e;ect
d. Decrease Decrease

Consolidated net income for a parent company and its par4ally owned subsidiary is best de5ned as the
parent company’s

a. Recorded net income

b. Recorded net income plus the subsidiary’s recorded net income
c. Recorded net income plus the subsidiary’s recorded net income
d. Income from the independent opera4ons plus subsidiary’s income resul4ng from
transac4ons with outside par4es

In the prepara4on of a consolidated statements work paper, dividend income recognized by a parent
company for dividends distributed by its subsidiary is

a. Included with parent company income from other sources to cons4tute consolidated net income
b. Assigned as a component of the non-controlling interest
c. Allocated propor4onately to consolidated net income and the non-controlling interest d.
Eliminated
In the prepara4on of a consolidated statement of cash 6ows using the indirect method of presen4ng
cash 6ows from opera4ng ac4vi4es, the amount of the non-controlling interest in consolidated income:

a. Combined with the controlling interest in consolidated net income

b. Deducted from the controlling interest in consolidated net income
c. Reported as a signi5cant noncash inves4ng and 5nancing ac4vity in the notes
d. Reported as a component of cash 6ows from 5nancing ac4vi4es

A parent company uses the par4al equity method to account for an investment in common stock of its
subsidiary. A por4on of the dividends received this year were in excess of the parent company’s share of
the subsidiary’s earnings subsequent to the date of the investment. The amount of dividend income that
should be reported in the parent company’s separate income statement should be a. Zero
b. The total amount of dividends received this year
c. The por4on of the dividends received this year that were in excess of the parent’s share of
subsidiary’s earnings subsequent to the date of investment
 d. The por4on of the dividends received this year that were NOT in excess of the parent’s share of
subsidiary’s earnings subsequent to the date of investment
Which one of the following describes a di;erence in how the equity method is applied under GAAP than
under IFRS?

a. The equity method is generally applied to limited partnerships under IFRS for investments of
more than 3 to 5%, whereas GAAP adopts a “signi5cant in6uence” principle
b. IFRS requires uniform accoun4ng policies, whereas GAAP does not
c. Signi5cant in6uence is presumed if the investor has 20% or more of the vo4ng rights in a
corporate investee under GAAP, whereas IFRS adopts a “facts and circumstances” approach that
looks beyond the vo4ng rights percentage
d. GAAP requires considera4on of poten4al vo4ng rights on currently exercisable of conver4ble
instruments, whereas IFRS does not

When the implied value exceeds the aggregate fair values of iden45able net assets, the residual
di;erence is accounted for as

a. Excess of implied over fair value

b. A deferred credit
c. Di;erence between implied and fair value
d. Goodwill

Under which set of circumstances would it not be appropriate to assume the value the non-controlling
shares is the same as the controlling shares?

a. The acquisi4on is for less than 100% of the subsidiary

b. The fair value of the non-controlling shares can be inferred from the value implied by the
acquisi4on price
c. Ac4ve market prices for shares not obtained by the acquirer imply a di;erent value
d. The amount of the “control premium” cannot be determined

When the value implied by the purchase price of a subsidiary is in excess of the fair value of iden45able
net assets, the workpaper entry to allocate the di;erence between implied and book value includes a
net assets, the workpaper entry to allocate the di;erence between implied and book value includes a

1. Debit to di;erence between implied and book value

2. Credit to excess of implied over fair value
3. Credit to di;erence between implied and book value
a. 1
b. 2
c. 3
d. Both 1 and 2

If the fair value of the subsidiary’s iden45able net assets exceed both the book value and the value
implied by the purchase price, the workpaper entry to eliminate the investment account

a. Debits Excess of Fair Value over Implied Value

 b. Debits Di;erence Between Implied and Fair Value
c. Debits Di;erence Between Implied and Book Value
d. Credits Di;erence Between Implied and Book Value
The entry to amor4ze the amount of di;erence between implied and book value allocated to an
unspeci5ed intangible is recorded

1. On the subsidiary’s books

2. On the parent’s books
3. On the consolidated statements workpaper
a. 1
b. 2
c. 3
d. Both 2 and 3

The excess of fair value over implied value must be allocated to reduce propor4onally the fair values
ini4ally assigned to

a. Current assets
b. Noncurrent assets
c. Both current and noncurrent assets
d. None of the above

The SEC requires the use of push down accoun4ng when the ownership change is greater than a.

50%

b. 80%
c. 90%
d. 95%

A 70% owned subsidiary company declares and pay a cash dividend. What e;ect does the dividend have
on the retained earnings and non-controlling interest balances in the parent company’s consolidated
balance sheet?

a. No e;ect on either retained earnings or non-controlling interest

b. No e;ect on retained earnings and a decrease in non-controlling interest
c. Decreases in both retained earnings and non-controlling interest
d. A decrease in retained earnings and no e;ect on non-controlling interest

In a business combina4on accounted for as an acquisi4on, how should the excess of fair value of
iden45able net assets acquired over implied value be treated?

a. Amor4zed as a credit to income over a period not to exceed forty years

b. Amor4zed as a charge to expense over a period not to exceed forty years
c. Amor4zed directly to retained earnings over a period not to exceed forty years
d. Recognized as an ordinary gain in the year of acquisi4on
Goodwill represents the excess of the implied value of an acquired company over the

a. Aggregate fair values of iden45able assets less liabili4es assumed

b. Aggregate fair values of tangible assets less liabili4es assumed
c. Aggregate fair values of intangible assets less liabili4es assumed
d. Book value of an acquired company
In preparing consolidated working papers, beginning retained earnings of the parent company will be
adjusted in years subsequent to acquisi4on with an elimina4on entry whenever:

a. A non-controlling interest exists

b. It does not re6ect the equity method
c. The cost method has been used only
d. The complete equity method is in use

Dividends declared by a subsidiary are eliminated against dividend income recorded by the parent under
the

a. Fair value op4on/model

b. Equity method
c. Cost model and Fair value op4on/model
d. Cost model

What is the e;ect if an unconsolidated subsidiary is accounted for by the equity method but
consolidated statements are being prepared for the parent company and other subsidiaries?

a. All of the unconsolidated subsidiary’s accounts will be included individually in the consolidated
statements
b. The consolidated retained earnings will not re6ect the earnings of the unconsolidated subsidiary.
c. The consolidated retained earnings will be the same as if the subsidiary had been included in the
consolida4on
d. Dividend revenue from the unconsolidated subsidiary will be re6ected in consolidated net
income

Which of the following statements applying to the uses of the equity method versus the cost method is
true?

a. The equity method is required when one 5rm owns 20% or more of the common stock of
another 5rm
b. If no dividends were paid by the subsidiary, the investment account would have the same
balance under both methods
c. The method used has no signi5cance to consolidated statements
d. An advantage of the equity method is that no amor4za4on of excess adjustments need s to be
made on the consolidated worksheet
In consolidated 5nancial statements, it is expected that:

a. Dividends declared equals the sum of the total parent company’s declared dividends and the
total subsidiary’s declared dividends
b. Retained Earnings equals the sum of the controlling interest’s separate retained earnings and the
non-controlling interest’s separate retained earnings
c. Common Stock equals the sum of the parent company’s outstanding shares and the subsidiary’s
outstanding shares
d. Net Income equals the sum of the income distributed to the controlling interest and the income
distributed to the non-controlling interest

How is the por4on of consolidated earnings to be assigned to non-controlling interest in consolidated

5nancial statements determined?

a. The net income of the parent is subtracted from the subsidiary’s net income to determine the
non-controlling interest
b. The subsidiary’s net income is extended to the non-controlling interest
c. The amount of the subsidiary’s earnings is mul4plied by the non-controlling’s percentage
ownership and is adjusted for the excess cost amor4za4on applicable to the NCI
d. The amount of consolidated earnings determined on the consolidated working papers is
mul4plied by the non-controlling interest percentage at the balance-sheet date

Alpha purchased an 80% interest in Beta on June 30, 20X4. Both Alpha’s and Beta’s repor4ng periods
end December 31. Which of the following represents the controlling interest in consolidated net income
for 20X4?

a. 100% of Alpha’s July1-December 31 income plus 80% of Beta’s July 1-December 31 income
b. 100% of Alpha’s July1-December 31 income plus 100% of Beta’s July 1-December 31 income
c. 100% of Alpha’s January1-December 31 income plus 80% of Beta’s July 1-December 31 income
d. 100% of Alpha’s January1-December 31 income plus 80% of Beta’s January 1-December 31
income

In a mid-year purchase when the subsidiary’s books are not closed un4l the end of the year, the
purchase income account contains the parent’s share of the

a. Subsidiary’s income earned for the en4re year

b. Subsidiary’s income earned from the beginning of the year to the date of acquisi4on
c. Subsidiary’s income earned from the date of acquisi4on to the end of the year
d. Consolidated Net Income
What is a basic premise of the acquisi4on method regarding accoun4ng for a non-controlling interest?

a. Consolidated 5nancial statements should be primarily for the bene5t of the parent company’s
stockholders
b. Consolidated 5nancial statements should be produced only if both the parent and the subsidiary
are in the same basic industry
c. A subsidiary is an indivisible part of a business combina4on and should be included in its en4rety
regardless of the degree of ownership
d. Consolidated 5nancial statements should not report a non-controlling interest balance because
these outside owners do not hold stock in the parent company

JJ Company acquired 85% of MR Company on April 1. On its December 31, consolidated income
statement, how should JJ account for MR’s revenues and expenses that occurred before April 1?

a. Include 100% of MR’s revenues and expenses and deduct the pre-acquisi4on por4on as
noncontrolling interest in net income
b. Exclude 100% of the preacquisi4on revenues and 100% of the preacquisi4on expenses from
their respec4ve consolidated totals
c. Exclude 15% of the preacquisi4on revenues and 15% of the preacquisi4on expenses from
consolidated expenses
d. Deduct 15% of the net combined revenues and expenses rela4ng to the preacquisi4on period
from consolidate net income

A parent buys 32% of a subsidiary in one year and then buys an addi4onal 40% in the next year. In a step
acquisi4on of this type, the original 32% acquisi4on should be

a. Maintained at its ini4al value

b. Adjusted to its equity method balance at the date of the second acquisi4on
c. Adjusted to fair value at the date of the second acquisi4on with a resul4ng gain or loss recorded
d. Adjusted to fair value at the date of the second acquisi4on with a resul4ng adjustment to
addi4onal paid-in capital

If AA Company acquires 80% of the stock of BB Company on January 1, 20X2, immediately a3er the
acquisi4on:

a. Consolidated retained earnings will be equal to the combined retained earnings of the two
companies
b. Goodwill will be reported in the consolidated balance sheet
c. AA Company’s addi4onal paid-in capital may be reduced to permit the carry forward of BB
Company retained earnings
 d. Consolidated retained earnings and AA Company retained earnings will be the same

Which of the following statements is correct

a. The non-controlling shareholders’ claim on the subsidiary’s net assets I s based on the book
value of the subsidiary’s net assets
b. Only the parent’s por4on of the di;erence between book value and fair value of the subsidiary’s
assets is assigned to those assets
c. Goodwill represents the di;erences between the book value of the subsidiary’s net assets and
the amount paid by the parent to buy ownership
d. Total assets reported by the parent generally will be less than total assets reported on the
consolidated balance sheet

Which of the following statements is correct?

a. Foreign subsidiaries do not need to be consolidated if they are reported as a separate opera4ng
group under segment repor4ng
b. Consolidated retained earnings do not include the non-controlling interest’s claim on the
subsidiary’s retained earnings
c. The non-controlling shareholders’ claim should be adjusted for changes in the fair value of the
subsidiary assets but should not include goodwill
d. Consolida4on is expected any 4me the investor holds signi5cant in6uence over the investee

How is the por4on of consolidated earnings to be assigned to the non-controlling interest in

consolidated 5nancial statements determined?

a. The parent’s net income is subtracted from the subsidiary’s net income to determine the
noncontrolling interest
b. The subsidiary’s net income is extended to the non-controlling interest
c. The amount of the subsidiary’s earnings recognized for consolida4on purposes is mul4plied by
the non-controlling interest’s percentage of ownership
d. The amount of consolidated earnings on the consolidated work papers is mul4plied by the
noncontrolling interest percentage on the balance sheet date

Under push down accoun4ng, the work paper entry to eliminate the investment account includes a a.

Debit to Goodwill

b. Debit to Revalua4on Capital

c. Credit to Revalua4on Capital
d. Debit to Revalua4on Assets
Which of the following observa4ons is NOT consistent with the use of push-down accoun4ng?

a. The revalua4on capital account is part of the subsidiary’s stockholders’ equity

b. No di;eren4al arise in the consolida4on process
c. Revalua4on Capital account is eliminated in preparing consolidated statements
d. Elimina4ng entries related to the di;eren4al are needed in the workpapers

When companies employ push-down accoun4ng:

a. The consolidated 5nancial statements will appear exactly as if push-down accoun4ng had not
been used
b. A special account called Revalua4on Capital will appear in the consolidated balance sheet
c. All consolida4on elimina4on entries are made on the books of the subsidiary rather than in
consolidated workpapers
d. It means that the subsidiary is not substan4ally wholly owned by the parent

Which of the following statements is false regarding push-down accoun4ng?

a. Push-down accoun4ng simpli5es the consolida4on process

b. Push-down accoun4ng provides beIer informa4on for internal revolu4on
c. Push-down accoun4ng must be applied for combina4ons under a pooling of interests
d. Push-down proponents argue that a change in ownership creates a new basis for subsidiary
assets and liabili4es

When a company applies the ini4al value method in accoun4ng for its investment in a subsidiary and the
subsidiary reports income less than dividends paid, what entry would be made for a consolidated
worksheet?

a. Retained Earnings

Investment in Subsidiary

b. Investment in Subsidiary

Retained Earnings

c. Investment in Subsidiary

Equity in subsidiary’s income

d. Retained Earnings

Addi4onal paid-in capital

In reference to the downstream or upstream sale of depreciable assets, which of the following
statements is correct?

a. Upstream sales from the subsidiary to the parent company always result in unrealized gains or
losses
b. The ini4al e;ect of unrealized gains and losses from downstream sales of depreciable assets is
di;erent from the sale of non-depreciable assets
c. Gains, but not losses, appear in the parent-company accounts in the year of sale and must be
eliminated by the parent company in determining its investment income under the equity
method of accoun4ng
d. Gains and losses appear in the parent-company accounts in the year of sale and must be
eliminated by the parent company determining its investment income under the equity
method
of
accoun4ng
In the year a subsidiary sells land to its parent company at a gain, a workpaper entry is made debi4ng

1. Retained Earnings – P Co. 2. Retained Earnings – S Co. 3. Gain in Sale of Land a. 1

b. 2
c. 3
d. Both 1 and 2

In years subsequent to the year a 90% owned subsidiary sells equipment to its parent company at a gain,
the non-controlling interest in consolidated income is computed by mul4plying the non-controlling
interest percentage by the subsidiary’s reported net income

a. Minus the net amount of unrealized gain on the intercompany sale

b. Plus the net amount of unrealized gain on the intercompany sale
c. Minus intercompany gain considered realized in the current period
d. Plus intercompany gain considered realized in the current period

Company S sells equipment to its parent company (P) at a gain. In years subsequent to the year of the
intercompany sale, a workpaper entry is made under the cost method debi4ng

a. Retained Earnings – P
b. Non-controlling interest
c. Equipment
d. All of these

P Corp. owns 90% of the outstanding common stock of S Company. On December 31, 20x4, S sold
equipment to P for an amount greater than the equipment’s book value but less than its original cost.
The equipment should be reported on the December 31, 20x4 consolidated balance sheet at

a. P’s original cost less 90% of S’s recorded gain

b. P’s original cost less S’s recorded gain
 c. S’s original cost
d. P’s original cost
In the year an 80% owned subsidiary sells equipment to its parent company at a gain, the noncontrolling
interest in consolidated income is calculated by mul4plying the non-controlling interest percentage by
the subsidiary’s reported net income

a. Plus the intercompany gain considered realized in the current period

b. Plus the net amount of unrealized gain on the intercompany sale
c. Minus the net amount of unrealized gain on the intercompany sale
d. Minus the intercompany gain considered realized in the current period

The amount of the adjustment to the non-controlling interest in consolidated net assets is equal to the
non-controlling interest’s percentage of the

a. Unrealized intercompany gain at the beginning of the period

b. Unrealized intercompany gain at the end of the period
c. Realized intercompany gain at the beginning of the period
d. Realized intercompany gain at the end of the period

In years subsequent to the upstream intercompany sale of non-depreciable assets, the necessary
consolidated workpaper entry under the cost method is to debit the

a. Non-controlling interest and Retained Earnings (Parent) accounts, and credit the nondepreciable
asset
b. Retained Earnings (Parent) account and credit the non-depreciable asset
c. Non-depreciable asset, and credit the Non-controlling interest and Investment in Subsidiary
accounts
d. No entries are necessary

When preparing consolidated 5nancial statement workpapers, unrealized intercompany gains, as a result
of equipment or inventory sales by a?liates, are allocated propor4onately by percent of ownership
between parent and subsidiary only when the selling a?liate is

a. The parent and the subsidiary is less than wholly owned

b. A wholly owned subsidiary
c. The subsidiary and the subsidiary is less than wholly owned
d. The parent of a wholly owned subsidiary

Gain or loss result from an intercompany sale of equipment between a parent and a subsidiary is

a. Recognized in the consolidated statements in the year of the sale

b. Considered to be realized over the remaining useful life of the equipment as an adjustment to
deprecia4on in the consolidated statements
c. Considered to be unrealized in the consolidated statements un4l the equipment is sold to a third
party
d. Amor4zed over a period not less than 2 years and not greater than 40 years
WW Company owns 80% of FF Company’s outstanding common stock. On December 31, 20x9, FF sold
equipment to WW at a price in excess of FF’s carrying amount, but less than its original cost. On a
consolidated balance sheet at December 31, 20x9, the carrying amount of the equipment should
reported at:

a. WW’s original cost

b. FF’s original cost
c. WW’s original cost less FF’s recorded gain
d. WW’s original cost less 80% of FF’s recorded gain

J Company acquired all of K Company’s outstanding common stock in exchange for cash. The acquisi4on
price exceeds the fair value of net assets requited. How should J Company determine the amounts to be
reported for the plant and equipment and long term debt acquired from K Company??

Plant and Equipment Long-term debt

a. K’s carrying amount K’s carrying amount

b. K’s carrying amount Fair value
c. Fair value K’s carrying amount
d. Fair value Fair value

PP Inc. owns 100% of SS Inc. On January 1, 20x2, PP sold delivery equipment to SS at a gain. PP had
owned the equipment for two years and used a 5ve-year straight-line deprecia4on rate with no residual
value. SS is using a three-year straight-line deprecia4on rate with no residual value for the equipment. In
the consolidated income statement, SS’s recorded deprecia4on expense on the equipment for 20x2 will
be decreased by:

a. 20% of the gain on the sale

b. 33 1/3% of the gain on the sale
c. 50% of the gain on the sale
d. 100% of the gain on the sale

Included in a working paper elimina4on (in journal entry format) for intercompany sales of merchandise
was a debit to Minority Interest in Net Assets of Subsidiary. This debit indicates that:

a. The parent company sold merchandise to a par4ally owned subsidiary

b. A wholly owned subsidiary sold merchandise to a par4ally owned subsidiary
c. A par4ally owned subsidiary sold merchandise to the parent company or to another subsidiary d.
Either a or b took place

From a consolidated point of view, the intercompany gain on a parent company’s sale of a depreciable
plant asset to the subsidiary is realized when:

a. The parent company sells the plant asset to the subsidiary

b. The subsidiary abandons the plant asset
 c. The subsidiary resells the plant asset to the parent company
d. Some other transac4on or event takes place
In the measurement of minority interest in net income of a par4ally owned subsidiary, the credit for
Deprecia4on Expense – Parent in the working paper elimina4on (in journal entry format) for
intercompany gain in a depreciable plant asset is aIributed to net income of:

a. The parent company

b. The subsidiary
c. The consolidated en4ty
d. None of the foregoing

The working paper elimina4on (in journal entry format) for a second year of intercompany sales made at
a markup over subsidiary cost by a par4ally owned subsidiary to the parent company includes:

a. A debit to Retained Earnings – Subsidiary

b. A credit to Minority Interest in Net Assets of Subsidiary
c. A credit to Cost of Goods Sold – Subsidiary
d. None of the foregoing

Which of the following is not an e;ect of a working paper elimina4on for intercompany sales of
merchandise by a parent company to a subsidiary?

a. It eliminates the overstatement of the subsidiary’s Sales ledger account balance

b. The intercompany pro5t por4on of the subsidiary’s Cost of Goods Sold ledger account balance
c. It reduces consolidated inventories to the cost incurred by the consolidated en4ty
d. It eliminates the parent’s Intercompany Sales and Intercompany Cost of Goods Sold ledger
account balances
e. None of the foregoing

If a gain on an intercompany transac4on is aIributable to a par4ally owned subsidiary, working paper

elimina4ons (in journal entry format) for accoun4ng periods subsequent to the period of the
intercompany transac4on will include a debit to Minority Interest in Net Assets of Subsidiary unless the
gain arose from:

a. A sale of plant assets

b. A sale of merchandise
c. An acquisi4on of outstanding bonds in the open market
d. A sale of intangible assets
e. None of the foregoing

The gross pro5t on an intercompany sale of merchandise cos4ng 500,000 at a gross margin rate of 16
2/3% based on selling price is:

a. 100,000
b. 120,000
c. 200,000
 d. 240,000
e. Some other amount
Is the non-controlling interest in net income of a par4ally owned subsidiary a;ected by:

> Elimina4on of deprecia4on aIributable to intercompany gain on machinery acquired by parent from
subsidiary?

>Elimina4on of intercompany gain on land sold by parent to subsidiary? a.

>Yes >Yes

b. >Yes >No

c. >No >Yes

d. >No >No

A working paper elimina4on to remove an intercompany pro5t or gain is not relevant for an
intercompany:

a. Sale of merchandise
b. Sale of plant asset or intangible asset
c. Sales-type/capital lease
d. Acquisi4on of an a?liate’s outstanding bonds payable in the open market

Blue Company owns 70% of Black Company’s outstanding common stock. On December 31, 20x4, Black
sold equipment to Blue at a price in excess of Black’s carrying amount, but less than its original cost. On
a consolidated balance sheet at December 31, 20x4, the carrying amount of the equipment should be
reported at:

a. Blue’s original cost

b. Black’s original cost
c. Blue’s original cost less Black’s recorded gain
d. Blue’s original cost less 70% of Black’s recorded gain

A parent and its 80% owned subsidiary have made several intercompany sales of noncurrent assets
during the past two years. The amount of income assigned to the noncontrolling interest for the second
year should include the noncontrolling interest’s share of gains:

a. Unrealized in the second year from upstream sales made in the second year
b. Realized in the second year from downstream sales made in both years
c. Realized in the second year from upstream sales made in both years
d. Both realized and unrealized from upstream sales made in the second year
A wholly owned subsidiary sold land to its parent during the year at a gain. The parent con4nues to hold
the land at the end of the year. The amount to be reported as consolidated net income for the year
should equal:

a. The parent’s separate opera4ng income, plus the subsidiary’s net income
b. The parent’s separate opera4ng income, plus the subsidiary’s net income, minus the
intercompany gain
c. The parent’s separate opera4ng income, plus the subsidiary’s net income, plus the intercompany
gain
d. The parent’s net income, plus the subsidiary’s net income, plus the intercompany gain

A parent sold land to its par4ally owned subsidiary during the year at a loss. The subsidiary con4nues to
hold the land at the end of the year. The amount to be reported as consolidated net income for the year
should equal:

a. The parent’s separate opera4ng income, plus the intercompany loss

b. The parent’s separate opera4ng income, plus the intercompany loss, plus the subsidiary’s net
income
c. The parent’s separate opera4ng income, minus the intercompany loss
d. The parent’s separate opera4ng income, minus the intercompany loss, plus the subsidiary’s net
income

An intercompany gain or loss on a downstream sale of land should be recognized in consolidated net
income:

I. In the year of the downstream sale

II. Over the period of 4me the subsidiary uses the land III. In the year the
subsidiary sells the land to an unrelated party a. I
b. II
c. III
d. I or II

On November 8, 20x4, Power Corp. sold land to Wood Co., its wholly owned subsidiary. The land cost
P61,500 and was sold to Wood for P89,000. From the perspec4ve of the combina4on, when is the gain
on the sale of the land realized?

a. Propor4onately over a designated period of years

b. When Wood Co. sells the land to a third party
c. No gain can be recognized
d. As Wood uses the land
e. When Wood Co. begins using the land produc4vely
Parent sold land to its subsidiary for a gain in 20x4. The subsidiary sold the land externally for a gain in
20x7. Which of the following statements is true?

a. A gain will be reported on the consolidated income statement in 20x4

b. A gain will be reported on the consolidated income statement in 20x7
c. No gain will be reported on the 2010 consolidated income statement
d. Only the parent company will report a gain in 20x7
e. The subsidiary will report a gain in 20x4

An intercompany sale took place whereby the transfer price exceeded the book value of a depreciable
asset. Which statement is true for the year following the sale?

a. A worksheet entry is made with a debit to gain for a downstream transfer

b. A worksheet entry is made with a debit to gain for an upstream transfer
c. A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer
when the parent uses the equity method
d. A worksheet entry is made with a debit to retained earnings for a downstream transfer
e. No worksheet entry is necessary

Which of the following statements is true concerning an intercompany transfer of a depreciable asset?

a. Non-controlling interest in subsidiary’s net income is never a;ected by a gain on the transfer
b. Non-controlling interest in subsidiary’s net income is always a;ected by a gain on the transfer
c. Non-controlling interest in subsidiary’s net income is a;ected by a downstream gain only
d. Non-controlling interest in subsidiary’s net income is a;ected only when the transfer is upstream
e. Non-controlling interest in subsidiary’s net income is increased by an upstream gain in the year
of transfer

any gain or loss or intercompany sale or property plant and equipment is deferred as realized income the

following year the income is depreciable.

TRUE

to eliminate the gain on intercompany sale the debit is to retained earning

FALSE

When transla4ng foreign currency 5nancial statements for a company whose func4onal currency is the
peso, which of the following accounts is translated using historical exchange rates?
 Notes Payable Equipment

a. Yes Yes
b. Yes No
c. No No
d. No Yes

Under the temporal method, monetary assets and liabili4es are translated by using the exchange rate
exis4ng at the:

a. Beginning of the current year

b. Date the transac4on occurred
c. Balance sheet date
d. None of these

The process of transla4ng the accounts of a foreign en4ty into its func4onal currency when they are
stated in another currency is called:

a. Veri5ca4on
b. Transla4on
c. Remeasurement
d. None of these

Which of the following would be restated using the average exchange rate under the temporal method?

a. Cost of goods sold

b. Deprecia4on expense
c. Amor4za4on expense
d. None of these

Paid-in capital accounts are translated using the historical exchange rate under:

a. The current rate method only

b. The temporal method only
c. Both the current rate and temporal methods
d. Neither the current rate nor temporal methods

Which of the following would be restated using the current exchange rate under the temporal method?

a. Marketable securi4es carried at cost

b. Inventory carried at market

c. Common stock
d. None of these
The transla4on adjustment that results from transla4ng the 5nancial statements of a foreign subsidiary
using the current rate method should be:

a. Included as a separate item in the stockholders’ equity sec4on of the balance sheet
b. Included in the determina4on of net income for the period it occurs
c. Deferred and amor4zed over a period not to exceed forty years
d. Deferred un4l a subsequent year when a loss occurs and o;set against that loss

Average exchange rates are used to translate certain items from foreign 5nancial statements into pesos.
Such averages are used in order to:

a. Smooth out large transla4on gains and losses

b. Eliminate temporary 6uctua4on in exchange rates that may be reversed in the next 5scal period
c. Avoid using di;erent exchange rates for some revenue and expense accounts
d. Approximate the exchange rate in e;ect when the items were recognized

When the func4onal currency is iden45ed as the peso, land purchased by a foreign subsidiary a3er the

a. Historical rate in e;ect when the land was purchased

b. Current rate in e;ect at the balance sheet date
c. Forward Rate
d. Average exchange rate for the current period

The appropriate exchange rate for transla4ng a plant asset in the balance sheet of a foreign subsidiary in
which the func4onal currency in the peso is:

a. Current exchange rate

b. Average exchange rate for the current year
c. Historical exchange rate in e;ect when the plant asset was acquired or the date of acquisi4on,
whichever is later
d. Forward Rate

A foreign subsidiary’s func4onal currency is its local currency which has not experienced signi5cant
in6a4on. The weighted average exchange rate for the current year would be the appropriate exchange
rate for transla4ng

Wages expense Sales to customers

a. Yes Yes
b. Yes No
c. No No
d. No Yes

If the func4onal currency is determined to be the peso and its 5nancial statements are prepared in the
local currency, PAS 21, requires which of the following procedures to be followed?

a. Translate the 5nancial statements into pesos using the current rate method
b. Remeasure the 5nancial statements into pesos using the temporal method
 c. Translate the 5nancial statements into pesos using the temporal method
d. Remeasure the 5nancial statements into pesos using the current rate method

P Company acquired 90% of the outstanding common stock of S Company which is a foreign company.
The acquisi4on was accounted for using the acquisi4on method. In preparing consolidated statements,
the paid-in capital of S Company should be converted at the:

a. Exchange rate e;ec4ve when S Company was organized.

b. Exchange rate e;ec4ve on the date of purchase of the stock of S Company by P Company
c. Average exchange rate for the period S Company stock has been upheld by P Company d.
Current exchange rate.
In preparing consolidated 5nancial statements of a Philippine parent company and a foreign subsidiary,
the foreign subsidiary’s func4onal currency is the currency:

a. Of the country the parent is located

b. Of the country the subsidiary is located
c. In which the subsidiary primarily generates and spends cash.
d. In which the subsidiary maintains its accoun4ng records.

Gains from remeasuring a foreign subsidiary's 5nancial statements from the local currency, which is not
the func4onal currency, into the parent company's currency should be reported as a(n):

a. Other comprehensive income item

b. Extraordinary item (net of tax)
c. Part of con4nuing opera4ons.
d. Deferred Credit.

Assuming no signi5cant in6a4on, gains resul4ng from the process of transla4ng a foreign en4ty's
5nancial statements from the func4onal currency to peso should be included as a (n):

a. Other comprehensive income item

b. Extraordinary item (net of tax)
c. Part of con4nuing opera4ons.
d. Deferred Credit.

A foreign subsidiary’s func4onal currency is its local currency and in6a4on of over 100 percent has been
experienced over a three-year period. For consolida4on purposes, PAS 29 requires the use of:

a. The current rate method only

b. The temporal method only
c. Both the current rate and temporal methods
d. Either the current rate or the temporal method
The objec4ve of remeasurement is to:

a. Produce the same results as if the books were maintained in the currency of the foreign en4ty’s
largest customer
b. Produce the same results as if the books were maintained solely in the local currency
c. Produce the same results as if the books were maintained solely in the func4onal currency d.
None of the above

The func4onal currency approach adopted by PAS 21 requires:

a. Separate statements be maintained by the domes4c parent company and the foreign branch
both in their own currencies
b. Separate statements be maintained by the domes4c parent company and the foreign branch
with the foreign branch translated into the func4onal currency
c. Results from foreign currency changes to be ignored
d. A focus on whether the domes4c repor4ng en4ty’s cash 6ows will be indirectly or directly
a;ected by changes in the exchange rates of the foreign en4ty’s currency

In which of the following circumstances surrounding a foreign subsidiary of a Philippine parent, wherein
peso is the most likely to be considered the func4onal currency?

a. Sales are made globally and collected in pesos. Plant uses local materials and labor and pays in
foreign currency. Intercompany transac4on volume is high.
b. The foreign subsidiary sells product only in their country and receives their own currency. The
materials and labor are also secured in foreign country and paid for with foreign currencies
c. The foreign subsidiary receives their debt capital from a Philippine bank in pesos and products
produced are sold globally for pesos
d. Raw materials are acquired from the parent and paid for in pesos. Labor is acquired locally and
paid in foreign currencies. Financing is secured from the parent in pesos

A Philippine 5rm owns 100% of a Japanese automobile manufacturer. The cost of automobile parts is
typically 75% of the 5rm's total product. In which of the following circumstances would neither the peso
nor the Japanese yen be considered the func4onal currency?

a. The Japanese 5rm buys German automobile parts with marks to produce cars sold in La4n
America for pesos.
b. The Japanese 5rm buys German automobile parts with pesos to produce cars sold in La4n
America for pesos.
c. The Japanese 5rm buys German automobile parts with marks to produce cars sold in La4n
America for marks.
d. The IASB requires that either the parent's or the subsidiary's local currency be used as the
func4onal currency.
When the func4onal currency is the foreign en4ty's currency:

a. Exchange rate changes do not a;ect the economic well-being of the parent
b. The subsidiary operates as an en4ty, independent of the parent
c. Exchange rate changes do not have immediate impact on the cash 6ows of the parent d. All of
the above are correct
The transla4on (remeasurement) adjustment reported in a transla4on when the func4onal currency is
not the foreign currency is included

a. As a separate component of other comprehensive income

b. The current liability sec4on of the balance sheet as deferred revenue
c. The calcula4on of net income
d. None of the above

Assuming that a foreign en4ty is deemed to be opera4ng in an environment dominated by the local
currency, the en4ty's assets are translated using

a. The current rate

b. A simple average rate
c. A weight average rate
d. A historical rate

Assuming that a foreign en4ty is deemed to be opera4ng in an environment dominated by the local
currency, the en4ty's capital stock is translated using

a. The current rate

b. A simple average rate
c. A weight average rate
d. A historical rate

If the func4onal currency is determined to not be the foreign en4ty's local currency, transla4on is done
using

a. The current rate

b. The func4onal method
c. The remeasurement method
d. The deriva4ve method

In most cases, which of the following is NOT a component of translated retained earnings?

a. Translated retained earnings at the end of the prior period

b. Income from the period translated at the historical rate
c. The value of dividends translated at the exchange rate on the date of declara4on
d. All are components of translated retained earnings
Which of the following is NOT true regarding foreign statement transla4on using the current or temporal
method?

a. All assets and all liabili4es are translated at the current exchange rate at the date of transla4on.
b. Monetary assets and liabili4es are translated at the current exchange rate at the date of
transla4on.
c. Equity accounts other than retained earnings are translated at the historic rate in e;ect on the
date of the investment.
d. Elements of income can be translated at a weighted average rate for the period

Which of the following is NOT considered when directly compu4ng the transla4on adjustment for
foreign 5nancial statements?

a. Beginning amount of net assets held by the domes4c investor

b. Increase or decrease in net assets for the period excluding capital transac4ons
c. Increase or decrease in net asset as a result of capital transac4ons
d. All are considered when directly compu4ng the transla4on adjustment

Exchange rates will not usually directly a;ect the cash 6ows of the parent en4ty in which of the following
cases?

a. The foreign en4ty operates in a currency other than its own.

b. The foreign en4ty operates in its local currency.
c. The foreign en4ty func4ons in a currency other than its local currency.
d. The foreign en4ty func4ons in the parent's currency.

The elimina4ons and adjustment entries necessary to consolidate the parent and subsidiary 5nancial
statements are translated as follows:

a. All balances, pro5ts, and losses at the current exchange rate on the consolida4on date
b. Intercompany balances translate at the rates used for other accounts, pro5ts and losses translate
at an average rate
c. Intercompany balances translate at the current rates, pro5ts and losses translate at an average
rate
d. None of the above are correct

A Philippine parent purchased a foreign subsidiary last year at a price in excess of the subsidiary’s book
value. This excess is assumed to be traceable to undervalued equipment. When the parent company
prepares its elimina4on entries for the excess, which of the following combina4ons of exchange rates
should be used?

Equipment Deprecia4on Expense

a. Historical Current
b. Current Historical
c. Historical Average
 d. Current Average
Which of the following is true concerning the accoun4ng for a foreign investment under the cost
method?

a. Investment income is translated at the exchange rate on the dividend declara4on date.
b. Investment income is translated using the average exchange rate for the year.
c. Investment income is based on the investee's net income adjusted for the excess of purchase
price over book value.
d. Investment income is based on the investee's net income without adjus4ng for the excess of
purchase price over book value.

A debit balance in a parent's cumula4ve transla4on adjustment a3er the 5rst year of owning a foreign
subsidiary suggests which of the following is true?

a. The exchange rate has strengthened rela4ve to the peso.

b. The exchange rate has weakened rela4ve to the peso.
c. The foreign en4ty had net income but there was not a change in exchange rates.
d. The foreign en4ty had a net loss but there was not a change in exchange rates.

Which of the following procedures would be necessary when a Swiss subsidiary maintains its books
euros and its func4onal currency is Japanese Yen and its parent is a Philippine company?

a. Remeasurement from euros to pesos

b. Remeasurement from euros to Japanese Yen; translate from Yen to pesos
c. Remeasurement from Yen to euros; translate from euros to pesos
d. None of the above

Assuming that the func4onal currency of a foreign subsidiary is the local currency, which of the following
accounts would be translated at the current rate?

a. Addi4onal Paid-in Capital

b. Retained Earnings
c. Allowance for DoubUul Accounts
d. Cost of Goods Sold

Assuming that the func4onal currency of a foreign subsidiary is not the local currency, which of the
following accounts would be remeasured at the historical rate?

a. Long-term notes payable

b. Accounts Payable
c. Land
d. Sales Revenue
Which of the following best describes the measurement of a gain or loss from the sale of a depreciable
asset by a foreign subsidiary whose func4onal currency is not the local currency?

a. Reconstruct the journal entry on the date of the sale using the historical rate for cash and the
depreciable asset and its accumulated deprecia4on
b. Reconstruct the journal entry on the date of the sale using the current rate for cash and the
historical rate for the depreciable asset and its accumulated deprecia4on
c. Translate the gain or loss using the historical rate.
d. Translate gains at the current rate and losses at the histori.al rate.

Which of the following best describes the accoun4ng for a foreign en4ty requiring transla4on or
remeasurement if the local economy is classi5ed as highly in6a4onary?

a. The en4ty's 5nancial statements are 5rst adjusted for in6a4on and then translated into the
domes4c currency.
b. The en4ty's 5nancial statements are 5rst adjusted for in6a4on and then remeasured into the
domes4c currency.
c. The unadjusted trial balance is translated if the func4onal currency is the local currency.

The adjustment resul4ng from the remeasurement of an en4ty opera4ng in a highly in6a4onary
environment would appear

a. In the stockholders’ equity sec4on of the balance sheet.

b. As a component of other comprehensive income.
c. As an ordinary income statement item.
d. As an extraordinary item on the income statement.

PAS 21 requires which of the following disclosures from 5rms involved in foreign currency transac4ons?

a. Beginning cumula4ve transla4on adjustments.

b. Ending cumula4ve transla4on adjustments.
c. The amount of income taxes for the period allocated to transla4on adjustments.
d. All are required disclosures.

In a company's disclosure of foreign currency transac4ons and hedges and transla4on adjustments, all of
the following items should be disclosed except

a. Beginning and ending cumula4ve transla4on adjustments.

b. The amount of income taxes for the period allocated to transla4on adjustments
c. The amount transferred from cumula4ve transla4on adjustment due to changes in foreign
exchange rates.
d. The aggregate adjustment for the period resul4ng from transla4on adjustment.
The reconcilia4on of the annual transla4on adjustment usually includes all of the following, EXCEPT

a. Net assets at the beginning of the period mul4plied by the change in exchange rates during the
period.
b. Change in net assets (excluding capital transac4ons) mul4plied by the di;erence between the
current rate and the average rate used to translate income.
c. Change in net assets (excluding capital transac4ons) mul4plied by the di;erence between the
historical rate and the average rate used to translate income.
d. Change in net assets due to capital transac4ons mul4plied by the di;erence between the current
rate and the rate at the 4me of the capital transac4on.

Exchange gains and losses resul4ng from transla4ng (not remeasuring) foreign currency 5nancial
statements into U.S. dollars should be included as a(an): ;

a. A component of other comprehensive income.

b. Extraordinary item in the income statement for the period in which the rate changes.
c. Ordinary gain/loss item in the income statement.
d. Component of opera4ng income.

When Philippine investor en4ty acquires interest in a foreign en4ty with the payment of foreign
currency, the determina4on of excess is calculated

a. In pesos
b. In the foreign currency
c. In pesos if remeasurement (historical rate/temporal method) is indicated
d. In the foreign currency if transla4on (current rate/func4onal method) is indicated

As part of the consolida4on process for a par4ally-held foreign subsidiary, the elimina4on entry to
distribute the excess of cost over book value will include a credit to Cumula4ve Transla4on Adjustment-
Parent

a. For the amount of excess aIributable to iden45able net assets 4mes the di;erence between
historical and current exchange rates
b. For the amount of excess aIributable to iden45able net assets 4mes the di;erence between
average and current exchange rates
c. For the Parent's por4on of the excess aIributable to iden45able net assets 4mes the di;erence
between historical and current exchange rates
d. For the Parent's por4on of the excess aIributable to iden45able net assets 4mes the di;erence
between average and current exchange rates
Consider the consolida4on process for a foreign subsidiary: When the excess of cost over book value is
aIributable to iden45able assets, those assets are adjusted in the “distribu4on” elimina4on entry by an
amount that is calculated as

a. The di;erence between cost and fair value as measured in the foreign currency
b. The di;erence between cost and fair value as measured in the foreign currency mul4plied by the
historical exchange rate
c. The di;erence between cost and fair value as measured in the foreign currency mul4plied by the
weighted-average exchange rate
d. The di;erence between cost and fair value as measured in the foreign currency mul4plied by the
current exchange rate

What is a subsidiary’s func4onal currency?

a. The parent's repor4ng currency.

b. The currency in which transac4ons are denominated.
c. The currency in which the en4ty primarily generates and expends cash.
d. Always the currency of the country in which the company has its headquarters.

In comparing the transla4on and the remeasurement process, which of the following is true?

a. The reported balance of inventory is normally the same under both methods
b. The reported balance of equipment is normally the same under both methods.
c. The reported balance of sales is normally the same under both methods.
d. The reported balance of deprecia4on expense is normally the same under both methods.

Which of the following statements is true for the transla4on process (as opposed to remeasurement)?

a. A transla4on adjustment can a;ect consolidated net income.

b. Equipment is translated at the historical exchange rate in e;ect at the date of its purchase.
c. A transla4on adjustment is created by the change in the rela4ve value of a subsidiary's net assets
caused by exchange rate 6uctua4ons.
d. A transla4on adjustment is created by the change in the rela4ve value of a subsidiary’s monetary
assets and monetary liabili4es caused by exchange rate 6uctua4ons.

A subsidiary of BB Corpora4on has one asset (inventory) and no liabili4es. The func4onal currency for
this subsidiary is the foreign currency (FC). The inventory was acquired for 100,000 FC when the
exchange rate was P0.16 = 1 FC. Consolidated statements are to be produced, and the current exchange
rates P0.19 = 1 FC. Which of the following statements is true for the consolidated 5nancial statements?

a. A remeasurement gain must be reported

b. A posi4ve transla4on adjustment must be reported.
c. A nega4ve transla4on adjustment must be reported.
d. A remeasurement loss must be reported.
At what rates should the following balance sheet accounts in foreign statements be translated (rather
than remeasured] into pesos?

Accumulated Deprecia4on—Equipment Equipment

a. Current Current
b. Current Average for year
c. Historical Current
d. Historical Historical

In the translated 5nancial statements, which method of transla4on maintains the underlying valua4on
methods used in the foreign currency 5nancial statements?

a. Current rate method; income statement translated at average exchange rate for the year
b. Current rate method; income statement translated at exchange rate at the balance sheet date c.
Temporal method
d. Monetary/nonmonetary method

Which of the following items is not remeasured using historical exchange rates under the temporal
method?

a. Accumulated deprecia4on on equipment

b. Cost of goods sold
c. Marketable equity securi4es
d. Retained earnings

In accordance with Philippines generally accepted accoun4ng principles, which transla4on combina4on
is appropriate for a foreign opera4on whose func4onal currency is the U.S. dollars?

Method Treatment of Transla4on adjustment

a. Temporal Other Comprehensive Income

b. Temporal Gain or loss in net income
c. Current rate Other Comprehensive Income
d. Current rate Gain or loss in net income

A foreign subsidiary’s func4onal currency is its local currency, which has not experienced signi5cant
in6a4on. The weighted average exchange rate for the current year is the appropriate exchange rate for
transla4ng

Wages Expense Wages Payable

a. Yes Yes
b. Yes No
c. No Yes
d. No No
The func4onal currency of DZ, Inc.’s Bri4sh subsidiary is the Bri4sh pound. DZ borrowed pounds as a
par4al hedge of its investment in the subsidiary. In preparing consolidated 5nancial statements, DZ’s
nega4ve transla4on adjustment on its investment in the subsidiary exceeded its foreign exchange gain
on its borrowing. How should DZ’s report the e;ects of the nega4ve transla4on adjustment and foreign
exchange gain in its consolidated 5nancial statements?

a. Report the transla4on adjustment in Other Comprehensive Income on the balance sheet and the
foreign exchange gain in the income statement
b. Report the transla4on adjustment in income statement and defer the foreign exchange gain in
Other Comprehensive Income on the balance sheet
c. Report the transla4on adjustment less the foreign exchange gain in Other Comprehensive
Income on the balance sheet
d. Report the transla4on adjustment less the foreign exchange gain in the income statement

Gains from remeasuring a foreign subsidiary’s 5nancial statements from the local currency, which is not
the func4onal currency into the parent’s currency should be reported as a (n)

a. Deferred foreign exchange gain

b. Transla4on adjustment in Other Comprehensive Income
c. Extraordinary item, net of income taxes
d. Part of con4nuing opera4ons

At what rates should the following balance sheet accounts in the foreign currency 5nancial statements
be restated into pesos?

Equipment Accumulated Deprecia4on of Equipment

a. Current Current
b. Current Average for year
c. Historical Current
d. Historical Historical

A credit-balancing item resul4ng from the process of resta4ng a foreign en4ty’s 5nancial statement from
the local currency unit to pesos should be included as a (an):

a. Separate component of stockholders’ equity

b. Deferred credit
c. Component of income from con4nuing opera4ons
d. Extraordinary item

When remeasuring foreign currency 5nancial statement into the func4onal currency, which of the
following items would be remeasured using a historical exchange rate?

a. Inventories carried at cost.

b. Trading securi4es carried at market values.
c. Bonds payable.
 d. Accrued liabili4es
A foreign subsidiary's func4onal currency is its local currency, which has not experienced signi5cant
in6a4on. The weighted-average exchange rate for the current year would be the appropriate exchange
rate tor transla4ng:

Sales to Customers Wages Expenses

a. No No
b. Yes Yes
c. No Yes
d. Yes No

The func4onal currency of DD Inc.'s subsidiary is the European euro. DD borrowed euros as a par4al
hedge of its investment in the subsidiary. In preparing consolidated 5nancial statements, DD's debit
balance of its transla4on adjustment exceeded its exchange gain on the borrowing. How should the
transla4on adjustment and the exchange gain be reported in DD's consolidated 5nancial statements?
a The transla4on adjustment should be neIed against the exchange gain, and the
. excess
transla4on adjustment should be reported in the stockholders’ equity sec4on of the
balance
sheet.
b. The transla4on adjustment should be neIed against the exchange gain, and the excess
transla4on adjustment should be reported in the statement of income in compu4ng net income.
c. The transla4on adjustment is reported as a component of other comprehensive income and
then accumulated in the stockholders’ equity sec4on of the balance sheet, and the exchange
gain should be reported in the statement of income in compu4ng net income.
d. The transla4on adjustment should he reported in the statement of income, and the exchange
gain should be reported separately in the stockholders’ equity sec4on of the balance sheet.

Which of the following accounts is a monetary item?

a. Cost of Sales
b. Inventory
c. Investment in Common Stock – IBM
d. Addi4onal Paid-in Capital
e. None of the above

Which of the following accounts is a monetary item?

a. Sales
b. Intercompany Bonds Payable
c. Investment in Common Stock – IBM
d. Deferred Income Tax Expense
e. None of the above
Which of the following accounts is a monetary item?

a. Deprecia4on Expense
b. Inventory
c. Investment in Common Stock – Subs
d. Intercompany Payable—Long-term por4on
e. None of the above

Which of the following accounts is not monetary item?

a. Accounts Receivable
b. Inventory
c. Accounts payable
d. Accrued liabili4es
e. None of the above

Which of the following accounts is not a monetary item?

a. Deferred Income Taxes Payable

b. Intercompany Payables
c. Long-term intercompany payables
d. Investment in Bonds
e. None of the above

Which of the following accounts is a monetary item?

a. Deferred income Taxes Expense.

b. Addi4onal Paid-in Capital
c. Sales
d. Deferred charges
e. None of the above

The term current rate is de5ned

a. As the exchange rate at the balance sheet repor4ng date.

b. As the average exchange rate during the current year.
c. As the exchange rate in e;ect when a current year transac4on occurred.
d. Di;erently for the balance sheet than for the income statement
e. None of the above

Which transla4on procedures are followed under the current rate method of transla4on?
 a. All assets and liabili4es are translated at the current exchange rate
b. All income statement accounts are translated at the current exchange rate
c. A combina4on of current and historical exchange rates is used in both 5nancial statements d.
Both a and b
e. None of the above

What occurs in transla4on under the current rate method of transla4on?

a. All income statement accounts are expressed in dollars by using exchange rates in e;ect when
the items were recognized in the income statement
b. The e;ects of exchange rate changes are reported currently in earnings.
c. All assets and liabili4es are translated using exchange rates that produce the U.S. dollar
equivalent at the 4me the transac4ons giving rise to the balance occurred.
d. The temporal method must be used.
e. None of the above.

A foreign subsidiary has the foreign currency as its func4onal currency. The parent enters into an FX
forward to hedge its net investment. What will occur or be the accoun4ng treatment?

a. There will always be an o;seQng e;ect.

b. There may or may not be an o;seQng e;ect.
c. Any gain or loss on the forward exchange contract must be recognized currently in earnings.
d. Any gain or loss on the forward exchange contract will be deferred on the parent's books and
treated as an adjustment to the Investment in Subsidiary account.
e. None of the above.

A parent owns a foreign subsidiary that has as its func4onal currency the local currency. To avoid
repor4ng a possible nega4ve e;ect in the U.S. dollar 5nancial statements from an adverse change in the
exchange rate, the parent should hedge which of the following items?

a. The net investment (net asset) posi4on.

b. The net monetary asset posi4on.
c. The net monetary liability posi4on.
d. The net monetary posi4on whether it be posi4ve or nega4ve.

How is the e;ect of an exchange rate change reported when the current rate method of transla4on is
used?

a. Report as a deferred gain or loss in the balance sheet.

b. Report currently in earnings. R
c. Report in Other Comprehensive Income.
d. Report in the “Owner Changes in Net Assets” sec4on of the statement of comprehensive
income.
e. None of the above.
How is the e;ect of an exchange rate change for the current year reported under the temporal method
of transla4on?

a. Currently in the income statement.

b. Currently in the income statement as an extraordinary item if material.
c. As a direct charge or credit to stockholders' equity.
d. Deferred in the asset or liability sec4on of the balance sheet.
e. None of the above.

What is the e;ect of an exchange rate change called in each of the following situa4ons?

Func4onal Currency

The Foreign Currency The Philippine Peso

a. Transla4on adjustment FX Transac4on Gain or Loss

b. FX Transac4on Gain or Loss Transla4on adjustment
c. FX Transac4on Gain or Loss FX Transac4on Gain or Loss
d. Transla4on adjustment Transla4on adjustment

Under the temporal method of transla4on, how is the e;ect of an exchange rate change reported?

a. As a deferred gain or loss in the balance sheet.

b. Currently in the income statement.
c. As a direct adjustment to equity.
d. In the “Other Non-owner Changes in Net Assets” sec4on of the statement of comprehensive
income.
e. As an extraordinary item.
The term used to describe the party that is the subject of a bankruptcy proceeding is debtor.
Creditors 5ling an involuntary bankruptcy pe44on must be owed at least P5,000 in total.
The only basis for an involuntary bankruptcy 5ling by creditors is inability to pay debts as they
mature.
The major categories of debt that are given special priority under the bankruptcy statues are: a.

Administra4ve costs

b. Certain posUiling “gap” claims in involuntary 5lings

c. Wages, salaries, and commissions
d. Employee bene5t plans
e. Deposits by individuals
f. Taxes
The appointment of a trustee is infrequent.
A class of creditors has accepted a plan of reorganiza4on if such plan has been accepted by
creditors that hold at least 2/3 in amount and more than 1/2 in number of the allowed claims of
such class of creditors.
A trustee is authorized to void both fraudulent and preferen4al transfers.
In a liquida4on 5ling, if the court desires informa4on that relates the ac4vity of the trustee with
the book balances exis4ng when the trustee was appointed, then a statement of realiza4on and
liquida4on may be prepared.

False----------Creditors having security interest collateralized by speci5c assets of a debtor in

bankruptcy liquida4on are en4tled to obtain sa4sfac4on of their claims from the free assets of
the debtor’s estate.
False-------Unsecured creditors whose claims are to be paid in full from the assets of a debtor in
bankruptcy liquida4on before any cash is paid to other unsecured creditors are classi5ed as
unsecured creditors having preference.
False-------Assets in a statement of a;airs (5nancial statement) are assigned to one of three
categories: assets pledged for fully secured liabili4es, assets pledged for par4ally secured
liabili4es, and priority assets.
True-------Insolvency in the bankruptcy sense is a 5nancial status in which the aggregate current
fair value of the assets of a business enterprise is not su?cient to pay the enterprise’s liabili4es.
False------The 5ling of a debtor’s pe44on in bankruptcy does not operate as an order for relief
by the bankruptcy court.
False------Creditors having priority under the Bankruptcy Law include creditors having security
interests collateralized by speci5c assets of the debtor.
True--------In the accountability technique of accoun4ng used by a trustee for a debtor in
bankruptcy liquida4on, there is no ledger account for owner’s equity.
True-------A railroad corpora4on may not 5le a debtor’s pe44on for bankruptcy.
True-------A debtor in bankruptcy liquida4on will not be discharged within six years of a previous
bankruptcy discharge.
True----------Owner’s equity amounts are not displayed in a statement of a;airs (5nancial
statement).
False--------The bankruptcy court has the op4on of appoin4ng either a trustee or an examiner in
bankruptcy reorganiza4on.
False---------All stockholders of a corpora4on undergoing bankruptcy reorganiza4on must
approve the plan of reorganiza4on before it is con5rmed by the bankruptcy court.

When is a “statement of a;airs” used?

a. Only in liquida4ons
b. Only in reorganiza4ons
c. In both liquida4ons and reorganiza4ons
d. In preparing a statement of realiza4on and liquida4on
e. None of the above
In a “statement of a;airs,”

a. Assets pledge with par4ally secured creditors are shown on the asset side of the
statement and as a deduc4on on the liability side of the statement
b. Assets pledged with fully secured creditors are shown only on the liability side of the
statement
c. Liabili4es owed to fully secured creditors are shown only on the asset side of the
statement
d. Liabili4es owed to par4ally secured creditors are shown only on the asset side of the
balance sheet and as a deduc4on on the liability side of the statement
e. None of the above
In a “statement of a;airs,”

a. Liabili4es with priority are shown on the liability side of the statement and as a
deduc4on on the asset side of the statement
b. Assets pledge with fully secured creditors are shown on the liability side of the
statement and as a deduc4on on the asset side of the statement
c. Liabili4es owed to fully secured creditors are shown on the asset side of the statement
and as a deduc4on on the liability side of the statement
d. Liabili4es owed to par4ally secured creditors are shown on the asset side of the balance
sheet and not as a deduc4on on the liability side of the statement
e. None of the above
A debtor 5ling a debtor’s bankruptcy pe44on will not be discharged if the debtor had received a
prior discharge in bankruptcy within the past:

a. Two years
b. Four years
c. Six years
d. Eight years
Typically, the es4mate amount available for short-term prepayments in a statement of a;airs
(5nancial statement) is:

a. Zero
b. Carrying amount
c. Current fair value
d. Net realizable value
William Bau4sta is star4ng a new business, Bau4sta Enterprises, which will be single
proprietorship selling retail novel4es. Bau4sta recently received a discharge in bankruptcy, but
certain proved claims were unpaid because of insu?cient funds. Which of the following is s4ll a
claim against Bau4sta:

a. The unpaid amounts owed to secured creditors who received less than the full amount
a3er resor4ng to their security interest and receiving their bankruptcy cash payments
b. The unpaid amounts owed to trade creditors for merchandise purchased and sold by
Bau4sta in the ordinary course of his prior business enterprise
c. A personal loan to Bau4sta by his father made in an aIempt to avoid bankruptcy
d. The unpaid amount of income taxes payable to the United States that became due
within three years preceding Bau4sta’s bankruptcy
What is de5ned as a condi4on in which a company is unable to meet debts as the debts
mature?

a. De5cit
b. Liability
c. Insolvency
d. Credit Squeeze
What type of ledge account is the Estate De5cit account used in the trustee’s accoun4ng records
for a debtor in bankruptcy liquida4on?

a. Asset
b. Liability
c. Equity
d. Revenue
e. None of the above
Which of the following is 5rst-ranked of the unsecured liabili4es with priority in bankruptcy
liquida4on?

a. Claims of governmental en44es for various taxes or du4es

b. Administra4ve costs
c. Claims for wages, salaries, and commissions, subject to limita4ons of amount and 4me
d. None of the foregoing
The account equa4on for a trustee in bankruptcy liquida4on is:

a. Assets equal liabili4es plus owner’s equity

b. Assets equal accountability
c. Assets equal liabili4es minus estate de5cit
d. Assets minus liabili4es equals accountability
Nimbus Company has incurred large net losses for the past two years. Because of its inability to
pay current liabili4es, Nimbus has 5led a pe44on for reorganiza4on under the Bankruptcy Law.
The reorganiza4on provisions of the Bankruptcy Law:

a. Require that the bankruptcy court appoint a trustee in all cases

b. Permit Nimbus management to remain in possession of its assets
c. Apply only to creditors’ bankruptcy pe44ons
d. Will apply to Nimbus only if Nimbus is required to register with the Securi4es and
Exchange Commission pursuant to the Philippine securi4es laws
In the journal entry to open the accoun4ng records of a trustee in a Chapter 7 bankruptcy
liquida4on, the debit to the Estate De5cit ledge account is in the statement of a;airs amount of
the:

a. Es4mated de5ciency to unsecured, non-priority creditors

b. Total es4mated amount available
c. Es4mated amount available for unsecured, non-priority creditors
d. Stockholders’ equity of the debtor corpora4on
Under the Bankruptcy Code, do creditors having priority include?
Par4ally Secured Creditors Speci5ed Unsecured Creditors

a. Yes Yes
b. Yes No
c. No Yes
d. No No

What are the objec4ves of the bankruptcy laws in the Philippines?

a. Provide relief for the court system and ensure that all debtors are treated the same
b. Distribute assets fairly and discharge honest debtors from their obliga4ons
c. Protect the economy and s4mulate growth
d. Prevent insolvency and protect shareholders
In a bankruptcy, which of the following statements is true?

a. An order for relief results only from a voluntary pe44on

b. Creditors entering an involuntary pe44on must have debts totaling at least P20,000
c. Secured notes payable are considered liabili4es with priority on a statement of a;airs d.
None
In repor4ng a company that is to be liquidated, assets are shown at:

a. Present value calculated using an appropriate e;ec4ve rate

b. Net realizable value
c. Historical cost
d. Book value
An involuntary bankruptcy pe44on must be 5led by:

a. The insolvent company’s aIorney

b. The holders of the insolvent company’s debenture bonds
 c. Unsecured creditors with total debts of at least P13,475
d. The company’s management

An order for relief

a. Prohibits creditors from taking ac4on to collect from an insolvent company without
court approval
b. Calls for the immediate distribu4on of free assets to unsecured creditors
c. Can be entered only in an involuntary bankruptcy proceeding
d. Gives an insolvent company 4me to 5le a voluntary bankruptcy pe44on
On a statement of 5nancial a;airs, how are liabili4es classi5ed?

a. Current and noncurrent

b. Secured and unsecured
c. Monetary and nonmonetary
d. Historic and futuris4c
What is a debtor in possession?

a. The holder of a note receivable issued by an insolvent company prior to the gran4ng of
an order for relief
b. A fully secured creditor
c. The ownership of an insolvent company that con4nues to control the organiza4on
during a bankruptcy reorganiza4on
d. The stockholders in a bankruptcy proceeding
How are an4cipated administra4ve expenses reported on a statement of 5nancial a;airs?

a. As a footnote un4l actually incurred

b. As a liability with priority
c. As a par4ally secured liability
d. As an unsecured liability
What is an inherent limita4on of the statement of 5nancial a;airs?

a. Many of the amounts reported are only es4ma4ons that might prove to be inaccurate
b. The statement is applicable only to bankruptcy
c. The statement covers only a short 4me, whereas a bankruptcy may last much longer
d. The 5gures on the statement vary as to a voluntary and an involuntary bankruptcy
On a balance sheet prepared for a company during its reorganiza4on, how are liabili4es
reported?
 a. As current and long-term
b. As monetary and nonmonetary
c. As subject to compromise and not subject to compromise
d. As equity related and debt related
On a balance sheet prepared for a company during its reorganiza4on, at what balance are
liabili4es reported?

a. At the expected amount of the allowed claims

b. At the present value of the expected future cash 6ows
c. At the expected amount of the seIlement
d. At the amount of the an4cipated 5nal payment
A corpora4on that is unable to pay its debts as they become due is:

a. Bankrupt
b. Overdrawn
c. Insolvent
d. Liquida4ng
To assist the trustee, a debtor must

a. Collect and reduce to money any non-exempt property

b. File progress reports with the courts
c. File a statement of a;airs, consis4ng of answers to a series of ques4ons regarding
debtor’s 5nancial condi4on
d. Pay dividends to creditors with regards to priori4es
Which of the following statements is true?

a. Certain debts are not dischargeable

b. The goal of liquida4on is to give the company a new start
c. All secured claims are paid in full
d. The expenses to administer the estate are paid last because they are unsecured
Which of the following does not describe the accoun4ng statement of a;airs?

a. The emphasis is on asset net realizable value, not historical cost

b. The statement of a;airs is concerned only with the assets of the debtor organiza4on, not
the claims
c. The statement can also be used in a reorganiza4on
d. The statement of a;airs is based on es4mated values; actual realized values may be
di;erent
The document used to es4mate amounts available to each class of claims is called a(n)

a. Statement of Assets and Liabili4es

b. Legal Statement of A;airs
c. Accoun4ng Statement of A;airs
d. Statement of Realiza4on and Liquida4on
The document used by a trustee to report periodically on the status of 5duciary ac4vi4es is
called a(n)

a. Statement of Assets and Liabili4es

b. Legal Statement of A;airs
c. Accoun4ng Statement of A;airs
d. Statement of Realiza4on and Liquida4on
A3er elimina4ng the de5cit in a reorganiza4on plan, a balance may remain in Reorganiza4on
Capital. On the balance sheet, where would this account appear?

a. Part of the Paid-in Capital

b. Part of the dated balance in Retained Earnings
c. An Intangible Asset if the balance is a debit
d. A deferred credit amor4zed over a period not to exceed 40 years
The ra4o called “dividend to general unsecured creditors” is calculated by which of the following
formulas?

a. Es4mated amount available for unsecured creditors with/without priority divided by

Total claims of all unsecured creditors with/without priority
b. Es4mated realizable value of all debtor assets divided by Book value of debtor assets
c. Es4mated gain/loss on liquida4on divided by Total es4mated net realizable value of
debtor assets
d. Net es4mated proceeds available to unsecured creditors divided by Total claims of
unsecured creditors
In the accoun4ng statement of a;airs, the gains of losses upon liquida4on would equal

a. Net book value of assets minus book values of liabili4es

b. The book value of assets minus their realizable value
c. Total es4mated realizable value of assets minus the amount assigned to secured
creditors
d. Total es4mated realizable value of assets minus the amount remaining or unsecured
creditors
A corpora4on’s accoun4ng statement of a;airs show a dividend of 40%. The dividend means
that

a. All creditors and stockholders will receive approximately 40% of the book value of their
respec4ve interests
b. All creditors will receive an amount approximately equal to 40% of the book value of
their claims, but stockholders will receive nothing
c. Class 106 unsecured claims will receive 40% of the book value of their respec4ve claims
d. Class 7 unsecured claims will receive 40% of the book value of their respec4ve claims
A corpora4on’s accoun4ng statement of a;airs shows a dividend of 115%. The dividend means
that

a. Secured creditors will receive an amount in excess of the book value of their claims
b. Unsecured creditors will receive an amount in excess of the book value of their claims
c. Stockholders may expect some return on their interests
d. An error was made in the prepara4on of the statement
The Statement of Realiza4on and Liquida4on di;ers from the Statement of A;airs because

a. The Statement of Realiza4on and A;airs reports es4mated realizable values rather than
actual liquida4on results
b. The Statement of Realiza4on and A;airs is a summary of secured debt ac4vity only
c. The Statement of Realiza4on and A;airs is prepared only at 5nal comple4on of the
liquida4on process
d. The Statement of Realiza4on and A;airs reports actual liquida4on results rather than
es4mated realizable values
When a business becomes insolvent, it generally has three possible courses of ac4on. Which of
the following is not one of the three possible courses of ac4on?

a. The debtor and its creditors may enter into a contractual agreement, outside of formal
bankruptcy proceedings
b. The debtor con4nues opera4ng the business in the normal course of the day-to-day
opera4ons
c. The debtor or its creditors may 5le a bankruptcy pe44on, a3er which the debtor is
liquidated
d. The debtor or its creditors may 5le a pe44on for reorganiza4on
A composi4on agreement is an agreement between the debtor and its creditors whereby the
credits agree to:

a. Accept less than the full amount of their claims

b. Delay seIlement of the claim un4l a later date
 c. Force the debtor into a liquida4on
d. Accrue interest at a higher rate

A debtor may 5le which type of pe44on when seeking judicial protec4on under the Bankruptcy
Law?

I. Voluntary
II. Involuntary a. I only
b. II only
c. Either I or II
d. Neither I or II
The du4es of the trustee include:

a. Appoin4ng creditors’ commiIees in liquida4on cases

b. Approving all payments for debts incurred before the bankruptcy 5ling
c. Examining claims and disallowing any that are improper
d. Calling a mee4ng of the debtor’s creditors
 CHAPTER 6

1. The organization that established international accounting standards is the

International Accounting Standards Board.
2. The pronouncements of the International Accounting Standards Board are
called International Accounting Standards.
3. Currencies are commodities.
4. The actual changing of one currency into another currency is called
conversion.
5. The process of expressing amounts stated in one currency in terms of another
currency through the use of an appropriate currency exchange rate between
the two currencies is called translation.
6. The number of units of a foreign currency needed to acquire one unit of the
domestic currency is referred to as the indirect quotation of the exchange rate.
7. The number of units of a domestic currency needed to acquire one unit of the
foreign currency is referred to as the direct quotation of the exchange rate.
8. Exchange rates that are determined by market conditions are termed floating
fee or floating rates.
9. The exchange rate for immediate delivery of currencies exchanged is the spot
rate.
10. The primary long-run cause of exchange rate changes is attributable to
differential rates of inflation.
11. A theory that explains long-run changes in exchange rates is called
purchasing power parity.
12. When a transaction is to be settled by the receipt or payment of a fixed
amount of a specified currency, the receivable or payable respectively, is said
to be denominated in that currency.
13. A party to a foreign transaction measures and records the transaction in the
currency of the country in which the party is located.
14. When a domestic exporter is to receive payment in a foreign currency at a
date later than the transaction date, the domestic exporter is said to be in a
(n) exposed asset position.
15. When a domestic importer is to make payment in a foreign currency at a date
later than the transaction date, the domestic exporter is said to be in a (n)
exposed liability position.
16. The date of which a transaction to import or sell inventory is recorded is called
the transaction date.
17. In settling foreign currency transactions, companies usually use bank wire
transfers.
False
1. International accounting standards are promulgated by the International
Organization of Securities Commissioners.
True 2. U.S. accounting standards currently do not comply with international
accounting standards in all areas.
False 3. In general, international accounting standards are more demanding than
U.S. accounting standards.
True 4. In general, U.S. accounting standards are more stringent than international
accounting standards.

False 5. It is a major effort to bring a U.S. company’s financial statements into

compliance with international accounting standards.
False 6. The process of actually changing one currency into another currency is
called translation.
True 7. The number of units of the foreign currency needed to acquire one unit of
the domestic currency (the Philippine peso) is referred to as the indirect quotation of
the exchange rate.
False 8. The number of units of the domestic currency (the Philippine peso) needed
to acquire one unit of the foreign currency is referred to as the indirect quotation of
the exchange rate.
True 9. To determine the Philippine peso equivalent of an amount stated in a foreign
currency, multiply the foreign currency by the direct exchange rate.
False 10. To determine the Philippine peso equivalent of an amount stated in a
foreign currency, multiply the foreign currency by the indirect exchange rate.
True 11. A foreign currency is strengthening; as a result, the indirect exchange rate
will decrease.
False 12. A foreign currency is weakening; as a result, the indirect exchange rate
will decrease.
True 13. The Philippine peso is weakening; as a result, the direct exchange rate will
increase.
False 14. The Philippine peso is strengthening; as a result, the direct exchange rate
will increase.
True 15. Floating rates and forward rates mean different things.
False 16. Fixed rates and forward rates mean the same thing.
False
True 17. Denominated means the currency in which settlement must be made.
18. Importing and exporting transactions are always measured in one
currency and denominated in a different currency.
False 19. An importing transaction is initially recorded on the books at the order (or
commitment) date.
False 20. In importing and exporting transactions, the transaction date and the
settlement date can never coincide.
False 21. In importing and exporting transactions, bank wire transfers must be used.
True 22. For foreign currency transactions, the IASB adopted the two-transaction
perspective—not the one-transaction perspective.
True 23. Adjusting foreign currency receivables and payables to the spot rate at
intervening financial reporting dates is essentially current-value accounting.
False 24. Under the one-transaction perspective, the existence of intervening
financial reporting dates between the transaction date and the settlement date is
irrelevant.
True 25. Under the two-transaction perspective, changes in the exchange rate
between the transaction date and the settlement date would not result in an
adjustment to the amount initially recorded as a sale in an exporting transaction.
False 26. Under the one-transaction perspective, FX transaction gains or losses are
not reported currently in the income statement.
False 27. In a foreign currency transaction in which the exchange rate changes
between the transaction date and the settlement date, one party will report an
exchange gain while the other party will report an exchange loss.
False 28. Exchange gains from foreign currency transactions are taxable when
recognized.
True 29. Exchange gains from foreign currency transactions are taxable when
realized.
False 30. Exchange losses from foreign currency transactions are tax deductible
when recognized.
True 31. FX transaction gains and losses recognized at intervening financial
reporting dates as a result of adjusting foreign currency receivables and
payables are always unrealized.
False
False 32. From the perspective of both domestic importers and domestic exporters
who have exposed positions, it is better to have the direct exchange rate increase
rather than decrease.
33. Domestic exporters having exposed positions prefer the Philippine peso to
get stronger.
True 34. Domestic importers having exposed positions prefer the Philippine peso to
get stronger.
False 35. Foreign currency transactions gains and losses are displayed in an
income statement as extraordinary items because they are unusual in nature and
are not expected to recur as a consequence of customary and continuing business
activities.
False 36. If the spot rates for the local currency unit (LCU) are: buying rate LCU1 =
P0.0090; and selling rate, LCU1 = P0.0096, a Philippine multinational enterprise
pays P900 to a foreign currency dealer for a LCU 100,000 draft.
True 37. The buying spot rate is used by a Philippine multinational enterprise to
restate a trade account receivable from a foreign customer denominated in the
foreign currency.
False 38. The pronouncements of the International Accounting Standards Board
establish accounting rules that must be used by U.S. multinational enterprises.
True 39. Spot rates are exchange rates applicable to current foreign currency
transactions.
True 40. Under the one-transaction perspective for foreign currency transactions,
the original amount entered in the accounting records for a foreign merchandise
purchase subsequently is adjusted when the exact amount of Philippine peso
required to obtain the foreign currency for payment to the supplier is known.
False 41. A decrease in the selling spot rate for a foreign currency in which a trade
account receivable of a Philippine multinational enterprise is denominated produces
a foreign currency transaction gain to the enterprise.
True 42. International Accounting Standards often are similar to the FASB’s
Statements of Financial Accounting Standards.
False 43. The liability under a forward contract is measured by the difference
between the forward rate and the spot rate on the date of the contract.
False
True 44. Foreign currency transaction gains attributable to a forward contract
designated as a hedge of a foreign-currency denominated firm commitment are
recognized in the carrying amount of the hedged item.
True 45. A foreign currency transaction gain or loss is recognized on a forward
contract that was not designated as a hedge whenever the forward rate for the
foreign currency changes.
False
46. The impetus behind the move to upgrade international accounting standards has recently
come from
a) The Securities and Exchange Commission
b) The International Organization of Securities Commissioners
c) The International Accounting Standards Board
d) The Financial Accounting Standards Board
e) The United Nations
47. Which of the following is false concerning Philippine GAAP relative to U.S. GAAP countries in
general?
a) Philippine GAAP requires more disclosure of lines of business than US GAAP
b) US GAAP requires more detailed information for interim financial reporting
c) US GAAP is largely based on tax laws
d) Some Western European countries allow wide latitude in smoothing out earnings
e) None of the above
48. Actually changing one currency into another currency is called
a) Translation
b) Denominating
c) Measuring
d) Conversion
e) None of the above
49. If one foreign currency units (FCU) can be exchanged for P1.50 of Philippine currency, what
fraction should be used to compute the indirect quotation of the exchange rate expressed in
FCU?
a) P1.50/1
b) 1/P1.50
c) 1/.667
d) .667/1
e) None of the above
50. To express 1,000 Foreign Currency Units (FCUs) in pesos, it is necessary to
a) Divide the indirect exchange rate by 1,000 FCUs
b) Multiply the indirect exchange rate by 1,000 FCUs
c) Divide the 1,000 FCUs by the direct exchange rate
d) Multiply the 1,000 FCUs by the direct exchange rate
e) None of the above
51. The process of expressing amounts stated in one currency in terms of another currency by
using appropriate currency exchange rates is called
a) Measurement
False
b) Conversion
c) Translation
d) Denominating
e) None of the above
52. Floating exchange rates are also referred to as
a) Free rates
b) Fixed rates
c) Spot rates
d) Direct rate
e) None of the above
53. Exchange rates determined by market conditions are commonly referred to as a) Floating
rates
b) Direct rates
c) Spot rates
d) Official rates
e) None of the above
54. Which of the following exchange rates does not fit under the floating exchange rate system?
a) Future rates
b) Official rates
c) Spot rates
d) Forward rates
e) None of the above
55. In the long run, changes in exchange rates can best be attributed to
a) Foreign trade deficits or surpluses
b) Foreign investment deficits or surpluses
c) Differential trade deficits or surpluses
d) Differential rates of inflation
e) None of the above

56. Which of the following items is not a cause that affects the price of a currency in either the
short run or the long run?
a) Interest rates
b) A foreign trade deficit or surplus
False
c) Foreign investment
d) Purchasing power parity theory
e) None of the above
57. A domestic company having importing and exporting transactions involving credit and
requiring settlement in foreign currency will hope that the direct exchange rate
a) Increases for both types of transactions
b) Decreases for both types of transactions
c) Increases for exporting transactions and decreases for importing transactions
d) Decreases for exporting transactions and increases for importing transactions
58. In unhedged importing or exporting transactions, which of the following dates is not a date
having any accounting significance insofar as amount reportable to stockholders?
a) The intervening financial reporting date
b) The settlement date
c) The transaction date
d) The commitment date
e) None of the above
59. For unhedged importing and exporting transactions involving credit and requiring settlement
in foreign currency, which of the following dates would never be of concern or have
accounting significance?
a) The forward rate date
b) The transaction date
c) The settlement date
d) The intervening financial reporting date(s)
e) None of the above

60. For importing transactions denominated in a foreign currency, any change in the exchange
rate between the transaction date and any intervening financial reporting date(s) is reported
as
a) An adjustment to the foreign currency receivable
b) A gain or loss to be added to or subtracted from the initially recorded cost of inventory
c) A gain or loss in the current income statement
d) A deferred gain or loss in the balance sheet pending settlement
False
e) None of the above
61. For importing and exporting transactions, recognizing in the income statement FX transaction
gains or losses resulting from adjustments made at intervening financial reporting dates is not
a) A disregarding of the realized versus unrealized concept
b) Essentially current-value accounting
c) Consistent with the one-transaction perspective
d) Allowed unless there is an offsetting loss or gain from a related hedging transaction
e) None of the above

62. A domestic exporter has foreign currency receivables. The exporter’s risk exposure is that the
a) Foreign currency will strengthen
b) Direct exchange rate will decrease
c) Peso will weaken
d) Indirect exchange rate will decrease
e) None of the above
63. A domestic importer whose transactions are in foreign currency has risk exposure that the
a) Foreign currency will strengthen
b) Direct exchange rate will decrease
c) Peso will weaken
d) Indirect exchange rate will decrease
e) None of the above

64. In a bank wire transfer, which of the following occurs?

a) Currency physically changes hands between the banks involved when the wire
transfer occurs
b) Currency is physically moved between countries by the banks involved at the wire
transfer date
c) The result is that the two banks involved create a payable and receivable between
each other
d) Both b and c
e) Both a and b
65. Concerning importing and exporting transactions, which of the following statements is false?
False
a) Gains and losses on adjustments to foreign currency receivables and payables may
be reported net in the income statement
b) Gains and losses on adjustments to foreign currency receivables and payables are
unrealized in nature
c) When a domestic company has a gain or loss as a result of adjusting a foreign
currency receivable or payable, the foreign company will have the opposite result
d) FX transaction gains are taxable when realized
e) None of the above
66. A foreign currency transaction loss occurs on an open-account purchase from a foreign
supplier denominated in local currency units (LCU) of the foreign supplier’s country if the:
a) Buying spot rate for the LCU decreases between the purchase date and the payment
date
b) Selling spot rate for the LCU decreases between the purchase date and the payment
date
c) Buying spot rate for the LCU increases between the purchase date and the payment
date
d) Selling spot rate for the LCU increases between the purchase date and the payment
date

67. A foreign currency transaction gain or loss is:

a) A change in the exchange rate quoted by a foreign currency dealer
b) A term synonymous with translation of a foreign currency to pesos
c) The difference between the recorded pesos amount of a trade account receivable or a
trade account payable denominated in a foreign currency and the amount of pesos
ultimately received or paid
d) A change from the current/noncurrent method to the monetary/nonmonetary method
of remeasuring a foreign investee’s financial statements to the pesos functional
currency
68. A transaction gain or loss at the settlement date is:
a) A change in the exchange rate quoted by a foreign exchange trader
b) Synonymous with the translation of foreign currency financial statements into dollars
c) The difference between the recorded dollar amount of an account receivable
denominated in a foreign currency and the amount of dollars received
False
d) The difference between the buying and selling rate quoted by a foreign exchange
trader at the settlement date
69. From the viewpoint of a Philippine company, a foreign currency transaction is a transaction:
a) Measured in a foreign currency
b) Denominated in a foreign currency
c) Measured in Philippine currency
d) Denominated in Philippine currency
70. The exchange rate quoted for future delivery of foreign currency is the definition of a (n):
a) Direct exchange rate
b) Indirect exchange rate
c) Spot rate
d) Forward exchange rate

71. A transaction loss would result from:

a) An increase in the exchange rate applicable to an asset denominated in a foreign
currency
b) A decrease in the exchange rate applicable to a liability denominated in a foreign
currency
c) The import of merchandise when the transaction is denominated in a foreign currency
d) A decrease in the exchange rate applicable to an asset denominated in a foreign
currency

72. The best definition for direct quotes would be “direct quotes measure…
a) How much foreign currency must be exchanged to receive 1 domestic currency
b) Current or spot rates
c) How much domestic currency must be exchanged to receive 1 foreign currency
d) Exchange rates at a future point in time
73. A Philippine company purchases medical lab equipment from a Japanese company. The
Japanese company requires payment in Japanese yen. In this transaction, the yen would be
referred to as the
a) Domestic currency for the Philippine company
False
b) Denominated currency
c) Purchasing currency
d) Selling currency
74. A spot rate may be defined as
a) The price a foreign currency can be purchased or sold today
b) The price today at which a foreign currency can be purchased or sold in the future
c) The forecasted future value of a foreign currency
d) The U.S. dollar value of a foreign currency
e) The Euro value of a foreign currency

75. A Philippine company that has purchased inventory from a German vendor would be exposed
to a net exchange gain on the unpaid balance if the
a) Amount to be paid was denominated in dollars
b) Peso weakened relative to the Euro and the Euro was the denominated currency
c) Peso strengthened relative to the Euro and the Euro was the denominated currency
d) Philippine company purchased a forward contract to buy Euros
76. A Philippine company that has sold its product to a German firm would be exposed to a net
exchange gain on the unpaid receivable if the
a) Amount to be paid was denominated in dollars
b) Peso weakened relative to the Euro and the Euro was the denominated currency
c) Peso strengthened relative to the Euro and the Euro was the denominated currency
d) Philippine company purchased a forward contract to buy Euros
77. A bank dealing in foreign currency tells you that the foreign currency will buy you P.80
Philippine peso. The bank has given you
a) A direct quote
b) An indirect quote
c) The official (fixed) rate
d) A forward rate
78. When an economic transaction is denominated in a currency other than the entity’s domestic
currency, the entity must establish a
a) Domestic rate
b) Hedge rate
c) Rate of currency exchange
False
d) Rate of exchange
79. Which of the following factors influences the spread between forward and spot rates?
a) Which currency is denominated as the domestic currency
b) The length of the forward exchange contract
c) The current cross rate between the two currencies
d) All are factors that may influence the spread

80. A forward exchange contract is being transacted at a premium if the current forward rate is
a) Less than the expected spot rate
b) Greater than the expected spot rate
c) Less than the current spot rate
d) Greater than the current spot rate
81. Foreign currency transactions not involving a hedge should be accounted for using
a) The one-transaction method
b) The two-transaction method
c) A hybrid of the one- and two- transaction methods
d) Either the one- or the two- transaction method
82. A transaction involving foreign currency will most likely result in gains and losses to the
reporting entity if the
a) Forward exchange contract is selling at a premium
b) Transaction is denominated and measured in the reporting entity’s currency
c) Transaction takes place in a country with a tiered monetary system
d) Transaction is denominated in a foreign currency and measured in the reporting
entity's currency
83. Which of the following does not represent an exchange risk on an exposed position to a
company transacting business with a foreign vendor?
a) Transaction is denominated in foreign currency settled at a future date
b) Firm commitment to purchase inventory to be paid for in foreign currency
c) Forecasted foreign currency transaction with a high probability of occurrence
d) Firm commitment to purchase inventory denominated in U.S. dollars
84. The number of types of forward contracts for which the established standards requires:
a) Three
b) Four
c) Five
d) Six
False

85. An entity denominated a sale of goods in a currency other than its functional currency. The
sale resulted in a receivable fixed in terms of the amount of foreign currency to be received.
The exchange rate between the functional currency and the currency in which the transaction
was denominated changed. The effect of the change should be included as a:

a) Separate component of stockholders’ equity whether the change results in a gain or a

loss
b) Separate component of stockholders’ equity if the change results in a gain and as a
component of income if the change results in a loss
c) Component of income if the change results in a gain and as a separate component of
stockholders’ equity if the change results in a loss
d) Component of income whether the change results in a gain or a loss
86. An entity denominated a December 15, 20x4, purchase of goods in a currency other than its
functional currency. The transaction resulted in a payable fixed in terms of the amount of
foreign currency, and was paid on the settlement date, January 20, 20x5. The exchange rates
between the functional currency and the currency in which the transaction was denominated
changed at December 31, 20x4, resulting in a loss that should:
a) Not be reported until January 20, 20x5, the settlement date
b) Be included as a separate component of stockholders’ equity at December
31, 20x4
c) Be included as a deferred charge at December 31, 20x4
d) Be included as a component of income from continuing operations for Choose the
correct answer for each of the following questions
87. On October 1, 20x4 XY Company, a Philippine company, contracted to purchase foreign
goods requiring payment in pesos one month after their receipt in XY’s factory. Title to the
goods passed on December 15, 20x4. The goods were still in transit on December 31, 20x4.
Exchange rates were 1 peso to 22 foreign currency units (FCUs), 20 FCUs, and 21 FCUs on
October 1, December 15, and December 31, 20x4, respectively. XY should account for the
exchange rate fluctuations in 20x4 as
a) A loss included in net income before extraordinary items
b) A gain included in net income before extraordinary items
c) An extraordinary gain
d) An extraordinary loss
False
88. On October 2, 20x4, LL Co., a Philippine company, purchased machinery from ST, a foreign
company, with payment due on April 1, 20x5. If LL’s 20x4 operating income included no
foreign exchange gain or loss, then the transaction could have
a) Resulted in an extraordinary gain
b) Been denominated in U.S. dollars
c) Caused a foreign currency gain to be reported as a contra account against machinery
d) Caused a foreign currency translation gain to be reported as a separate component of
stockholders’ equity
89. Philippine based Corporate X has a number of importing transactions with companies based
in UK. Importing activities result in payables. If the settlement currency is the British Pound,
which of the following will happen by changes in the direct or indirect exchange rates?
Direct Exchange Rate Indirect Exchange
Rate
Increases Decreases Increases Decreases
a. NA NA NA NA
b. Loss Gain Gain Loss
c. Loss Gain NA NA
d. Gain Loss Loss Gain
90. Philippine based Corporation X has a number of exporting transactions with companies
based in Sweden. Exporting activities result in receivables. If the settlement currency is the
Swedish Krona, which of the following will happen by changes in the direct or indirect
exchange rates?
Direct Exchange Rate Indirect Exchange
Rate
Increases Decreases Increases Decreases
a. Loss Gain NA NA
b. Loss Gain Gain Loss
c. NA NA NA NA
d. Gain Loss Loss Gain

91. Corporation X has a number of exporting transactions with companies based in Vietnam.
Exporting activities result in receivables. If the settlement currency is the US dollar, which of
the following will happen by changes in the direct or indirect exchange rates?
Direct Exchange Rate Indirect Exchange
Rate
Increases Decreases Increases Decreases
False
a. Loss Gain NA NA
b. Loss Gain Gain Loss
c. NA NA NA NA
d. Gain Loss Loss Gain
92. May foreign currency transaction gains or losses be recognized on the following transactions
denominated in a foreign currency:
Purchase of Sales of
Merchandise? Merchandise?
a) Yes Yes
b) Yes No
c) No Yes
d) No No
93. Which of the following best describes current GAAP with respect to the required reporting
currency?
a) A currency other than the peso may be the reporting currency in financial statements
b) Only the peso may be the reporting currency in financial statements
c) Companies can change their reporting currency as much as they wish
d) Companies can never change their reporting currency
94. An exchange rate of P1.32:1 FC
a) Means that each peso is worth 1.32 FC
b) Implies that the peso has strengthened vis-à-vis the FC
c) Implies that the GC has strengthened vis-à-vis the peso
d) Can also be expressed as P1: 0.76 FC

95. Which of the following terms describes the change in currency values relative to one another
as a result of market conditions?
a) Exchange rate
b) Fixed exchange rate
c) Floating exchange rate
d) None of the above
96. Which of the following terms describes the change in currency values relative to one another
as a result of decisions made by politicians?
a) Exchange rate
b) Fixed exchange rate
False
c) Floating exchange rate
d) Floating exchange rate
97. Which of the following terms describes currency values relative to one another? a) Exchange
rate
b) Fixed exchange rate
c) Floating exchange rate
d) Floating exchange rate
98. Which of the following statements is not accurate with regard to a purchase or sale
denominated in a foreign currency?
a) The account titles would be the same as a similar transaction undertaken with a
Philippine company
b) Future fluctuations of the foreign currency’s value are not anticipated
c) The amount recorded in the financial records will be the estimated value of the foreign
currency paid or received
d) The amount recorded in the financial records is the number of foreign currency units
exchanged
99. What is the date called when a foreign currency transaction is originally recorded?
a) Origination date
b) Balance sheet date
c) Transaction date
d) Settlement date

100. What is the date called when a foreign currency transaction is paid through the exchange
of currency?
a) Origination date
b) Balance sheet date
c) Transaction date
d) Settlement date
 False
Which of the following statements is not correct?
a. Joint arrangements may be entered into to manage risks involved in a project
b. Joint arrangements may be entered into to provide the par4es with access to new technology or new markets
c. Joint arrangements require investors to have equal interests in the joint arrangement
d. The key feature of a joint arrangement is that the par4es involved have joint control over the decision making in
rela4on to the joint arrangement

The par4cular rela4onship between par4es that signi5es the existence of a joint arrangement is
a. Signi5cant in6uence by one party over the other party;
b. Control over the opera4ng policies of one party by another party;
c. Shared in6uence by two par4es over the ac4vi4es of another party;
d. Joint control by the par4es over the ac4vi4es of an opera4on.

The maIers generally dealt with in a joint arrangement contract include the:
I II III IV

- ac4vity, dura4on and repor4ng obliga4ons Yes Yes Yes Yes

- capital contribu4on of the venturers Yes Yes Yes No

- sharing of the output, expenses or results No Yes Yes Yes

- vo4ng rights of the venturers No No Yes No a. I b. II c. III d. IV

PFRS 11 Joint Arrangements provides that joint control exists where:

a. No single party is in a posi4on to control the ac4vity unilaterally;
b. The decisions in areas essen4al to the goals of the joint arrangement do not require the consent of the
par4es;
c. No one party may be appointed as the manager of the joint arrangement;
d. One party alone has power to control the strategic opera4ng decisions of the joint arrangement.

Which of the following is correct?

a. All joint arrangements which are not structured through a separate vehicle are classi5ed as joint ventures;
b. For a joint venture, the rights pertain to the rights and obliga4ons associated with individual assets and
liabili4es, whereas with a joint opera4on, the rights and obliga4ons pertain to the net assets.
c. In considering the legal form of the separate vehicle if the legal form establishes rights to individual assets
and obliga4ons, the arrangement is a joint opera4on. If the legal form establishes rights to the net assets of
the arrangement then the arrangement is a joint venture.
d. Where the joint operators have designed the joint arrangement so that its ac4vi4es primarily aim to provide
the par4es with an output if will be classi5ed as a joint venture.

Which of the following statements is not true in rela4on to joint control?

a. Each party must have an equal interest for joint control to exist
b. Joint control exists only where there is contractually agreed sharing of control
c. En44es over which a party has joint control are accounted for in accordance with PFRS 11 Joint
False
Arrangements
d. Joint control requires the unanimous consent of the par4es sharing control

In rela4on to supply of a service to a joint opera4on by one of the joint operators, which of the following statements is
correct?
a. A joint operator can recognize 100% of the earned through the supply of services to the joint opera4on;
b. A joint operator is en4tled to recognize a pro5t from the supply of services to itself;
c. A joint operator cannot earn a pro5t on supplying services to itself;
d. A joint operator is not able to recognize the service revenue or service cost for the services supplied to the joint
opera4on
PetroTex shares the use, in equal measure, of an oil pipeline with four other oil companies. The joint opera4on states
that the maintenance of the pipeline will also be shared on an equal basis by all 5ve par4es. This pipeline project is
considered as a:
a. Joint opera4on
b. Joint venture
c. Business combina4on
d. Statutory consolida4on
In rela4on to No. 8, PetroTex also has a joint arrangement with two other companies to share control of
Antonio Oil. The arrangement states that all three companies have an equal say in the running of Antonio Oil. None of
the three partners is able to dominate the strategic and opera4on ac4vi4es of Antonio Oil. This pipeline project is
considered as a:
a. Joint opera4on
b. Joint venture
c. Business combina4on
d. Statutory consolida4on
A joint arrangement has three par4es in which A owns 50% vo4ng rights, while B owns 30% and C owns 20% vo4ng
rights in the arrangement. The terms of the contract among the par4es A, B, and C state that at minimum 75% of the
vo4ng rights are needed to exercise the control over the arrangement. This arrangement is:
a. Joint opera4on
b. Joint venture
c. Business combina4on
d. Statutory consolida4on
An arrangement is established by two par4es and each party owns 50% vo4ng rights of the arrangement and the terms
of the contract require that at minimum 51% vo4ng rights are needed to exercise the control over the management.
a. Joint control
b. No Joint venture
c. Business combina4on
d. Statutory consolida4on

A joint arrangement is established by three par4es in which A owns 50% vo4ng rights while B and C each owns 25%
vo4ng rights of that arrangement. The terms of the contract among A, B and C state that a minimum of 75% vo4ng rights
are needed to exercise the control over the arrangement. This joint arrangement is:
a. Joint opera4on
b. No Joint venture
c. Business combina4on
False
d. Statutory consolida4on
Two par4es established a joint arrangement in the form of an incorporated separate legal en4ty. Each party to the
arrangement owns 50% vo4ng rights of the incorporated en4ty. The incorpora4on results in the separa4on of the joint
owners from this en4ty and this re6ects that the assets and liabili4es held in the jointly control en4ty are the assets and
liabili4es of the incorporated en4ty, in such a case, the par4es to the en4ty have the right to the net assets of the en4ty;
therefore it will be treated as: a. Joint opera4on
b. Joint venture
c. Associate
d. Subsidiary
A and B decide to enter into a joint arrangement to produce a new product. A undertakes one manufacturing process
and B undertakes the other. A and B have agreed that decisions regarding the joint opera4on will be made unanimously
and that each will bear their own expenses and take on agreed share of the sales revenue from the product
a. Joint opera4on
b. Joint venture
c. Associate
d. Subsidiary
For the purposes of equity accoun4ng for an investment in an associate, it is presumed that the investor has signi5cant
in6uence over the other en4ty where the investor holds:
a. Between 1% and 5% of the vo4ng power of the investee;
b. Between 5% and 10% of the vo4ng power of the investee;
c. 20% or more of the vo4ng power of the investee;
d. 50% or more of the vo4ng power of the investee;
The following are regarded as factors indica4ng the existence of signi5cant in6uence over another en4ty:
I II III IV
- representa4on on the board of directors Yes Yes Yes Y
e
s
- par4cipa4on in decisions about dividends No Yes Yes Y
e
s
- interchange of managerial personnel No No No Y
e
s
- ability to control the investee’s opera4ng ac4vi4es No Yes No N
a. I; o
b. II;
c. III;
d. IV;

For the purposes of equity accoun4ng, signi5cant in6uence is regarded as the power of an investor to:
a. Control the 5nancial and opera4ng policy decisions of an investee;
b. Par4cipate in the 5nancial and opera4ng policy decisions of an investee;
c. Par4cipate in the day-to-day management of a joint venture interest;
d. Dominate the 5nancing decisions of an en4ty Which of the following statements is correct?
a. All joint arrangements are accounted for under PAS 28
False
b. Joint arrangements classi5ed as joint ventures are accounted for under PFRS 11
c. Joint arrangements classi5ed as joint ventures are accounted for under PAS 28
d. Joint arrangements classi5ed as joint opera4ons are accounted for under PAS 28
For the purposes of equity accoun4ng for an investment in an associate, it is presumed that the investor has signi5cant
in6uence over the other en4ty where the investor holds:
a. Between 1% and 5% of
b. Between 5% and 10% of the vo4ng power of the investee;
c. 20% or more of the vo4ng power of the investee;
d. 50% or more of the vo4ng power of the investee;
When disclosing informa4on about investments in associate, PAS 28 Investments in Associates and Joint
Ventures, requires separate disclosure of which of the following
I. Shares in associates, in the statement of 5nancial posi4on
II. Share of pro5t or loss of associates, in the statement of pro5t or loss and other comprehensive income.
III. Share of any discon4nuing opera4ons, in the statement of changes in equity
IV. Shares of changes recognized directly in the associate's equity, in the statement of changes in equity a. I, II, III and IV;
b. I, II and IV only;
c. II, II and IV only
d. I, II and III only;
When elimina4ng any unrealized pro5t arising when a joint operator provides services to a joint opera4on the pro5t is
eliminated against:
a. The investment in the joint opera4on;
b. Retained earnings;
c. Work in progress, 5nished goods and other inventory related accounts;
d. Cost of goods sold
Bosch Co. received a cash dividend from a common stock investment. Should Bosch resort on increase in the investment
account if it accounts for the investment under the fair value method or the equity method?
a. Fair value method, NO; Equity method, NO
b. Fair value method. YES: Equity method, YES
c. Fair value method, YES: Equity method, NO
d. Fair value method, NO: Equity method, YES
PFRS requires joint ventures to be reported as
a. Equity method investments.
b. Trading securi4es.
c. Equity method or propor4onately consolidated investments.
d. Available-for-sale securi4es.

ABC Company uses the equity method to report its investment in 25% of the stock of XYZ Company. Its original
investment cost exceeded 25% of the book value of XYZ by a large amount. ABC is compu4ng equity in net income of XYZ
for the current year, which is 5ve years a3er the acquisi4on. Which situa4on below requires ABC to adjust the equity in
net income number for write-o;s of the di;erence between investment cost and XYZ's book value?
AIribute the di;erence to
a. Goodwill
b. Brand names with inde5nite life.
c. Databases with a 3-year life.
False
d. Plant assets with a 20-year life.
Impairment losses on equity method investments are
a. Not reported.
b. Reported in other comprehensive income.
c. Reported as a direct adjustment to beginning retained earnings.
d. Reported on the income statement.
Equity in net income is a;ected by all but which one of these items related to the investee?
a. Impairments of inde5nite life intangibles of the investee.
b. Markup on inventory sold by the investee to the investor
c. Markup on inventory sold by the investor to the investee -
d. Amor4za4on of previously unreported intangibles of the investee
Which of the following statements is true concerning propor4onate consolida4on for joint ventures?
a. It is allowed under U.S. GAAP but not under PFRS
b. It was abolished under PFRS for most joint ventures, as of 2013
c. It is allowed for separate repor4ng of the joint venture’s 5nancial statements
d. It is a way to avoid repor4ng the joint venture’s leverage on the investor’s balance sheet An investor who
owns 30% of the common stock of an investee is most likely to exercise signi5cant in6uence requiring use of the
equity method when:
a. The investor and investee sign an agreement under which the investor surrenders signi5cant rights
b. The investor tries and fails to obtain representa4on on the investee’s board of directors
c. Tries and fails to obtain 5nancial informa4on from the investee
d. The second largest investor owns 1% of the investee’s outstanding stock
Where an acquisi4on in an associate results in an excess the excess is accounted for in the year of acquisi4on as follows:
a. As a credit against the investment in associate account.
b. As a credit against the share of associate pro5le account
c. As a debit against the share of associates retained earnings
d. No adjustment is required due to the single line method of accoun4ng followed under the equity method
An investor uses the equity method to account for an investment in common stock. A3er the date of acquisi4on, the
equity investment account of the investor is:
a. Not a;ected by its share of the earnings or losses of the investee
b. Not a;ected by its share of the earnings of the investee but is decreased by its share of the losses of the investee
c. Increased by its share of the earnings of the investee but is not a;ected by its share of the investee’s losses,
d. Increased by its share of the earnings of the investee and is decreased by its share of the investee’s losses
Richard uses the equity method to account for its investment in Plains on January 1. On the date of acquisi4on, Plains’
land and buildings were undervalued on its balance sheet. How do these excesses of fair values over book values a;ect
Richard's Equity Income from Plains?
a. Building, Decrease: Land, Decrease
b. Building, Decrease: Land, No E;ect
c. Building, Increase; Land, Increase
d. Building, Increase; Land, No E;ect
On January 1, Wolf purchased 15% of Fieldman’s common stock. On August 1, it purchased another 30% of Fieldman’s
common stock. During October, Fieldman declared and paid a cash dividend on its common stock. How much income
from Fieldman should Wolf report on its income statement?
a. 15% of Fieldman 's income for January 1 to July 31, plus 45% of Fieldman ‘s income for the remainder of the year
b. 45% of Fieldman 's income from August 1 to December 31 only
False
c. 40% of Fieldman's income
d. The amount of dividends received from Fieldman,
Which of the following does not indicate an investor company’s ability to signi5cantly in6uence an investee?
a. Material inter-company transac4ons
b. The investor owns 30% while another investor owns 70%
c. Interchange of personnel
d. Technological dependency
When a company holds between 20% and 50% of the outstanding stock of an investee. Which of the following
statements applies?
a. The investor should always use the equity method to account for its investment.
b. The investor should use the equity method to account for its investment unless circumstances indicate that it is
unable to exercise “signi5cant in6uence" over the investee.
c. The investor must use the fair value method unless it can clearly demonstrate the ability to exercise “signi5cant
in6uence” over the investee.
d. The investor should always use the fair value method to account for investment.
When an investor can no longer exert signi5cant in6uence over the investee, it must change to the fair value method.
What is the required accoun4ng treatment on investor’s books?
a. A prior period adjustment is recorded to bring retained earnings to what it would have been if the new method
had been used in the past
b. The book value on the date of change becomes the “cost” of the investment
c. The investment will be adjusted to its fair value
d. Both b and c are required
The primary bene5ciary of a variable interest enterprise:
a. Must include the assets, liabili4es, and results of the variable interest enterprise in its consolidated 5nancial
statements
b. Can simply record income on a cash basis when dividends are received or income accrued
c. Only recognizes a gain or loss on the sale of its interest in the variable interest enterprise
d. Only includes the results of the variable interest enterprise if it has in excess of 50% of the vo4ng share capital of
the variable interest enterprise

CHAPTER 11

20. In consignment sales, the consignee:

a. Records the merchandise as an asset on its books

b. Records a liability for the merchandise held on consignment
c. Recognizes revenue when it ships merchandise to the consignor
d. Prepares an “account report” for the consignor which shows sales, expenses, and cash receipts

21. Revenue is recognized by the consignor when the:

a. Goods are shipped to the consignee

b. Consignee receives the goods
c. Consignor receives an advance from the consignee
d. Consignor receives an account sales from the consignee

22. Goods on consignment should be included in the inventory of:

False
a. The consignor but not the consignee
b. Both the consignor and the consignee
c. The consignee but not the consignor
d. Neither the consignor nor the consignee

23. In accoun4ng for sales on consignment, sales revenue and the related cost of goods sold should be recognized by
the:

a. Consignor when the goods are shipped to the consignee

b. Consignee when the goods are shipped to the third party
c. Consignor when no45ca4on is received the consignee has sold the goods
d. Consignee when cash is received from the customer

24. The roe of the agent in a Principal-Agent rela4onship is to

a. Arrange for the principal to provide goods or services to a customer

b. Provide the goods or services for a customer
c. Market the principal goods and services to prospec4ve customers
d. Develop and maintain goodwill of the principal’s customers

25. The use of the net method of recognizing revenue by an agent

a. Is appropriate as long as both revenue and costs are included

b. Is the correct method in a Principal-Agent rela4onship
c. Could result in an overstatement of the agent’s revenue
d. Cost result in an understatement of the agent’s revenue

26. Consignments are a specialized marke4ng method whereby the

a. Consignee purchases goods for sale and sends payment when goods are sold
b. Consignee (agent) holds 4tle to the product
c. Consignee pays for good up front and is paid when merchandise is sold
d. Consignee takes possession of merchandise but 4tle remains with manufacturer

27. Consigned goods are recognized as revenues by the

a. Consignor when a sale to a third party has occurred

b. Consignor when the merchandise has been shipped to a consignee
c. Consignee when a sale to a third party has occurred
d. Consignor when it receives payment from consignee for goods sold

28. Which of the following is most true regarding consignment arrangements?

a. Revenue is recognized at the point in 4me when the consignment arrangement is made
b. Revenue is recognized when goods are transferred to the consignee
c. Revenue is recognized upon sale by the consignee to an end customer
d. Revenue is never recognized because GAAP does not allow such arrangements

29. Consignments are a specialized marke4ng method whereby the

False
a. Consignee purchases goods for sale and sends payment when goods are sold
b. Consignee (agent) holds 4tle to the product
c. Consignee pays for good up front and is paid when merchandise is sold
d. Consignee takes possession of merchandise but 4tle remains with manufacturer

30. Consigned goods are recognized as revenues by the

a. Consignor when a sale to a third party has occurred

b. Consignor when the merchandise has been shipped to a consignee
c. Consignee when a sale to a third party has occurred
d. Consignor when it receives payment from consignee for goods sold

31. Sweeney most likely should recognize revenue when:

a. He paints the pain4ng, because the pain4ng is produced while he works

b. When he transfers the pain4ng to a barbershop
c. When the barbershop sells the pain4ng
d. When the barbershop’s right of return expires

32. A3er Sweeney has transferred a pain4ng to a barbershop, the pain4ng:

a. Should be counted in Sweeney’s inventory un4l the barbershop sells it

b. Should be counted in the barbershop’s inventory, as the barbershop now possesses it
c. Should be counted in either Sweeney’s or the barbershop’s inventory, depending on which incurred the cost of
preparing the pain4ng for display
d. We lack su?cient informa4on to know who should carry the pain4ng in inventory

33. Which of the following is most true regarding consignment arrangements?

a. Revenue is recognized at the point in 4me when the consignment arrangement is made
b. Revenue is recognized when goods are transferred to the consignee
c. Revenue is recognized up sale by the consignee to an end customer
d. Revenue is never recognized because GAAP does not allow such arrangements
CHAPTER 13

HOME OFFICE AND BRANCH ACCOUNTING: GENERAL PROCEDURES

True 1. An expense item allocated by the home o?ce to a branch is recorded by the branch by a debit to an
expense ledger account and a credit to the Home o?ce account
True 2. A debit to the Home O?ce ledger account and a credit to the Trade Accounts Receivable account in the
accoun4ng records of a branch indicate that the home o?ce collected accounts receivable of the branch
False 3. Start-up costs incurred by a branch in the ini4al months of opera4ons are appropriately deferred and
amor4zed in subsequent pro5table accoun4ng periods
False 4. If the home o?ce carries branch equipment in its accoun4ng records, an acquisi4on of equipment by
the branch is recorded in the home o?ce accoun4ng records by a debit to the Investment in Branch ledger
account and a credit to the Equipment: Branch Account
False
True 5. Separate 5nancial statements of home o?ce and branch do not meet the needs of investors, creditors,
or other outside users of 5nancial statements.
False 6. In a working paper for combined 5nancial statements of home o?ce and branch, the balance of the
Shipments to Branch ledger account is eliminated against the balance of the Investment in Branch account.
False 7. If the perpetual inventory system is used by both the home o?ce and the branch, the reciprocal ledger
accounts used by the branch are the Home O?ce and Shipments from Home O?ce accounts.
False 8. The “shipments to branch” account is added to the home o?ce’s purchases account in determining
home o?ce cost of goods sold.
True 9. When inventory is received from the home o?ce, a branch increases its home o?ce account.
True 10. Reciprocal home o?ce and branch accounts are eliminated when home o?ce and branch 5nancial
statements are combined for external repor4ng.
False 11. The “branch o?ce” account on the home o?ce’s books and the “home o?ce” account on the
branch’s books are examples of nonreciprocal accounts whose balances would be combined when the home
o?ce is preparing a balance sheet for all its combined opera4ons.
True 12. When performing the “end-of-the-period reconcilia4on between the Home O?ce account on the
branch’s books and the Branch Account on the home o?ce’s books, shipments in transit from the branch back
to the home o?ce will be treated as an addi4on to the home o?ce’s Branch Account.
False 13. When performing the “end-of-the-period reconcilia4on between the Home O?ce account on the
branch’s books and the Branch Account on the home o?ce’s books, home o?ce expenses which are allocated
to the branch o?ce from the home o?ce will be subtracted from the Home O?ce Account on the branch’s
books
True 14. There are three ways to reconcile the balance in the home o?ce’s Branch Account with the balance in
the branch’s Home O?ce Account. One way would be to reconcile from the home o?ce balance to the branch
balance. A second way would be to reconcile from the branch balance to the home o?ce balance. A 5nal way
would be to reconcile both the home o?ce’s branch balance and the branch’s home o?ce balance to the
adjusted true balance.
True 15. The incremental pro5tability of a branch o?ce may be hidden if the home o?ce allocates too many
5xed costs to the branch o?ce
False 16. A major disadvantage of a centralized accoun4ng system is that the pro5tability of branch opera4ons
cannot be determined because branch opera4ons are not accounted for in a separate general ledger.
True 17. Home o?ce alloca4ons to a branch are not required under current standards
True 18. Income taxes can be allocated to a branch
True 19. Branch 5xed assets can be carried on the home o?ce’s books under a decentralized accoun4ng
system
False 20. If branch 5xed assets are recorded on the home o?ce’s books, deprecia4on expense would not be
charged to branch opera4ons
False

CHAPTER 14

HOME OFFICE AND BRANCH ACCOUNTING: SPECIAL PROCEDURES

TRUE 1. The balance of the allowance for Overvalua4on of Inventories: Branch ledger account is deducted from
the balance of the investment in branch account in the separate balance sheet of the home o?ce.

FALSE 2. If the home o?ce bills shipment of merchandise to the branch at 25% above home o?ce cost and the
judgment balance of the allowance for Overvalua4on of Inventories: Branch ledger account is 2,400 and
amount of branch inventories at build prices is 81,600.

TRUE 3. If the branch managers are responsible for ordering merchandise from the home o?ce any exist
freight costs incurred as a result of inter-branch shipments are absorbed by the appropriate branch rather than
by the home o?ce.

TRUE 4. Freight cost on merchandise shipped, as directed by the home o?ce, by Westside branch to Eastside
branch in excess of normal freight costs from the home o?ce to Eastside Branch are recognized as opera4ng
expenses of the home o?ce.

FALSE 5. A markup of 16 2/3% on billed price is equal to the markup of 14 2/7% on cost of merchandise
shipped to the branch by the home o?ce.

FALSE 6. If the home o?ce bills merchandise shipments to the branch at prices above the home o?ce cost, the
net income reported to the home o?ce by the branch is overstated from a total company point of view.

FALSE 7. In a combined balance sheet for home o?ce and branch, the balance of the allowance for
overvalua4on of inventories: branch ledger account is deducted from the balance of the investment in branch
account.

FALSE 8. A home o?ce ships merchandise to its branch at the transfer price greater than cost. When this
merchandise is resold by the branch to outside en44es the branch's pro5t will be overstated.

TRUE 9. A closing entry prepared by a branch will adjust the loading account and record branch pro5t or loss in
the home o?ce account.

TRUE 10. Unrealized pro5ts from transac4ons between a home o?ce and its branch are eliminated in
preparing combined 5nancial statements for the enterprise.

FALSE 11. A home o?ce records shipments to its branch at billing prices and adjusts the loading account at
year-end . When this approaches used, the loading account during the period will always be zero.
False
TRUE 12. If a "loading" account is used, the "shipments to branch" account on the home o?ce books is created
for the actual cost of shipments made to the branch whereas the "shipments from the home o?ce" on the
branch's books includes any ini4al unrealized pro5t.

FALSE 13. Freight charges incurred by the branch o?ce on merchandise inventory shipped from the home
o?ce would be included in the branch cost of goods available-for-sale even if the wrong merchandise was
shipped from the home o?ce.

TRUE 14. One reason why a branch o?ce would not have a "loading" account is that the home o?ce usually
does not want the branch personnel to know the amount of unrealized pro5t built into the merchandise's
transfer price.

FALSE 15. It is equally probable that a "loading" account could be charged with an unrealized inventory loss as
it is that it could be charged with an unrealized inventory pro5t.

TRUE 16. As a general rule, the "loading" account will be credited for the unrealized pro5t element of the
merchandise shipped to the branches and debited for the amount of any realized inventory pro5ts.

TRUE 17. If the "Shipments from the Home O?ce" account and the "Shipments to the Branch O?ce" account
are kept on a reciprocal basis and home o?ce charges of mark-up on these shipments, there will be no need to
adjust the loading account at the end of the period for any realized inventory pro5ts.

TRUE 18. If the "Shipments from the Home O?ce" account and the "Shipments to the Branch O?ce" account
are kept on a reciprocal basis and the home o?ce charges a markup on this shipments, two adjustments to the
loading account will be needed at the end of the period. One adjustment will be needed to adjust the
"Shipments to Branch" account down to its cost basis, and, a second adjustment will be needed to transfer any
realized inventory pro5ts from the loading to the "Branch Pro5t" account.

FALSE 19. When a branch receives merchandise a transfer prices that include a loading factor and sells that
merchandise, its cost of goods sold will be understated and its income will be
overstated.

20. The Allowance for Overvalua4on of Inventories: Branch ledger account of the home o?ce is debited:

a) When the home o?ce ships merchandise to the branch at a billed price that exceeds cost
b) In a journal entry to close the account at the end of an accoun4ng period
c) When the branch’s ending inventory is recorded in the home o?ce accoun4ng records d) In
some other circumstances
21. Amongst the various reasons given for the internal transfer of merchandise inventory at a price above
its cost are:

a) The equitable alloca4on of income amongst the various units of the business enterprise b)
E?ciency in pricing inventories
c) Concealment of the true pro5t margins from branch personnel
False
d) All of the above are considered valid reasons
22. A branch o?ce is allowed to make sales, carry inventory for resale to customers, and incur normal
opera4ng expenses. The home o?ce ships merchandise to the branch o?ce at cost plus a 20% markup. The
home o?ce uses a loading account. If the loading account is used in its customary fashion, it will track:

a) Unrealized inventory pro5ts only

b) Unrealized inventory pro5ts and overall branch pro5ts but not branch losses
c) Unrealized inventory pro5ts and overall branch pro5ts and losses
d) Overall branch pro5ts and losses but not unrealized inventory pro5ts
23. It is generally accepted that a branch o?ce should incur and pay for, or at least be charged with it, the
reasonable caused of transpor4ng merchandise into the branch o?ce and preparing it for sale to customers. In
light of this generally accepted prac4ce, which of the following charges for freight costs would be considered
unreasonable if imposed on the branch o?ce:

a) Requiring the branch to ship some of its inventory or another branch loca4on due to inventory
shortages at the des4na4on branch
b) Charging a cost to the branch for freight charges that is a 5xed percentage of the cost billed to
the branch for the inventory itself
c) Charging freight charges to a branch o?ce for inventory shipped by mistake where the number
of such mistakes occur rather frequently
d) All of the situa4ons would normally be considered unreasonable

24. In preparing combined 5nancial statements, which of the following accounts are eliminated (brought to
a zero balance) in the combining process?

Branch Income or Loss Purchases Sent to Branch

a) Yes Yes
b) No Yes
c) No No
d) Yes No
25. In the year end general ledger closing procedures, which accounts are closed in arriving at Cost of
Sales?

Purchases Sent to Branch Purchases from Home O?ce

a) Yes Yes
b) No Yes
c) No No
False
d) Yes No
26. The general ledger entry to adjust the Intracompany Pro5t Deferred account at the end of an
accoun4ng period

a) Is reversed in the following accoun4ng period

b) Is reversed in the combining process
c) Results in an entry in the combining process that is essen4ally a reclassi5ca4on entry
d) Results in the Intracompany Pro5t Deferred account being reduced to a zero balance in the
combined column of the combining statement worksheet
e) None of the above

D. Which of the following accounts is a reciprocal account to the Investment in Branch account? a. Branch Income
b. Equity in Home O?ce
c. Home o?ce capital
d. None of the above

D. In preparing combined 5nancial statements, which of the following accounts are eliminated (brought to a zero
balance) in the combining process?

Branch Income or Loss Home o?ce capital

a. Yes Yes
b. No Yes
c. No No
d. Yes No

D. A control feature in a decentralized accoun4ng system is

a. The balance in the investment in Branch account must equal the balance in the Home O?ce
Capital account
b. The balance in the Investment in Branch account must equal the balance in the Home O?ce
Capital account less the branch’s cumula4ve unremiIed pro5ts
c. The intracompany accounts are eliminated in preparing combined 5nancial statements
d. The balance in the Investment in Branch account must equal the balance in the Branch Income account

B. Which of the following would explain why the Investment in Branch account is less than the Hoome O?ce Capital
account?

a. A cash transfer to the branch is in transit

b. A cash transfer to the home o?ce is in transit
c. An inventory shipment to the branch (at cost) is in transit
d. A home o?ce has received and deposited a remiIance from a branch customer but has not yet no45ed the
branch
e. None of the above
False
A. A home o?ce, month-end alloca4on of previously recorded adver4sing expenses to a branch requires the
following entry on the home o?ce’s books:

Debit Credit
a. Investment in Branch Adver4sing Expense
b. Home O?ce Capital Adver4sing Expense
c. Branch Income Home O?ce Capital
d. Investment in Branch Accrued Liabili4es
e. None of the above

B. A home o?ce, month-end alloca4on of previously recorded adver4sing expenses to a branch requires the
following entry on the branch’s books to record the alloca4on:

Debit Credit
a. Adver4sing expense Accrued liabili4es
b. Branch income Home O?ce capital
c. Adver4sing expense Branch income
d. Home O?ce capital Accrued liabili4es
e. None of the above

D. The Shipments to Branch Ledger account in the accoun4ng records of the home o?ce of a business enterprise:

a. Is an asset valua4on account

b. Indicates that the home o?ce uses the periodic inventory system
c. Is adjusted at the end of the accoun4ng period to equal the unrealized pro5t in the branch’s ending inventories
d. Is not displayed in the home o?ce’s separate 5nancial statements

C. The Western Branch of Rivas Company reported a net income of 60,000 for the month of January. The appropriate
journal entry (explana4on omiIed) for the home o?ce of Rivas Company is:

a. Income Summary 60,000

Income: Western Branch 60,000
b. Income: Western Branch 60,000
Income Summary 60,000
c. Investment in Western Branch 60,000
Income: Western Branch 60,000
d. Investment in Western Branch 60,000
Income Summary 60,000

C. Both a home o?ce and a branch use the periodic inventory system. If at the end of an accoun4ng period the
balance of the branch’s Home O?ce ledger account does not agree with the balance of the home o?ce’s
Investment in Branch account because of a shipment of merchandise in transit from the home o?ce to the
branch
False
a. The home o?ce debits Investment in Branch and credits Shipments in Transit to Branch
b. The branch debits Home O?ce and credits Shipments in Transit from Home O?ce
c. The home o?ce debits Shipments in Transit to Branch and credits Investment Branch
d. The branch debits Shipments in Transit from Home O?ce and credits Home O?ce

A. The 5scal year of King Company which is located in Manila end on September 30. On September 30,20x4, the
home o?ce of King Company shipped merchandise cos4ng 80,000 to Rizal Branch and prepared an appropriate
entry for the shipment. The Rizal Branch did not receive the merchandise on that same day. Both the home o?ce
and the branch use the perpetual inventory system.

The end of period adjustments on September 30,20x4 should include:

a. A debit to Inventories and a credit to Home O?ce Current in the branch accoun4ng records
b. A debit to Branch Current and a credit to Inventories in the home o?ce accoun4ng records
c. A debit to Home O?ce Current and a credit to Inventories in the branch accoun4ng records d. Other journal
entry

B. Among the journal entries (explana4on omiIed) in the accoun4ng records of the home o?ce of Price Company
was the following:

O?ce Equipment: Lang Branch 12,500

Investment in Lang Branch 12,500

This journal entry indicates that:

a. The home o?ce acquired o?ce equipment for the branch

b. The home o?ce shipped o?ce equipment to the branch
c. The branch acquired o?ce equipment, which is carried in the accoun4ng records of the home o?ce
d. None of the foregoing occurred

B. The Income: Branch ledger account is maintained in the accoun4ng records of:
a. The home o?ce only
b. The branch only
c. Both the home o?ce and the branch
d. Neither the home o?ce nor the branch

D.If at the end of an accoun4ng period the balance of the Investment in Branch ledger account in the accoun4ng records
of the home o?ce is 20,000 and the balance of the Home O?ce account in the accoun4ng records of the branch (a3er
the branch recorded closing entries) is 25,500, the most likely explana4on for the discrepancy of 5,500 is a:

a. RemiIance of cash is best described to the branch not recorded by the home o?ce
b. Net income of branch not recorded by the home o?ce
c. Net loss of branch not recorded by the home o?ce
d. Collec4on by the home o?ce of a branch note receivable not recorded by the branch

A.The Home O?ce ledger account in the accoun4ng records of a branch is best described as:
False
a. A revenue account
b. An equity account
c. A deferred revenue account
d. None of the foregoing

D.The following journal entry (explana4on omiIed) appeared in the accoun4ng records of Marty Corpora4on’s only
branch:

Opera4ng expenses 600,000

Home O?ce 600,000

The journal entry indicates that:

a. The branch incurred opera4ng expenses for the bene5t of the home o?ce
b. The home o?ce incurred opera4ng expenses for the bene5t of the branch
c. The branch paid the home o?ce for services rendered to the branch
d. None of the foregoing occurred

A.In a working paper for combined 5anancial statements of home o?ce and branch, the branch’s net income is included
in:

a. The debit column of the branch income statement sec4on and the credit column of the branch statement of
retained earnings sec4on
b. The credit column of the branch income statement sec4on and the debit column of the branch statement of
retained earnings sec4on
c. The debit column of the branch income statement sec4on and the credit column of the home o?ce statement of
retained earnings sec4on
d. Some other manner

B.A debit to the Income Summary ledger account and a credit to the Home O?ce account appear in:

a. The accoun4ng records of the home o?ce to record the net income of the home o?ce
b. The accoun4ng records of the home o?ce to record the net income of the branch
c. The accoun4ng records of the branch to record the net income of the branch
d. Some other manner

D.The following journal entry (explana4on omiIed) appeared in the accoun4ng records of the home o?ce of Silversmith
Company:

Investment in Seaside Branch 8,980

Opera4ng expenses 8,980

This journal entry indicates that:

a. The branch incurred opera4ng expenses for the bene5t of the home o?ce
b. The home o?ce incurred opera4ng expenses for the bene5t of the branch
False
c. The branch paid the home o?ce for services rendered to the branch
d. None of the foregoing occurred

C.If both the home o?ce and the branch of a business enterprise use the periodic inventory system, the home
o?ce’s Shipments to Branch ledger account:

a. Is a valua4on account for the home o?ce’s Investment in Branch account

b. Always should have the same balance as the branch’s Shipments from Home O?ce account c. Is a revenue
account
d. Is a valua4on account for the home o?ce’s Purchases account

C.If both the home o?ce and the branch of a business enterprise use the perpetual inventory system, a Shipment to
Branch ledger account appears in the accoun4ng records of:

a. The home o?ce only

b. The branch only
c. Both the home o?ce and the branch
d. Neither the home o?ce nor the branch
False
B. On January 31, 20x4, the home o?ce of Wall Company collected a trade account receivable of Doris Branch. The
accoun4ng for this transac4on by Wall Company should include a:

a. Credit to Trade Accounts Receivable: Doris Branch in the accoun4ng records of the home o?ce
b. Debit to Cash in Transit in the accoun4ng records of Doris Branch
c. Credit to Investment in Doris Branch in the accoun4ng records of the home o?ce
d. Debit to Receivable from Home O?ce in the accoun4ng records of Doris Branch

B. If the home o?ce of Mobile Company maintains the accoun4ng records for the plant assets of the branch, and the
branch acquired equipment for 100,000, the appropriate journal entry for the branch is:

a. Debit the Home O?ce Current account and credit a plant asset account for 100,000
b. Debit the Home O?ce Current account and credit Cash for 100,000
c. Debit to plant asset account and credit the Home O?ce Current account for 100,000
d. Debit Cash and credit the home O?ce Current account for 100,000

A company has an external sales agency. The company allows the sales agency to incur and pay for all its expenses and
approved asset purchases. The company has never transferred any tangible assets to the agency and created the agency
by simply establishing an agency working capital fund of 25,000. Whenever the sales agency needs more working capital
it transmits the receipts for what it has spent back to the main o?ce which then sends cash back to the agency to cover
the remiIed items. Small amounts of merchandise inventory are sent to the agency for display and demonstra4on
purposes. These items are transferred at cost.

C. An opera4on such as the one described above most closely resembles a(n):

a. Voucher system
b. PeIy cash system
c. Accounts receivable subsidiary ledger
d. Accounts payable subsidiary ledger

D. The primary advantages of the system described is that it:

a. Is adequate for e;ec4ve control over agency expenses

b. Is adequate for measuring the contribu4on of agency opera4ons to enterprise income
c. It is simple to establish and maintain
d. It provides a basis for determining if agency opera4ons are being performed e?ciently

A.Which of the following statements most correctly describes the types of informa4on that a sales agency would have to
collect for the home o?ce to properly determine the sales agency’s probability

a. Only agency sales, opera4ng expenses, and cost of sales

b. Only agency sales and opera4ng expenses
c. Only agency sales, cost of sales, opera4ng expenses, and the actual or average amount of 5xed assets located at
the agency loca4ons
d. Only agency sales, opera4ng expenses, and the ending balances of accounts receivable
False
D. Which of the following statements correctly describes the rela4onship between the accoun4ng systems used for a
sales agency when compared to the accoun4ng systems used for a branch o?ce:

a. The sales agency accoun4ng system cannot be set up to measure the probability of the sales agency but the
branch accoun4ng system can be set up to measure the probability of the branch
b. The sales agency accoun4ng system can be set up to measure the probability of the sales agncy but the branch
accoun4ng system cannot be set up to measure the probability of the branch
c. The accoun4ng system of the sales agency is not usually considered a separate segment of the company’s en4re
accoun4ng system but the accoun4ng system of the branch o?ce is usually considered a separate segment of
the company’s en4re accoun4ng system
d. None of the above.

B. In preparing the 5nancial statements of the home o?ce and its various branches:

a. Nonreciprocal accounts are eliminated but reciprocal accounts are combined

b. Both reciprocal and nonreciprocal accounts are eliminated
c. Both reciprocal and nonreciprocal accounts are combined
d. Reciprocal accounts are eliminated and nonreciprocal accounts are combined
False
CHAPTER 17: PARTNERSHIP
1. A partnership is a (n) accounting entity
2. Partnerships need not follow GAAP
3. The major categories in which partnerships deviate from GAAP are:
a. Cash basis instead of accrual basis
b. Prior period adjustments
c. Use of fair (or current) values instead of historical cost
d. Recognition of goodwill in situations not involving business combinations
4. A contra-capital account used by partnerships is called the drawings account
5. When a partnership is being formed, equity dictates that noncash assets contributed to the partnership
be recorded at their fair (or current) values
6. The fundamental objective underlying much of partnership accounting is that of achieving equity among
the partners
7. A method of allocating profits and losses among partners that has the advantage of preventing potential
inequities among partners in the event of liquidation is capital balances
8. An alternative to the partnership form of organization is the professional corporation

False 9. A partnership is a taxable entity

True 10. A partnership is a tax-reporting entity but not a tax-paying entity
False 11. In a general partnership, only a majority of partners need to have unlimited liability to partnership
creditors
True 12. When a partnership agreement has provisions that are contrary to laws pertaining to partnerships,
law is controlling
False 13. Partnerships are separate legal entities, like corporations
True 14. A partner’s drawing account is merely a contra-capital account
False 15. A partner’s drawing account is substantively a loan account
False 16. Under the Partnership Law, partnerships must follow GAAP
False 17. Only individuals are allowed to be partners in a partnership
True 18. Proprietorships and partnerships are similar in that they are both easily formed
False 19. Proprietorships and partnerships are different in that proprietors have unlimited legal liability while
each partner’s legal liability is limited to his/her percentage ownership in the partnership
True 20. Partnerships are not required to prepare financial statements in accordance with GAAP unless they
have publicly traded debt or are required to follow GAAP by a creditor
False 21. Most small partnerships maintain their financial information in accordance with GAAP
True 22. Tax authorities basically view partnerships and proprietorships as extensions of their owners
False 23. Partnerships are not required to pay any taxes
False 24. The proprietary theory of equity is based on the notion that a business entity is distinct from the
owners
True 25. The entity theory of equity is based on the notion that a business entity is distinct from the owners

False 26. An individual partner’s personal responsibility for partnership debts is an example of the entity theory
of equity
False
True 27. Appraisals are not necessarily required when assigning value to noncash assets contributed to the
partnership

True 28. Assigning a noncash asset the contributor’s carrying value could result in a misallocation of gain or
loss if the asset is sold
False 29. An asset’s carrying value should not be considered when establishing the initial capital accounts of
partners
True 30. The assumption of a liability by the partnership with regard to a noncash asset contributed to the
partnership by a partner will affect the value assigned to the partner’s capital account
31. The partnership form of business is:
a. An economic entity
b. A separate legal entity, just as a corporation is a legal entity
c. A taxable entity
d. A fiscal entity
32. When a partnership is formed, equity dictates that assets contributed to the partnership be recorded in the
general ledger at their:
a. Adjusted tax basis
b. Fair (or current) value
c. Replacement value
d. Book value
e. Historical cost
33. A unique feature of partnerships (compared with publicly owned corporations) is that
a. They do not have to follow GAAP
b. They are not governed by laws
c. Books have to be maintained on the tax basis
d. They do not file income tax returns
34. A distinct and major advantage of the professional corporation form of organization in comparison with the
partnership form of organization is:
a. Limited liability with respect to damages arising from professional services
b. Greater allowable tax deductions for retirement plans
c. Ease of formation
d. Book value
e. Historical cost

35. A partnership is formed by two individuals who were previously sole proprietors. Property other than cash
that is part of the initial investment in the partnership would be recorded for financial reporting purposes at
the

a. Proprietor’s book values or the fair value of the property at the date of the investment, whichever is
higher
b. Proprietor’s book values or the fair value of the property at the date of the investment, whichever is
lower
c. Proprietor’s book values of the property at the date of the investment
False
d. Fair value of the property at the date of the investment
e. None of the above
36. Which of the following is not a characteristic of a partnership?
a. The partnership itself pays no income taxes
b. It is easy to form a partnership
c. Any partner can be held personally liable for all debts of the business
d. A partnership requires written Articles of Partnership
e. Each partner has the power to obligate the partnership for liabilities
37. Which of the following is not a reason for the popularity of partnerships as a legal form for
businesses?
a. Partnerships may be formed merely by an oral agreement
b. Partnerships can more easily generate significant amounts of capital
45. The disadvantages of the partnership form of business organization, compared to corporations, include
a. The legal requirements for formation
b. Unlimited liability for the partners
c. The requirement for the partnership to pay income taxes
d. The extent of governmental regulation
e. The complexity of operations
46. The advantages of the partnership form of business organization, compared to corporations, include
a. Single taxation
b. Ease of raising capital
c. Mutual agency
d. Limited liability
e. Difficulty of formation
47. A partner's withdrawal of assets from a limited liability partnership that is considered a permanent reduction
in that partner's equity is debited to the partner's:
a. Drawing account
b. Retained Earnings account
c. Capital account
d. Loan Receivable account

48. The drawing ledger accounts of limited liability partners are used:

a. To record the partners’ salaries

b. To reduce the partners’ capital account balances at the end of an accounting period
c. In the same manner as the partners’ loan accounts
d. To record the partner’s share of net income or loss for an accounting period
49. A partner's drawing account, in substance, is:
a. A capital account
b. A contra-capital account
False
c. A salary expense account
d. A loan account (a loan from the partnership)
e. None of the above
50. Which of the following is NOT a characteristic of the proprietary theory that influences accounting for
partnerships?
a. Partners' salaries are viewed as a distribution of income rather than a component of net income
b. A partnership is not viewed as a separate, distinct, taxable entity
c. A partnership is characterized by limited liability
d. Changes in the ownership structure of a partnership result in the dissolution of the partnership
51. Which of the following statements are true when comparing corporations and partnerships?
a. Partnership entities provide for taxes at the same rates used by corporations
b. In theory, partnerships are more able to attract capital
c. Like corporations, partnerships have an infinite life
d. Unlike shareholders, general partners may have liability beyond their capital balances
52. Which of the following is not an advantage of a partnership over a corporation?
a. Ease of formation
b. Unlimited liability
c. The elimination of taxes at the entity level
d. All of the above
53. Under the entity theory, a partnership is
a. Viewed through the eyes of the partners
b. Viewed as having its own existence apart from the partners
c. A separate legal and tax entity
d. Unable to enter into contracts in its own name

CHAPTER 18
False 1. The ability of partners to withdraw resources from the partnership is controlled exclusively by the laws
of the state where the partnership resides
True 2. The articles of partnership often control the size of withdrawal partners are allowed to make
True 3. If a partnership makes a payment on behalf of a partner, a withdrawal has occurred
False 4. Partnerships are required to indicate the manner in which profits and losses are to be allocated among
the partners
True 5. With the exception of the residual profit and loss ratio, partners can agree to apply profit and loss
allocation components in any order
False 6. The interest component of partnership profit and loss allocation rewards the partner for labor and
expertise brought into the partnership
True 7. The purpose of the interest on capital balances component of partnership profit and loss allocation is to
reward partners for contributing economic resources to the partnership
False
False 8. The interest on capital balances component of partnership profit and loss allocation is always based
on each partner's beginning or period capital balance
True 9. The interest on capital balances component of partnership profit and loss allocation is generally stated
as a percentage of the capital balance.
False 10. The salary portion of the profit and loss allocation is set in the articles of partnership and will not
change over time
True 11. The salary portion of the partnership profit and loss allocation is not included in the partnership's
income statement
True 12. The salary portion of the partnership profit and loss allocation is used to compensate partners for the
time and effort expected in business
False 13. Partnerships are required to have bonuses clauses and articles of partnership
True 14. Bonus to partners can be based on any criteria on which the partners agree
False 15. Partnership bonus arrangements must consider net income as part of the bonus calculation
True 16. A residual interest is always a component of partnership profit and loss allocation
False 17. Partnership profit and loss residual percentages must be equal
False 18. Partnership profit and loss residual percentages must be the same for profits as they are for losses
True 19. Partnership profit and loss residual percentages are used to allocate any remaining profit or loss to
partners after all other allocation components have been considered
True 20. Partnership residual profit and loss percentages may be changed by agreement of the partners
False 21. Partnership residual profit and loss percentages do not have to be the last component applied in the
profit and loss allocation process
True 22. When partnership profit and loss ratios are changed, the difference between market and book value
should be determined and allocated to partners based on the current existing profit and loss ratios
False 23. Partnerships must revalue assets up and/or down when the profit and loss ratios are adjusted
True 24. When an error is discovered in the financial records of a partnership, it should be corrected
immediately. Allocation of any change to capital accounts as a result of an error collection should be based on
the profit and loss ratios that existed when the error occurred
False 25. The value assigned to noncash assets invested by partners in a limited partnership is the cost of the
assets of the current fair value of the assets at the time of investment, whichever is lower
False 26. Partners are also employees if they are active in the business of the partnership
True 27. Theoretically, salary allowances paid to partners should not be reflected as salary in the general
ledger
False 28. Interest on partnership capital is mandatory in dividing profits and losses

29. Partnership drawings are

a. Always maintained in a separate account from the partner's capital account
b. Equal to partners' salaries
c. Usually maintained in a separate draw account with any excess draws being debited directly to the
capital account
d. Not discussed in the specific contract provisions of the partnership
False
30. Drawings
a. Are advances to a partnership
b. Are loans to a partnership
c. Are a function of interest on partnership average capital
d. Are the same nature as withdrawals
31. Withdrawals from the partnership accounts are typically not used
a. To record compensation for work performed in the business
b. To reduce the partners' capital account balances at the end of an accounting period
c. To record interest earned on a partner's capital balance
d. To reduce the basic investment that has been made in the business to record a reward for ownership in
the partnership
32. Which of the following is not a withdrawal that may be found in a partnership's drawing account?
a. Removal of cash by a partner
b. Payment of partner's speeding ticket by the partnership
c. Removal of inventory by a partner
d. All of the above may be found in a drawing account
33. Which of the following statements is correct with regard to drawing accounts that may be used by a
partnership?
a. Drawing accounts are close to the partners' capital accounts at the end of the accounting period
b. Drawing accounts establish the amount that may be taken from the partnership by a partner in a given
time period
c. Drawing accounts are similar to Retained Earnings in a corporation
d. Drawing accounts appear on the balance sheet as a contra-equity account
34. Which of the following would be least likely to be used as a means of allocating profits among partners who
are active in the management of the partnership?
a. Salaries
b. Bonus as a percentage of net income before the bonus
c. Bonus as a percentage of sales in excess of a targeted amount
d. Interest on average capital balances
35. Which of the following best describes the use of interest on invested capital as a means of allocating
profits?
a. If interest on invested capital is used, it must be used for all partners
b. Interest is allocated only if there is partnership net profit
c. Invested capital balances are never affected by drawings of the partnerships
d. Use of beginning or ending measures of invested capital may be subject to manipulation that distorts
the measure of invested capital
36. A partnership agreement calls for allocation of profits and losses by salary allocations, a bonus allocation,
interest on capital, any remainder to be allocated by preset ratios. If a partnership as 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
False
d. The loss will be allocated using the profit and loss ratios, only
37. The partnership agreement provides a formula for the computation of a bonus to the partners, the bonus
would be computed
a. Next to last, because the final allocation is the distribution of the profit residual
b. Before income tax allocations are made
c. After the salary and interest allocations are made
d. In any manner agreed to by the partners
38. 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 a partner is treated in the same manner as salaries of corporate employees
d. Partner salaries are directly closed to the capital account
39. Partners active in a partnership business should have their share of partnership profits based on the
following
a. A combination of salaries plus interest based on average capital balances
b. A combination of salaries and percentage of net income after salaries and any other allocation basis
c. Salaries only
d. Percentage of net income after salaries is paid to inactive partners
40. Which of the following could be used as a basis to allocate profits among partners who are active in the
management of the partnership?
1. Allocation of salaries 3. The amount of time each partner works
2. The number of years with the partnership 4. The average capital invested a. 1 and 2

b. 1 and 3
c. 1,2 and 3
d. 1, 3 and 4
e. 1, 2, 3 and 4
41. In a partnership, interest in a capital investment is accounted for as (n)
a. Return on investment
b. Expense
c. Allocation of net income
d. Reduction of capital
42. Bob and Fred form a partnership and agree to share profits in a 2 to 1 ratio. During the first year of
operation, the partnership incurs a P20,000 loss. The partners should share the losses
a. Based on their average capital balances
b. In a 2 to 1 ratio
c. Equally
d. Based on their ending capital balances
43. Which of the following interest component calculation bases is least susceptible to manipulation when
allocating profits and losses to partners?
a. Beginning capital account balance
False
b. Average of beginning and ending capital account balances
c. Weighted average capital account balance
d. Ending capital account balance

44. A partnership agreement calls for allocation of profits and losses by salary allocations, a bonus allocation,
interest on capital, with any reminder to be allocated by preset 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 the profit and loss ratios, only
45. What is the underlying purpose of the interest on capital balances component of allocating partnership
profits and losses?
a. Compensate partners who contribute economic resources to the partnership
b. Reward labor and expertise contributions
c. Reward for special responsibilities undertaken
d. None of the above
46. What is the underlying purpose of the salary component of allocating partnership profits and losses?
a. Compensate partners who contribute economic resources to the partnership
b. Reward labor and expertise contributions
c. Reward for special responsibilities undertaken
d. None of the above

CHAPTER 19
False 1. The dissolution of a partnership occurs only when the partnership is terminating operations and going
out of business
True 2. One reason a change in the number of partners in a partnership through the addition or withdrawal of a
partner is important because the partners have unlimited liability
False 3. A new partner in a partnership accepts unlimited liability for actions that occurred before that partner
join the partnership
True 4. The admission of a new partner into a partnership can occur without any new assets being invested
into the partnership
False 5. If a partner is going to acquire an ownership interest in a partnership directly from another partner the
other partners do not need to approve the admission
False 6. If a new partner acquires 40% of an existing partner's equity in the partnership, the new partner is also
entitled to 40% of the existing partner's profit and loss allocation
False 7. When a new partner is joining a partnership by making a payment to the partnership for an amount
more than book value, the partners of acquired to choose one of three methods of recording the new partner's
payment in excess of book value
False
True 8. The revaluation of assets and liabilities at the date a new partner joins the partnership, by investing
assets directly into the partnership, does not eliminate the possibility that the partnership might need to record
bonuses or goodwill as part of the admission of the new partner
False 9. The amount that assets are revalued when a new partner joins a partnership is always shared by
existing partners equally
False 10. If a new partner's capital account is created for an amount less than the value of net assets
contributed, an error has been made in the partnership's accounting records
True 11. The recognition of a bonus to existing partners at the date and new partner is admitted to a
partnership often occurs in lieu of the recognition of goodwill for the existing partners
True 12. The bonus recognized by existing partners when a new partner is admitted to a partnership is
commonly shared among the existing partners based on the existing partners' relative profit and loss residual
ratios
True 13. It is possible for a new partner's capital account to be established at an amount greater than the
market value of the identifiable assets invested
False 14. New partners are never recipients of bonuses when they join the partnership
True 15. A bonus paid to a new partner results in a reduction in the capital accounts of the existing partners in
proportion to their profit and loss sharing ratios
True 16. The goodwill method of admitting a new partner to a partnership results in greater total assets than
the bonus method of admitting a new partner
True 17. When the goodwill method is applied to recognize the admission of a new partner and the existing
partners are responsible for the goodwill, the new partner's capital account will always be established equal to
the amount of the contribution to the partnership
False 18. The existing partners will always recognize goodwill when a new partner is admitted to the company
and the goodwill method is applied
False 19. When the goodwill method is applied to recognize the admission of a new partner and the new
partner is responsible for the goodwill, the new partner’s capital account will be established at the amount of
the contribution
True 20. When new partner goodwill is recognized at the date the partner joins the partnership, the existing
partners' capital accounts do not change as a result of the new partner's admission
False 21. A partner may withdraw from a partnership at any time without notice given to the existing partners
True 22. A withdrawing partner may have his/her partnership interest acquired by an outside investor agreed to
by the remaining partners or the partnership
False 23. If existing partners acquire a withdrawing partner's equity, the existing partners must purchase the
withdrawing partner's equity in proportion to their residual profit and loss ratios
True 24. The revaluation of assets when a partner withdraws from the partnership may be a complete
revaluation or a partial revaluation, reflecting the change in value with regard to the withdrawing partner's
ownership interest
False 25. A partnership's assets must be revalued when a partner withdraws
False 26. When a partnership's assets are revalued at the date a partner withdraws from the partnership, the
withdrawing partner's equity must be acquired by the partnership. It cannot be acquired by an outside investor
or the existing partners personally
True 27. Withdrawing partners from a partnership may receive a bonus or pay a bonus to remaining partners
False
False 28. If the assets of a partnership are revalued at the date of a partner's withdrawal, there can be no
bonus recorded
True 29. A bonus can be recorded for a retiring partner only if the partnership acquires the equity of the partner
False 30. At the date a partner withdraws from a partnership, the partners must choose to either recognize the
goodwill with respect to the withdrawing partner or they can choose to recognize all of the partnership's
goodwill
True 31. Any goodwill recognized at the date a partner withdraws from a partnership is usually allocated to
partners based on the residual profit and loss ratios
True 32. Partnerships may have both a revaluation of assets and liabilities as well as goodwill recognition at
the date a partner withdraws from a partnership

33. Cob, Inc., a partner in TLC Partnership, assigns its partnership interest to Bean, who is not made a partner.
After the assignment, Bean asserts the rights to:
I. Participate in the management of TLC II. Cob's share of TLC's partnership profits Bean is correct as
to which of these rights?
a. I only
b. II only
c. I and II
d. Neither I nor ii
34. A partner assigned his partnership interest to a third party. Which statement best describes the legal
ramifications to the assignee?
a. The assignment of the partnership interest does not entitle the assignee to partnership assets upon
liquidation
b. The assignment dissolves the partnership
c. The assignee has the right to share in the management of the partnership
d. The assignee does not become a partner but has the right to share in future partnership profits and to
receive the proper share of partnership assets upon liquidation
35. Transferable interest of a partner includes all of the following except:
a. The partner's share of the profits and losses of the partnership
b. The right to receive distributions
c. The right to receive any liquidating distribution
d. The authority to transact any of the partnership's business operations
36. Who may acquire the ownership interest of a partner who is a withdrawing from a partnership?
a. Existing partners
b. New investors
c. The partnership
d. All of the above
37. If existing partners acquire the equity of a withdrawing partner, in what manner do they divide the equity?
a. In any manner they choose
b. Equally
c. Proportionate to their residual profit and loss ratios
False
d. Existing partners are not permitted to acquire the equity of a withdrawing partner
38. Which of the following will not result in the dissolution of a partnership?
1.Partners are incompatible and choose to cease operations
2.Partners realized that the profit figures have failed to reach projected levels
3.Retirement of a partner
4.Death of a partner
a. 1 and 2 only
b. 3 and 4 only
c. 1, 2, and 3
d. 1, 2, 3 and 4
e. Neither 1, 2, 3 or 4
39. The dissolution of a partnership occurs
a. Only when the partnership sells its assets and permanently closes its books
b. Only when a partner leaves the partnership
c. At the end of each year, when income is allocated to the partners
d. Only when a new partner is admitted to the partnership
e. When there is any change in the individuals who make up the partnership
40. Which of the following results in dissolution of a partnership?
a. Contribution of additional assets to the partnership by an existing partner
b. Receipt of a draw by an existing partner
c. Winding up of the partnership and the distribution of remaining assets to the partners
d. Withdrawal of a partner from a partnership
41. Changes in partnership ownership are presumed to be arm's length transactions that may require which of
the following actions?
a. Recognitions of goodwill to existing partners
b. Revaluation of existing partnership assets
c. Recognition of goodwill or other intangible assets attributable to the incoming partner d. All of the above
are possible
42. Which of the following forms of new partner admission will not result in a change in the partnership's net
assets?
a. Purchase of an ownership interest directly from the partnership
b. Purchase of an ownership interest directly from an existing partner
c. Either of the above
d. Neither of the above
43. Which of the following must occur for a new partner to enter the partnership by acquiring an ownership
interest directly from an existing partner?
a. Existing partners must know the amount the new partner is paying for the ownership interest
b. The new partner must acquire all of the current partner's ownership interest
c. Existing partners must approve the admission of the new partner in the partnership
d. The new partner must live in the same state as the other partners
44. Which of the following must be true when a new partner acquires an ownership interest directly from an
existing partner?
False
a. Capital must be assigned to the new partner
b. The new partner's profit and loss allocation must be proportionate to the capital account balance
c. The new partner must be allocated some amount of profit and loss
d. The existing partners must provide the list of all the partnership's outstanding liabilities to the new
partner

45. When a new partner joins a partnership by investing assets into the partnership, what method may be used
to record the admission of the new partner?
a. Revaluation of existing assets
b. Recognition of goodwill
c. Application of the bonus method
d. Any of the three or a combination may be applied
46. Which of the following is a reason to not revalue partnership assets at the date a new partner is admitted to
the partnership?
a. There has been a change in ownership
b. A new legal entity exists
c. The partnership has not ceased operations
d. All three are reasons to not revalue partnership assets at the date of a new partner's admission
47. A bonus is recognized by existing partners at the date a new partner joins a partnership when which of the
following relationships occur?

a. The new partner’s contribution exceeds his/her percentage of total partnership capital after the
investment is made
b. The new partner’s contribution is less than his/her percentage of total partnership capital after the
investment is made
c. The new partner’s contribution is equal to his/her percentage of total partnership capital after the
investment is made
d. It is not possible to determine the answer to this question
48. Which of the following is not a criterion for recognizing a bonus to existing partners when a new partner
joins the partnership?
a. Only cash assets were contributed to the partnership by the new partner
b. The existing partners desire to not recognize goodwill on the balance sheet
c. The articles of partnership indicate that the bonus method will be used to admit new partners
d. The new partner invest small into the partnership that his/her share of total partnership capital after the
investment is made
49. Which method of recording the admission of a new partner into partnership potentially results in the
existing partners' capital accounts changing in value?
a. Bonus method
b. Goodwill method
c. Either bonus method or goodwill method
d. Existing partners; capital never change
False
50. A bonus recognized by a new partner at the date of admission into the partnership is generated by the
existing partners in what way?
a. Equally
b. In proportion to capital account balances
c. In proportion to profit and loss residual ratios
d. In proportion to salaries
51. Which of the following is not a criterion recognizing a bonus to a new partner when the new partner joins
the partnership?
a. Only cash assets were contributed to the partnership by the new partner
b. The existing partners desire to not recognize goodwill on the balance sheet
c. The articles of partnership indicate that the bonus method will be used to admit new partners
d. The new partner invests into the partnership that his/her share of total partnership capital after the
investment is made
52. Which of the following statements is false with regard to the goodwill recognized for a new partner entering
a partnership?
a. The new partner's capital account balance will exceed amount invested
b. The existing partners' capital accounts will remain unchanged
c. The amount invested by the new partner will be less than his/her proportion of the partnership's book
value before goodwill is recognized
d. The three partners will have equal capital account balances when the transaction is completed
53. Which of the following statements presents a reason that goodwill may be recorded with regard to a new
partner at the date of the partner's admission to the partnership?
a. The existing partnership is worth more than the appraised value of the tangible net assets
b. The new partner has a strong desire to become a member of the partnership
c. The total value of the new partner's contribution to the partnership is greater than the value of the
identifiable net assets contributed
d. The new partner's residual interest in profits and losses is greater than 30%
54. What portion of the partnership's assets must be revalued when a partner withdraws from the partnership?
a. The withdrawing partner's share must be revalued
b. All of the partnership's assets must be revalued
c. Any or all of the partnership's assets may be revalued but none have to be revalued
d. Partnership assets may not be revalued when a partner withdraws
55. The admission of a new partner under the bonus method will result in a bonus to
a. The old partners only
b. The new partner only
c. Either the new partner or the old partners, but not both
d. None of the above
56. When a new partner is admitted into a partnership and the new partner receives a capital credit less than a
tangible assets contributed, which of the following explains the difference?
I. The new partner's goodwill has been recognized
II. The old partners received a bonus from the new partner
a. I only
b. II only
False
c. Either I or II
d. Neither I nor II
57. When a new partner is admitted into a partnership and the new partner receives a capital credit greater
than the tangible assets contributed, which of the following explains the differences?
I. The old partners' goodwill is being recognized
II. The new partner's goodwill is being recognized
a. I only
b. II only
c. Either I or II
d. Both I and II
58. When a new partner is admitted into a partnership and the capital of the old partner decreases, which of
the following explains the reason for the decrease?
I. Undervalued liabilities were written up to their fair values
II. Undervalued assets written up to their fair values
a. I only
b. II only
c. Both I and II
d. Neither I nor II
59. When a partner retires from a partnership and the retiring partners paid more than the capital balance in
her account, which of the following explains the differences?
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. Both I and II
60. When the old partners receive a bonus upon admission of a new partner into a partnership, the bonus is
allocated to:
I. All the partners in their profit and loss sharing ratio
II. The existing partners in their profit and loss sharing ratio
a. I only
b. II only
c. Either I or II
d. Both I and II
61. When a new partner is admitted into a partnership and the old partners' goodwill is recognized, the goodwill
is allocated to:
I. All the partners in their profit and loss sharing ratio
II. The old partners in their profit and loss sharing ratio
a. I only
b. II only
c. Either I or II
d. Both I and II
62. Which of the following statements is true with regard to a withdrawing partner?
a. A bonus must be paid to the retiring partner
b. A bonus may be paid to the retiring partner
c. A bonus must be paid to the retiring partner or to the remaining partners
False
d. Recognizing a bonus is not appropriate when a partner retires
63. What change occurs to continuing partners' capital accounts when withdrawing partner is assigned
goodwill at the date of withdrawal?
a. Continuing partners' capital accounts decrease by their profit and loss ratio proportion of the goodwill
assigned to the withdrawing partner
b. Continuing partners' capital accounts increase
c. Continuing partners' capital accounts do not change
d. Goodwill cannot be recognized with regard to withdrawing partners
64. What amount of goodwill can be recognized at the date a partner withdraws from a partnership?
a. The withdrawing partner's portion of goodwill
b. The continuing partner's portion of goodwill
c. Goodwill may not be recognized at the date a partner withdraws
d. Either the withdrawing partner's portion of goodwill or the goodwill attributable to the entire partnership
65. What portion of the partnership's assets must be revalued when a partner withdraws from the partnership?
a. The withdrawing partner's share must be revalued
b. All of the partnership's assets must be revalued
c. Any or all of the partnership's assets may be revalued but none have to be revalued
d. Partnership assets may not be revalued when a partner withdraws
66. Which of the following characterizes the bonus method, compared to the goodwill method, when
unrecorded intangibles are traceable to the previous partners?
a. The intangibles are actually recorded
b. The legal significance of a change in ownership structure of the partnership is emphasized
c. This method generally produces more equitable results if the former partners do not share profits and
losses in the same relationship to each other as they did before a new partner was admitted
d. The market value concept rather than the historical cost concept is emphasized
CHAPTER 22 12. Identify which of

the following are insurance contracts:

a. Compensation is cash or kind to contract holders for losses suffered while travelling
b. Financial guarantee contract that requires payment even if the holder has not insured a loss on
the failure of the debtor to make payments when due
c. Deferred annuity contract where the holder will receive or can elect to receive a life contingent
annuity at rates prevailing when the annuity begins
d. Loan contract containing a pre-payment fee that is waived if pre-payment results from the
borrower’s death
13. Identify which of the following are insurance contracts:
a. Financial guarantee contract that requires payment even if the holder has not insured a loss on
the failure of the debtor to make payments when due
b. Deferred annuity contract where the holder will receive or can elect to receive a life contingent
annuity at rates prevailing when the annuity begins
c. Loan contract containing a pre-payment fee that is waived if pre-payment results from the
borrower’s death
d. A contract that requires specified payments to reimburse the holder for a loss it incurs because
a specified debtor fails to make payment when due
14. Identify which of the following are insurance contracts:
False
a. A catastrophe bond in which principal interest payments are reduced significantly if a specified
triggering event occurs and the triggering event includes a condition that the issuer of the bond
suffered a loss
b. Loan contract containing a pre-payment fee that is waived if pre-payment results from the
borrower’s death
c. Financial guarantee contract that requires payment even if the holder has not insured a loss on
the failure of the debtor to make payments when due
d. Deferred annuity contract where the holder will receive or can elect to receive a life contingent
annuity at rates prevailing when the annuity begins
15. An insurance contract can contain both deposit and insurance elements. An example might be a
reinsurance contract where the cedent receives a repayment of the premiums at a future time if
there are no claims under the contract. Effectively this constitutes a loan by the cedent that will be
repaid in the future. PFRS 4 requires that:
a. Each payment by the cedent is accounted for as a loan advance and as a payment for
insurance cover
b. The insurance premium is accounted for as a revenue item in the income statement
c. The premium is accounted for under PFRS 15
d. The premium paid is treated purely as a loan and is accounted for under PFRS 9
16. Which of the following accounting practices has been outlawed by PFRS No. 4?
a. Shadow accounting
b. Catastrophe accounting
c. A test for the adequacy of recognized insurance liabilities
d. An impairment test for reinsurance assets
17. Which of the following types of insurance contract would probably not be covered by PFRS 4?
a. Motor insurance
b. Life insurance
c. Medical insurance
d. Pension plan
18. PFRS says that insurance contracts should:
a. Be covered by existing accounting policies during phase one
b. Comply with the PFRS Framework document
c. Comply with all existing PFRS
d. Be covered by PAS 32 and PFRS 9 only
19. PFRS 4 does not apply to:
a. Product warranties, which are covered by PFRS 15 and PAS 37;
b. Employer’s assets and liabilities under employee benefit plans, which are covered by PAS 19
and PFRS 2
c. Contingent consideration payable or receivable in a business combination, which is covered by
PFRS 3, Business Combinations
False
d. Property insurance contract
20. Which of the following items are outside the scope of PFRS 4 unless the issuer elects to apply
PFRS 4 to such contracts?
a. Financial guarantee contracts
b. Motor insurance
c. Medical insurance
d. Life insurance
21. PFRS 4 permits an insurer to change its accounting policies for insurance contracts only if, as a
result:
a. Its financial statements present information that is more relevant
b. No less reliable, or more reliable
c. No less relevant
d. All of the above

22. The term “unbundle” is defined as

a. An uncertain future event that is covered by an insurance contract and creates insurance risk
b. A contract under which on party (the insurer) accepts significant insurance risks from another
party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain
future event (the insured event) adversely affects the policyholder
c. Represents the first phase of the project on insurance contracts
d. Account for the components of a contract as if they were separate contracts
23. To unbundle a contract, an insurer component shall:
a. Apply PFRS 4 to the insurance component
b. Apply PFRS 9 to deposit component
c. Both a and b
d. None of the above
24. It is an assessment of whether the carrying amount of an insurance liability needs to be increase
(or the carrying amount of related deferred acquisition costs or related intangible assets
decreased), based on a review of future cash flows:
a. Unbundle
b. Insurance risk
c. Insured event
d. Liability adequacy test
25. It is defined as a cedant’s (policyholder under a reinsurance contract) net contractual rights under
a reinsurance contract. A reinsurance contract is an insurance contract issued by one insurer (the
reinsurer) to compensate another insurer (the cedant) for losses on one or more contracts issued
by the cedant:
a. General Insurance Business
False
b. Insurance risk
c. Reinsurance assets
d. Liability adequacy test
26. Which of the following items are not peculiar to insurance business are as a follows: a. Premiums

b. Reinsurance
c. Claims and Acquisition costs
d. Risk default

27. In accordance with the accrual assumption, the full amount of the premium is not recognized
immediately as income when received; instead, the premium is normally regarded as being
earned:
a. Every other month of different amount
b. Every other month of equal amount
c. Only at the end of the year
d. Evenly over the period of the policy
28. Premiums could have been written by insurance agents close to the end of the reporting period,
but the policies may not have been booked-in at the end of the reporting period by the insurer due
to administrative delays in the submission of returns by the agents
a. Reinsurance
b. Claims
c. Acquisition costs
d. Pipeline premiums
29. Methods of computing the unearned premium reserve, as follows:
a. Fixed percentage method
b. Time apportionment method
c. Both a and b
d. None of the above
30. This method measures the unearned premium reserve by applying a specified percentage to the
total premiums written in each class of business insurance
a. Fixed percentage method
b. Time apportionment method
c. Straight-line method
d. Declining balance method
31. This method may be applied to calculate the unearned premium reserve both for policies that are
annual (one year) and non-annual (more than or less than one-year)
False
a. Fixed percentage method
b. Time apportionment method
c. Straight-line method
d. Declining balance method

32. This method computes the unearned premiums, policy by policy, on a pro-rata basis in respect of
the unexpired periods of the respective insurance policies at the end of each period:
a. The 1/365th method
b. The 1/24th method
c. The 1/8th method
d. The straight line method
33. This method represents a practical simplification of the time apportionment method but can only
be applied for insurance policies which have a term of one year
a. The 1/365th method
b. The 1/24th method
c. The 1/8th method
d. The straight line method
34. This method is based on the general assumption that the premiums are spread uniformly over the
quarter and the average date of all policies written in quarter is in the middle of the quarter
a. The 1/365th method
b. The 1/24th method
c. The 1/8th method
d. The straight line method
35. It is a demand by any party for payment by the insurer of a policy benefit on account of an alleged
loss resulting from an event or events alleged to be covered by a policy of insurance
a. Liability adequacy test
b. Pipeline premiums
c. Acquisition cost
d. Insurance claim
36. The term “claims” is often used interchangeably with the term
a. Policy benefits
b. Losses
c. Both a and b
d. None of the above
False

37. These are commissions and agency related expenses incurred in securing premiums on general
insurance policies:
a. Reinsurance
b. Claims
c. Acquisition costs
d. Pipeline premiums
38. These are expenses other than allocated claim expenses which relate to the reporting, recording
and adjustment of claims. This may include the entire expense of the claims department such as
office overheads, sales of staff and a proportion of senior management overheads
a. Unallocated claims expense (“UCE”)
b. Actual claims
c. Allocated claims expense
d. Policy benefits
39. Acquisition costs are commission and agency related expenses incurred in securing premiums on
general insurance policies
a. Reinsurance
b. Claims
c. Acquisition costs
d. Pipeline premiums
40. It arises when the unearned premium reserve is less than the anticipated claims and related
expenses:
a. Premium deficiency
b. Claims
c. Acquisition costs
d. Premiums
41. It is an arrangement whereby the reinsurer, in consideration of a premium, agrees to indemnify
the principal ceding insurer against the loss, or part of the loss, which the latter may sustain under
the policy or policies that the insurer has written
a. Reinsurance
b. Claims
c. Acquisition costs
d. Pipeline premiums
False

42. It is an insurer that reinsures part or the whole of a risk with one or more reinsurers. The risk
reinsured is referred to as an outward reinsurance
a. Reinsurer
b. Ceding insurer
c. Beneficiary
d. Victim
43. It is an insurer which accepts part of a risk from ceding insurer by way of reinsurance. The risk
acceptance is referred to as inward reinsurance
a. Reinsurer
b. Ceding insurer
c. Beneficiary
d. Victim
44. It is defined as "a reinsurance of reinsurance assumed where the reinsurer will retrocede a whole
or a part of the risk accepted from the direct insurer to another reinsurer”
a. Reinsurer
b. Ceding insurer
c. Beneficiary
d. Retrocession
45. It is a reinsurance whereby the ceding insurer and reinsurer share premiums and claims relating
to the original contracts of insurance in the same proportion as the share of the reinsurer(s)
a. Treaty reinsurance
b. Facultative insurance
c. Proportional reinsurance
d. Non-proportional reinsurance
46. It is a reinsurance whereby the ceding insurer undertakes payment of all losses up to a pre-
agreed amount. The balance of any loss that exceeds that agreed limit will be met by the
reinsurers, usually up to a contractual maximum
a. Treaty reinsurance
b. Facultative insurance
c. Proportional reinsurance
d. Non-proportional reinsurance

47. It is defined as a form of reinsurance where business is ceded on the basis of an agreement
between the ceding insurer and the reinsurer, whereby the ceding insurer agreed to cede and the
False
reinsurer agrees to accept automatically the reinsurance of the risk written by the ceding insurer,
which fall within the scope of the treaty, subject to the limits and terms specified therein
a. Treaty reinsurance
b. Facultative insurance
c. Proportional reinsurance
d. Non-proportional reinsurance
48. It is defined as a form of reinsurance offered on an individual risk basis, and where the ceding
insurer makes the offer of reinsurance and the reinsurer has the option to accept or reject the risk
and to quote the terms for acceptance
a. Treaty reinsurance
b. Facultative insurance
c. Proportional reinsurance
d. Non-proportional reinsurance
49. This means that the premiums shall be earned evenly over the period of the risk coverage, and
that the portion of the premium that relates to the unexpired periods shall be carried forward as
unearned premium reserve
a. Treaty reinsurance
b. Facultative insurance
c. Outward reinsurance
d. Inward reinsurance
50. In an outward reinsurance arrangement, premium and commission shall be accounted for in the
same accounting period as the original policy to which the reinsurance relates. Claims recoveries
and any related expenses should be accounted for in the same accounting period as the original
policy and claims to which the reinsurance relates
a. Treaty reinsurance
b. Facultative insurance
c. Outward reinsurance
d. Inward reinsurance

Financial guarantee contract is a contract that requires the issue to make specified payments to
reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due
in accordance with the original or modified terms of a debt instrument

a. Treaty reinsurance
b. Facultative insurance
c. Financial guarantee
False
d. Inward reinsurance

Ques4on 1

1 / 1 pts

If the entity cannot demonstrate that a performance obligation is satisfied over time, it is presumed
that the performance obligation is satisfied at a point in time.

Correct! 3352

True

5120

False

Ques4on 2

1 / 1 pts

If the transaction price in a construction contracts includes a variable consideration, for example a
penalty provision or performance bonus, the entity shall estimate the variable consideration taking
into consideration any constraints to the estimate.

Correct! 6612
False

True

5970

False

Ques4on 3

1 / 1 pts

Revenue from sales-based royalties is recognized at the end of the year of sale.

Correct! 2766

True

353

False

Ques4on 4

1 / 1 pts

Under the current PFRSs, initial franchise fees are recognized in full as revenue when there is
substantial performance by the franchisor indicated by the commencement of operations of the new
franchise business.

Correct! 387

True

4249
False

False

Ques4on 5

1 / 1 pts

According to PFRS 15 Revenue from Contracts with Customers, contracts with customers are
generally combined and accounted for as a single contract.

571

True

Correct! 9554

False

Ques4on 6

1 / 1 pts

According to PFRS 15, a measure of progress based on the hours expended on the contract is an
application of the inputs method.

Correct! 3356

True

4317

False
False

Ques4on 7

1 / 1 pts

If the performance obligation in a franchise contract is satisfied at a point in time, revenue is

recognized over the duration of the contract as the obligation is satisfied.

4400

True

Correct! 7113

False

Ques4on 8

1 / 1 pts

In the construction of complex structures wherein the cost incurred and other efforts expended on
the contract do not correlate to the stage of completion of the project, the most appropriate method
for measuring progress on the contract are the outputs method.

Correct! 8219

True

7191

False
False

Ques4on 9

1 / 1 pts

Franchise is not a license.

8761

True

Correct! 3142

False

Ques4on 10

1 / 1 pts

"Step 2" of the recognition principles of PFRS 15 is the allocation of the transaction price to the
performance obligations in the contract.

3730

True

Correct! 1648

False
False
Ques4on 11

1 / 1 pts

If the entity retains control over an asset created during the construction period in a long-term
construction contract, revenue is most likely not recognized using the percentage of completion
method.

3406

True

Correct! 593

False

Ques4on 12

1 / 1 pts

The transaction price is the initial franchise fee.

3871

True

Correct! 8706

False

Ques4on 13
False
PFRS 15 requires that revenue from all long-term construction contracts be recognized using the
percentage of completion method.

Correct Answer 2809

True

You Answered 8939

False

Ques4on 14

1 / 1 pts

If the entity cannot demonstrate that a performance obligation is satisfied at a point in time, it is
presumed that the performance obligation is satisfied over time.

9970

True

Correct! 4025

False

Ques4on 15
False
1 / 1 pts

The third step in the recognition of revenue under PFRS 15 is to identify the contract with the
customer.

1471

True

Correct! 9246

False

Ques4on 16

1 / 1 pts

Lease contracts are covered by PFRS 15.

1486

True

Correct! 1417

False

Ques4on 17

1 / 1 pts

The percentage of completion under a construction contract is always computed based on the costs
incurred to date as it bears to the total expected costs on the contract.
False
5344

True

Correct! 1723

False

Move To... This element is a more accessible alternave to drag & drop reordering. Press Enter or
Space to move this queson.

Ques4on 18

1 / 1 pts

If the performance obligation is a franchise contract is satisfied overtime, revenue is recognized

when the obligation is satisfied.

9030

True

Correct! 2858

False

Ques4on 19

1 / 1 pts

The current PFRSs do not address the accounting for revenues from franchise contracts.

9944
False

True

Correct! 4545

False

Ques4on 20

1 / 1 pts

A franchise may be between two private entities or individuals.

Correct! 4137

True

6429

False

Gain on sale of equipment based on sale between parent and subsidiary (downstream sale) is added to the combined
equipment account balances since this gain has a posi4ve e;ect on net income. False

if case of sale of land, the gain on its sale by the parent to the subsidiary is to be recognized immediately during the year,
even if the property is not yet sold by the subsidiary. False

For companies using the equity method, it is not necessary to equate beginning consolidated retained earnings with the
amount of consolidated retained earnings reported at the end prior repor4ng period. True

In intercompany sale of property, plant and equipment, either downstream or upstream both a;ect noncontrolling
interest. False

Discount on bonds payable is amor4zed and debited to interest expense over the life of the bonds. True
False
Under the equity method, the retained earnings of the parent company may not equal the correct consolidated retained
earnings; some adjustments are s4ll needed. False

In any case, the unauthorized balance of the deferred gain(loss) is not eliminated when the consolidated 5nancial
statement are prepared. False

The amount of the adjustment to the non-controlling interest in consolidated net assets is equal to the noncontrolling
interest’s percentage of the Realized intercompany gain at the beginning of the period.

In an upstream sale of property, plant, and equipment, part of the gain (loss) on the sale is allocated to the
noncontrolling interest based on its percentage interest. True

In the year of sale, the amount of intercompany gain recorded by the selling a?liate is considered as realized if the asset
sold has a remaining life of one (1) year. True

In 20x4, Parrot Company sold land to its subsidiary,Tree Corpora4on, for 12,000. It had a book value of P10,000. In the
next year, Tree sold the land for P18,000 to an una?liated 5rm.

The 20x4 unrealized gain was eliminated from consolidated net income by a working paper entry that credited land
P2,000.

In years subsequent to the year a 90% owned subsidiary sells equipment to its parent company at gain, the
noncontrolling interest in consolidated income is computed by mul4plying the non-controlling interest percentage by the
subsidiary’s reported income. Plus intercompany gain considered realized in the current period.

If the asset sold by parent to subsidiary is subsequently sold to an unrelated party the unamor4zed balance of the
deferred gain(loss) in recognized in pro5t or loss. True

In 20x4, Parrot Company sold land to its subsidiary, Tree

Corpora4on, for P12, 000. It had a book value of P10, 000. Tree sold the land for P18, 000 to an una?liated 5rm.
Which of the following is correct?
A consolida4on working paper entry is required each year un4l the land is sold outside the related par4es.

To eliminate investment in subsidiary and recognize goodwill, the debits are to Goodwill and to Investment accounts.
False

WW Company owns 80 percent of FF Company’s outstanding common stock. On December 31, 20x9, FF sold equipment
to WW at a price in excess of FF’s carrying amount, but less than its original cost. On a consolidated balance sheet at
December 31, 20x9, the carrying amount of the equipment should be reported at: WW’s original cost less FF’s recorded
gain

To eliminate overstatement in deprecia4on, the debit is to accumulated deprecia4on. True

From the view of the consolidated en4ty, whatever gain(loss) is considered to be unrealized from the use of the property
or equipment. False

Cost of goods sold account is 5nally debited for the excess of the fair value over the cost of the inventory, assuming this
was sold during the year. True
False
P Corp. owns 90% of the outstanding common stock of S company. ON December 31, 20x4, S sold equipment to P for an
amount greater than the equipment’s book value but less than its original cost. The equipment should be reported on
the December 31, 20x4 consolidated balance sheet at P’s original cost less S’s recorded gain

Any gain (loss) on intercompany sale of property, plant and equipment is deferred and recorded as realized income the
following year, if the asset is depreciable. False

Upon consolida4on, the shareholders’ equity accounts of the parent are eliminated, thus carried to the consolidated
column. False

In an upstream sale,the adjustment for the gain(loss) is shared between the controlling interest and NCI, therefore NCI is
not a;ected. False

To eliminate the gain on the intercompany sale, the debit is to retained earnings. False

From a consolidated point of view, the intercompany gain on a parent company’s sale of a depreciable plant asset to the
subsidiary is realized when: Some other transac4on or event takes place.

To eliminate overstatement in deprecia4on, the debit is to accumulated deprecia4on. False

1. Tom and Jerry formed a management consulting partnership on January 1, 2021. The fair value of net
assets invested by each partner follows:

Tom Jerry

Cash 13,000 12,000

Accounts receivable 8,000 6,000

Office 2,000 800

Office equipment 30,000

Land 30,000

Accounts payable 2,000 5,000

Mortgage payable 18,800

During the year, Tom withdrew P15,000 and Jerry withdrew P12,000 in anticipation of operating
profits.Net profit for 2021 was P50,000 which is to be allocated based on the original net capital
investment.

● The capital balance of Tom on December 31, 2021 is

69,553

● The capital balance of Jerry on December 31, 2021 is

29,447

2. Robert, Mico and Aaron formed a partnership on March 1, 2019 with original capital contributions of
P300,000, P100,000, and P400,000, respectively. On April 30, 2019, agreed to invest additional capital
of P100,000 each. On August 1, all partners agreed to have the same level of contributed capital of
P500,000.

● How much is the average capital balance of Mico for the 10-month period ending December 31,
2019?
330,000

● How much is the average capital balance of Robert for the 10-month period ending December
31, 2019?
430,000

● How much is the average capital balance of Mico for the 10-month period ending December 31,
2019?
Robert of P100,000. Mico of P300,000 and nothing from Aaron

3. Dino, Doods, and Dong have the following accounts and their normal balances on January 31, 2021,
the date the partners agreed to liquidate their 3D Partnership:

Cash P20,000 Accounts Payable P10,000

 Accounts Receivable 25,000 Notes Payable 27,000

Allowance for Bad Debts 5,000 Loans due to Dino 5,000

Merchandise Inventory 60,000 Loans due to Doods 7,000

Furniture & Equipment 50,000 Dino, Capital 20,000

Accumulated Depreciation 5,000 Doods, Capital 40,000

Dong, Capital 36,000

The partners divide profit and losses 4:1:5, respectively. Sales proceed follows:
Accounts Receivable P10,000
Merchandise Inventory 30,000
Furniture & Equipment 20,000

● Assuming that Dino is a limited partner, the cash paid to Dong is?
0

● If Dino is a limited partner, the cash paid to Doods is

32500

● Assuming that Dino is a limited partner, how much additional investment should Dong give?
1500

● How much is the non-cash assets?

125000

● Assuming that any deficiency will be immediately paid, the cash paid to Doods
40500

● Assuming that any deficiency is uncollectible, the cash paid to Dong?

2667

● The sale of non-cash assets resulted in a total loss of

65000

● How much is the cash available for distribution to the partners?

43000

● The sale resulted in a capital deficiency for

Dino

4. Felicity and Gregory are partners with capital balances of P700,000 and P500,000, respectively. They
agree to accept Randell who will contribute land costs him P500,000, but with a market value of
P600,000.

Randell will be given 30% interest in the partnership and bonus is to be recognized.
 ● The revised capital of Felicity after the admission of Randell is
P735,000

● Who gives the bonus?

Randell

Randell will be given 40% interest in the partnership.

● Assuming bonus is to be recognized, how much is the bonus?

120,000

● Assuming bonus is to be recognized, who gets the bonus?

Randell

5. Felicity and Gregory are partners with capital balances of P700,000 and P500,000, respectively. They
agree to accept Randell who will contribute land costs him P500,000 but with a market value of
P600,000. Randell will be given 30% interest in the partnership but assets should first be revalued
using Randell’s investment and interest as basis.

● How much is the total agreed capital?

P2,000,000

● How much is the total asset revaluation?

200,000

6. Felicity and Gregory are partners with capital balances of P700,000 and P500,000, respectively. They
agree to accept Randell who will contribute land costs him P500,000 but with a market value of
P600,000. Randell will be given 40% interest in the partnership but assets should first be revalued
using Randell’s investment and interest as basis.

● Total asset revaluation amounts to

P(300,000)

7. Ara, Bea, and Cai agreed to admit a new partner on January 1, 2021 when their capital balances were
250,000, 150,000, and 200,000, respectively. Profit and loss ratio is 2:1:2, respectively. A new partner,
Dell was admitted for cash investment that will give her 25% interest in the partnership.

How much should Dell invest?

200,000

8. Ara, Bea, and Cai agreed to admit a new partner on January 1, 2021 when their capital balances were
250,000, 150,000, and 200,000, respectively. Profit and loss ratio is 2:1:2, respectively.

Ara retired and the partnership paid her P240,000 after the assets were revalued.

● Bea’s capital after Ara’s retirement is

P145,000

Ara retired and the partnership paid her P280,000 after the assets were revalued.
 ● Total capital after Ara’s retirement is
P395,000

9. Ara, Bea, and Cai agreed to admit a new partner on January 1, 2021 when their capital balances were
250,000, 150,000, and 200,000, respectively. Profit and loss ratio is 2:1:2, respectively. A new partner,
Dell was admitted for cash investment of 100,000 for a 20% interest in an agreed capitalization of
700,000. The accountant recognized
Bonus to new partner

10. Ali and Bebe formed a partnership. The partnership agreement stipulates the following:
a. Ali shall contribute non-cash assets with a carrying amount of P60,000 and fair value of
P100,000.
b. Bebe shall contribute cash of P200,000
c. Ali and Bebe have an interest of 80% and 20%, respectively, on both initial and subsequent
partnership profits and losses
d. No outside cash settlement shall be made between the partners. *

● The entry to record the contribution of Bebe includes a credit to Ali’s capital in the amount of
140000

● The total partnership capital after the formation is ________.

300000

● The adjusted capital account of Bebe after the formation is ________.

60000

11. The partners in the ABC partnership have the capital balances as follows:
A - 70 000 ; B - 70, 000 ; C - 105 000
Profits and losses are shared 30%, 20%, 50%, respectively. On this date, C withdraws and the partners
agree to pay him P140,000 out of partnership cash. *

● Using the total revelation of asset method, the revised capital of B after the withdrawal of C is
84000

● Using partial revaluation of asset method, the revised capital of A after the withdrawal of C is
70000

● Using bonus method, the revised capital of A after the withdrawal of C is

91000 49000

12. Jack holds an ownership interest of 63% and Teresa holds an ownership interest of 37% in the J and T
partnership. This year, in order to fully develop the business, Jack contributes an additional P6800 and
Teresa contributes an additional P3200 to the partnership. Which of the following is TRUE of this
scenario
Individual contributions of P6800 by Jack and P3200 by Teresa will be recorded.

13. Assume that after operations and partners’ withdrawals during 20x2 and 20x3, DE partnership has a
book value of P120,000 and profit and loss (P&L) percentage on January 1, 20x4 as follows:
 a. Capital balances of P72,000 and P48,000 for D and E, respectively.
b. P/L ratio of 7:3 to D and E, respectively.

On this date, G is admitted to the partnership. G purchased one-fourth of D’s interest for P21,600 and
one-fourth of E’s interest for P14,400 making direct payment to D and E. The new partner will have a
one-fourth share in the profits and losses. The old partners continue to use their profit and loss ratios.

● The capital of E after the admission of G is _______.

36000

● The revised profit or loss percentage of D is _______.

52.5%

On this date, G is admitted to the partnership. G paid P28,000 directly in exchange for a one-third
interest of D.

● The capital account credit to G is _______.

24,000

14. Rica is a sole proprietor who invested her grocery when she invited Belle to form a new partnership
business. The following are the assets and liabilities of the grocery:

Cash 50,000

Merchandise 30,000 Book Value

P20,000 Market Value

Fixed Asset (100k less Acc. Depn 10K) 90,000 Book Value

70% of cost Market Value

Accounts Payable 20,000

Accrued Expenses 7,000

Belle invested the following:

Cash P60,000

Land (mortgage balance of 200,000 Book Value

P500k plus accrued interest
for 6 mos at 18%)

500,000 Market Value

Store furniture (costing 30,000

P40k less acc depn of 10k)

The total liabilities of the newly formed partnership would be

81,500
15. A statement of financial position of the partnership of X, Y, Z contains the following account balances:

Cash P240,000 Accounts Payable P300,000

Accounts Receivable 280,000 Notes Payable 200,000

Loans to Z 40,000 Loans from Y 20,000

Inventories 400,000 X, Capital 340,000

Property, Plant, and 440,000 Y, Capital 340,000

Equipment

Z, Capital 200,000

In January 2021, the loan to Z, was offset against his capital balance, P200,000 of accounts receivable
were collected and inventories with carrying value of P160,000 were sold for P200,000. Available cash
was distributed. **

X, Y, and Z share profits and losses in the ratio of 5:3:2, respectively.

● After the first distribution of cash, the equity of Y is ________.

220000

● If Z received P30,000 during the first cash distribution, the amount that should have been
received by X is ________.
15000

● If P40,000 cash was withheld for possible liquidation expenses, the amount of cash received by
Y in the first cash distribution is ________.
100000

● If X received a total of P240,000 in full settlement of his interest in the partnership, the total loss
incurred on the liquidation of the partnership is ________.
200000

● The amount of cash available for distribution to partners is ________.

140000

16. Brian Snow and Wendy Waite formed a partnership on July 1, 20x2. Brian invested P20,000 cash,
inventory valued at P15,000, and equipment valued at P67,000. Wendy invested P50,000 cash and
land valued P120,000. The partnership assumed the P40,000 mortgage on the land.

On June 30, 20x3, the partnership reported a net loss of P24,000. The partnership contract specified
that income and losses were to be allocated by allowing 10% interest on the original capital investment,
salaries of P15,000 to Brian and P20,000 to Wendy, and the remainder to be divided in the ratio of
40:60.
 On July 1, 20x3, Alan Young was admitted into the partnership with a P70,000 cash investment. Alan
was given 30% interest in the partnership because of his special skills. The partners elect to use the
bonus method to record the admission. Any bonus should be divided in the old ratio of 40:60.*

On June 30, 20x4, the partnership reported a net income of P150,000. The new partnership contract
stipulated that income and losses were to be divided a fixed ratio of 20:50:30

On July 2, 20x4, Brian withdrew from the partnership for personal reasons. Brian was given P40,000
cash and a P60,000 note for his capital interest.

● The share of Snow in the net loss for the first year is ________.
(16,320) 7680

● The share of Snow in the net income for the second year is ________.
30000

● The decrease in the capital of Waite upon the admission of Alan is ________.
8040

● Upon formation the amount credited to the capital account of Waite is ________.
130 000

● The entry to record the withdrawal of Snow includes a credit to Waite, Capital in the amount of
11850

17. A 1:3:2 ratio is the same as

⅙:½:⅓

18. Mickey, Donald, and Minnie are partners sharing profit and loss in the ratio of 2:1:1, respectively. Their
capital balances are P400,000 for Mickey, P200,000 for Donald and P100,000 for Minnie. Claims of
suppliers amounted to 500,000 including the loan extended by Minnie, P50,000. The cash balance
amounted to P300,000 and it increased to P1,050,000 as a result of the sale of the non-cash assets.

● How much cash was received by Donald in the final settlement?

162,500

● How much cash was received by Mickey in the final settlement?

325,000

● How much was the non-cash assets of the partnership?

900,000

● How much was the loss from sale of non-cash assets?

150,000

● How much was the cash proceeds from sale of non-cash assets?
750,000

● How much cash will Minnie receive?

 112,500

19. Partnership JB has two partners, Jim and Bill. Jim own 60% of the partnership and Bill owns 40%. In
which of the following transactions will the partnership be held responsible for an individual partners'
actions
Bill signs a contract to buy furniture for official use in the partnership.

20. Carlin and Marley have a partnership agreement which includes the following provisions regarding
sharing net income or net loss.
* A salary allowance of P120,000 to Carlin and P100,000 to Marley.
* An interest allowance of 10% on capital balances at the beginning of the year.
* A bonus of 20% to Carlin,
* The remainder is to be divided 40% to Carlin and 60% to Marley.

The capital balances on January 1, 2018 for Carlin and Marley was P90,000 and P120,000,
respectively. During 2018, the Carlin and Marley partnership had sales of P2,000,000, cost of goods
sold of P1,100,000, and operating expenses of P400,000. Income Tax rate is 30%.

● If bonus is computed based on net income before bonus, salary allowances, and interest on
capital, the total share of C in the partnership is ________.
214600

● If bonus is computed based on net income after bonus, salary allowances, and interest on
capital, the total share of C in the partnership is ________.
183500

21. On January 1, 2021, Am and Boy agreed to form a partnership. The partners’ contribution are as
follows:

Am Boy

Cash 50,000 120,000

AR 360,000 1,080,000

Inventories 216,000 360,000

Land 1,080,000

Building 900,000

Equipment 90,000 90,000

AP 336,000 450,000

Capital 1,460,000 2,100,000

The partners agreed to the following:

A. The recoverable amounts of the partners’ accounts receivable are P300,000 and P760,000 for
and Boy , respectively
B. The inventory contributed by Boy includes obsolete items with a recorded cost of P200,000
 C. The land contributed by Am has an attached mortgage of P180,000. The partnership shall
assume the mortgage
D. The equipment contributed by Boy has a fair value of P130,000
E. Has an unrecorded accounts payable of P100,000. The partnership assumes the obligation of
settling the account *

● The total assets of Amboy Partnership is

3986000

● The adjusted capital balance of Am is

1120000

● The adjusted capital balance of Boy is

1800000

22. Assume that AA and BB partners of AB Partnership (who share net income and loss in 80%:20%)
organize A & B Corporation to take over the net assets of the partnership. The balance sheet of the
partnership on June 20, 20x4, the date of incorporation, is as follows: **

Assets:

Cash 14,400

Trade AR 33,720

Allowance for doubtful accounts (720)

Inventories 30,600

Equipment 72,000

A/D (31,200)

Total Assets 118,800

Liabilities and Partners Capital

Trade AP 42,000

AA, Capital 57,588

BB, Capital 19,212

Total Liabilities and Partners Capital 118,800

After an appraisal of the equipment and an audit of the partnership’s financial statements, the partners
agree that the following adjustments are required to restate the net assets of the partnership to current
fair value:
A. Increase the allowance for doubtful accounts to P1,200
B. Increase the inventories to current replacement cost of P36,000
 C. Increase the equipment to its reproduction cost new, P84,000, less accumulated depreciation on
this basis, P36,600; that is to current fair value , P47,400
D. Recognize accrued liabilities of P1,320
E. Recognize goodwill of P12,000

A & B Corporation is authorized to issue 12,000 shares of P10 par common stock. It issues 9,000
shares of common stock valued at P11 a share to the partnership in exchange for the net assets of the
partnership

● In the books of the corporation, the amount credited to Paid in Capital in Excess of Par is
9000

● The adjusted capital of AA is

75348

● The adjusted capital of BB is

23652

● The total net adjustment is

22200

23. An advantage of the partnership as a form of business

A partnership is created by a mere agreement of the partners

24. Luz, Vi and Minda are partners when the partnership earned a profit of P30,000. Their agreement
provides the following regarding the allocation of profit and losses:
a. 8% interest in partner’s ending capital in excess of P75,000
b. Salaries of P20,000 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 P60,000, P80,000 and P100,000 for partners Luz, Vi and Minda,
respectively. What is the amount of profit allocated for Minda, if each provision of the profit and loss
agreement is satisfied to whatever extent possible using the priority order shown above?
P2,000

25. Partners AA and BB have profit and loss agreement with the following provisions: salaries of P30,000
and P45,000 for AA and BB, respectively; a bonus to AA of 10% of net income after salaries and bonus,
and interest of 10% on average capital balances of P20,000 and P35,000 for AA and BB, respectively.
One-third of any remaining profits will be allocated to AA and the balance to BB.

● If the partnership has net income of P102,500, how much should be allocated to Partner AA?
P41,000

● If the partnership has net income of P102,500, how much should be allocated to Partner BB?
P61,500

● If the partnership had net income of P22,000, how much should be allocated to partner AA,
assuming that the provision of the profit and loss agreement are ranked by order of priority
starting with salaries?
 P8,800

26. Hope & Faith Co. reports net income after 30% tax of P235,000 by the end of 2018. The partnership
agreement provides for division of profit or loss on the ratio of the partners’ capital balances. At the end
of 2017, each partner had a capital balance of P220,000. During 2018, Hope made additional
investment of P50,000 on April 1 and withdrew P70,000 of her capital on September 30. Faith, on the
other hand, made additional investment of P80,000 on October 1.

● The share of Hope in the net profit using the ratio of weighted average capital is ____
P117,500

27. The partnership agreement of Rossi and Olson provides for salary allowances of P45,000 to Rossi and
P35,000 to Olson, with the remaining income or loss to be divided equally. During the year, Rossi and
Olson each withdraw cash equal to 80% of their salary allowances. If partnership net income is
P100,000, Rossi’s equity in the partnership would
Increase more than Olson’s

28. Nancy and Betty enter into a partnership agreement where they decide to share profits according to the
following rules.
● Nancy and Berry will receive salaries of P1700 and P14500 respectively as the from allocation.
● The next allocation is based on 20% of each partner’s capital balances.
● Any remaining profit or loss is to be allocated completely to betty

The partnership net income for the first year is P50,000. Nancy’s capital balance is P83,000 and Betty's
capital is P11,000 at the end of the year. Calculate the share of profit/loss to be allocated to Betty.
P31,700

29. The most appropriate basis for dividing partnership net income when the partners do not plan to take
an active role in daily operation is
On a ratio based average capital balances

30. XYZ Partnership provided for the following in the distribution of profits and losses:
First: X is to receive 10% of net income up to P100,000 and 20% of the amount in excess thereof.
Then: Y and Z are each to receive a 5% of the remaining income in excess of P150,000 after X’s share.
Lastly: The balance is to be distributed equally to the three partners.

● If the partnership income is P250,000, what is the total share of X?

P108,000

31. Tamayo, Banson and Vidal, a partnership formed on january 1, 2018, had the following initial
investments.

Tamayo 100,000

Banson 150,000

Vidal 225,000
 The partnership agreement profits and losses are to be shared equally by the partners after
consideration is made for the following:
a. Salaries allowed to partners: P60,000 for Tamayo; P48,000 for Banson and P36,000 for Vidal.
b. Average partner’s capital balances during the year shall be allowed 10% interest.

Additional information:
A. On June 30,2018, Tamayo invested an additional P60,000.
B. Vidal withrew P70,000 from the partnership on September 30, 2018.
C. Share on the remaining profit was P3,000 for each partner.

● The average capital of Vidal is ________.

207500

● The partnership net profit for 2018 before salaries, interest and partner’s share on the
remainder is _______.
201750

● The average capital of Tamayo is ________.

130000

● Interest on average capital balances of the partners totals

48750

● Total Partnership Capital

666750

32. Mariano and Lucas entered into partnership on March 1, 2018, investing P125,000 and P75,000
respectively. It was agreed that Mariano, the managing partner, was to receive a salary of P12,000 per
year and also 10% bonus on the profit after adjustment for the salary, the balance of the profit was to
be divided in the ratio of the original capital. On December 31, 2018, account balances are as follows:

Cash 70,000 Accounts payable 60,000

Accounts receivable 67,000 Sales 233,000

Furniture and Fixtures 45,000 Mariano, Capital 125,000

Purchases 196,000 Lucas Capital 75,000

Sales returns & allowances 5,000 Mariano Drawing (20,000)

Operating expenses 60,000 Lucas Drawing (30,000)

Inventories on December 31, 2018 were merchandise, P73,000; Supplies P2,500. Prepaid insurance
was P950 and accrued liabilities totaled P1,550. Depreciation on Furniture & Fixtures is to be computed
at 20% per year. Income tax rate is 35%.

● The distribution of net profit to Mariano is _______.

20342
 ● The distribution of net profit to Lucas is _______.
5268

● After closing the net profit and drawing accounts, the capital of Lucas is _______.
50268

● After closing the net profit and drawing accounts, the capital of Mariano is _______.
125342

33. Sison, Torres and Velasco are partners in an accounting firm. Their capital account balances at year-
end were: Sison, P50,000; Torres, P110,000; Velasco, P50,000. They share profits and losses in a
4:4:2 ratio, after the following terms;
a. Partners Velasco is to receive a bonus of 10% of net profit after bonus.
b. Interest of 10% shall be paid on the portion of a partner’s capital in excess of P100,000.
c. Salaries of P10,000 and P12,000 shall be paid to partners Sison and Velasco, respectively.

● Assuming a net profit of P22,000 for the year, the profit share of Sison was ________.
8800

● Assuming a net profit of P22,000 for the year, the profit share of Torres was ________.
(200)

● Assuming a net profit of P22,000 for the year, the profit share of Velasco was ________.
13400

● Assuming a net profit of P44,000 for the year, the profit share of Sison was ________.
16800

● Assuming a net profit of P44,000 for the year, the profit share of Torres was ________.
7800

● Assuming a net profit of P44,000 for the year, the profit share of Velasco was ________.
19400

34. Carlin and Maley have a partnership agreement which includes the following provisions regarding
sharing net income or net loss:
❖ A salary allowance of P120,000 to Carlin and P100,000 to Maley.
❖ An investment allowance of 10% on capital balances at the beginning of the year.
❖ A bonus of 20% Carlin
❖ The remainder to be divided 40% to Carlin and 60% to Maley.

The capital balance on January 1, 2018 for Carlin and Maley was P90,000 and P120,000, respectively.
During 2018, the Carlin and Maley partnership had sales of P2,000,000 cost of goods sold of
P1,100,000 and operating expenses of P400,000. Income tax rate is 30%.

● If bonus is computed based on net income before bonus, salary allowances, and interest on
capital, the total share of C in the partnership is __________.
P214,600
 ● If bonus is computed based on net income after bonus, salary allowances, and interest on
capital, the total share of C in the partnership is __________.
P183,500

35. Which one of the following would not be considered an expense of a partnership in determining income
for the period?
Salary allowance to partners

36. A partners share of net income is recognized in the accounts through

Closing entries

37. Jaime, Madrid and Soriano are partners sharing profits on a 5:3:2 ratio. On January 1, 2018, Matias
was admitted into the partnership with a 20% share in the profits. The old partners continue to
participate in profits proportionate to their original ratios. For the year 2018, the partnership books
showed a net profit of P250,000. It was disclose however, that the errors shown below were made:

● Assuming that income tax rate is 35%, the share of Jaime in the corrected net profit is
________.
96100

● Assuming that income tax rate is 35%, the share of Madrid in the corrected net profit is
________.
57660

● Assuming that income tax rate is 35%, the share of Soriano in the corrected net profit is
________.
38440

● Assuming that income tax rate is 35%, the share of Matias in the corrected net profit is
________.
48050

● The new profit and loss ratio of Jaime is ________.

40%

● The new profit and loss ratio of Madrid is ________.

24%

● The new profit and loss ratio of Soriano is _______.

16%

38. The net income of the Rice and Wynn partnership is P120,000. The partnership agreement specifies
that Rice and Wynn have a salary allowance of P32,000 and P48,000 respectively. The partnership
agreement also specifies an interest allowance of 10% on capital balances at the beginning of the year.
Each partner had a beginning capital balance of P80,000. Any remaining net income or net loss is
shared equally.

● What is Rice’s share of the P120,000 net income?

P52,000
 ● What is the balance of Wynn’s Capital account at the end of the year after net income has been
distributed?
P148,000

39. The BLUE Company, a partnership, was formed on January 1, 2018 with four partners, Belen, Lorna,
and Edna. Capital contributions were as follows:

Belen 100,000

Lorna 50,000

Ursula 50,000

Edna 40,000

The partnership agreement provides that each partner shall receive 5% interest on the amount
of his/her capital contribution. In addition, Belen is to receive a salary of P10,000 and Lorna a salary
of P6,000 per annum which are to be charged as expenses of the business. The agreement further
provides that Ursula shall receive a minimum of P5,000 per annum from the partnership and Edna a
minimum of P12,000 per annum, both including the profits is to be distributed in the following
proportion: Belen 30% Lorna 30% Ursula 20% Edna 20%.

● The amount that must be earned by the partnership during 2018, before any change for interest
on capital or partners salaries in order that Belen may receive an aggregate of P25,000
including interest, salary and share of profits would be _________. (Disregard income tax.
Round your final answer to the nearest peso. Do not use peso sign, comma, and decimal.)
64667

● Using the amount that must be earned by the partnership during 2018, before any change for
interest in capital or partners salaries in order that Belen may receive an aggregate of P25,000,
including interest, salary and share of profits, the total earnings of Ursula would be
_________. (Disregard income tax. Round your final answer to the nearest peso. Do not use
peso sign, comma, and decimal.)
9167

● Using the amount that must be earned by the partnership during 2018, before any change for
interest in capital or partners salaries in order that Belen may receive an aggregate of P25,000,
including interest, salary and share of profits, the total earnings of Lorna would be _________.
(Disregard income tax. Round your final answer to the nearest peso. Do not use peso sign,
comma, and decimal.)
18500

40. On October 31, 2018, Zita and Jones formed a partnership by investing cash of P300,000 and
P200,000, respectively, The partners agreed to receive and annual salary allowance of P360,000 and
to give Zita a bonus 20% of the net income after partner’s salaries, the bonus being treated as an
expense.
 If the profits after salaries and bonuses are to be divided equally, and the profits on December 31,
2018 after partner’s salaries but before bonus of Zita are P360,000, how much is the share of Zita in
the profits?
P270,000

41. RK is trying to decide whether to accept a salary of P40,000 or a salary of P25,000 plus a bonus of
10% of net income after salaries and bonus as a means of allocating profit among partners. Salaries
traceable to the other partners are estimated to be P100,000. What amount of income would be
necessary so that RK would consider choices to be equal?
P290,000

42. A, B, and C are capitalist partners while D is an industrial partner. The partnership reported a net loss of
P100,000. How much is the share of D in the reported net loss?
P-0-

43. A partner’s share of net income is recognized in the accounts through

Closing entries

44. If the partnership agreement does not specify how income is to be allocated, profits and losses should
be allocated
In accordance with their capital contribution

45. Lori and Mike enter into a partnership and decide to share profits and losses as follows:
● The first allocation is a salary allowance with Lori receiving P12,000 and Mike receiving
P25,000.
● The second allocation is 20% of the partners’ capital balances at year end. On December 31,
2019, the capital balances for Lori and Mike are P86,000 and P344,000, respectively.
● Any remaining profit or loss is allocated equally.

For the year ending December 31, 2019, the partnership reported a net loss of P122,000. The journal
entry to record the loss allocation will _______.
Debit Lori, Capital for P93,300

46. The Smith and Jones partnership agreement stipulates that profits and losses will be shared equally
after salary allowances of P120,000 for Smith and P60,000 for Jones. At the beginning of the year,
Smith’s Capital account had a balance of P240,000, while Jones’ Capital account had a balance of
P210,000. Net income for the year was P150,000 The balance of Jones’ Capital account at the end of
the year after closing is
P255,000

47. David, Chris, and John formed a partnership on July 31, 2019. They decided to share profits equally,
but inserted a clause in the partnership agreement where any losses would be allocated in the ratio of
5:2:3, respectively. For the year ended December 31, 2019, the firm earned a net income of P50,000.
However, for the year ended December 31, 2020, the firm incurred a loss of P60,000. Assuming that
John had an initial capital contribution of P43,000 and made no withdrawals, what is the balance of
John’s capital account as of december 30, 2020? (Assume that none of the partners made any further
contributions to their capital accounts. Do not round any percentage calculations. Round all monetary
calculations to the nearest peso)
P41,667
48. DOER partnership was organized on March 1, 2021. On formation date, Dory invested P150,000 and
Erwin invested land and building with fair value of P80,000 and P100,000. Erwin also invested P60,000
cash in the partnership on November 1, 2021 to meet the additional liquidity requirements of the
business. The Article of Co-partnership stipulates the following:
A. Annual salary of P18,000 o Dory and P24,000 to Erwin
B. 10% annual interest on average capital account balance, and the
C. Remainder to be shared 6:4 to Dory and Erwin, respectively.

The annual salary was to be withdrawn by each partner in twelve monthly installments, During the fiscal
year ended, February 28, 2022, DOER had net sales of P500,000, cost of sales of P280,000, and total
operating expenses of P100,000 (excluding salaries and interest on average capital balance of
partners). Each partners made monthly cash drawings in accordance with the agreement.

Assume that the annual salary is to be recognized as operating expenses and the total operating
expenses of P100,000 includes the partners’ salaries but excluding interest on partners’ average capital
account balances.

● The capital balance of Dory at the end of the fiscal year is

216000

● The capital balance of Erwin at the end of the fiscal year is

294000

● The share of Dory in the net income is

66000

● The share of Erwin in the net income is

54000

DOER partnership was organized on March 1, 2021. On formation date, Dory invested P150,000 and
Erwin invested land and building with fair value of P80,000 and P100,000. Erwin also invested P60,000
cash in the partnership on November 1, 2021 to meet the additional liquidity requirements of the
business. The Article of Co-partnership stipulates the following:
D. Annual salary of P18,000 o Dory and P24,000 to Erwin
E. 10% annual interest on average capital account balance, and the
F. Remainder to be shared 6:4 to Dory and Erwin, respectively.

The annual salary was to be withdrawn by each partner in twelve monthly installments, During the fiscal
year ended, February 28, 2022, DOER had net sales of P500,000, cost of sales of P280,000, and total
operating expenses of P100,000 (excluding salaries and interest on average capital balance of
partners). Each partners made monthly cash drawings in accordance with the agreement.

Walang assume that annual salary blablabla.

● The capital balance of Dory at the end of the fiscal year is

190800
49. Mr Chow, Ms. King, Mr. Jolly and Ms. Bee formed a partnership on Jan. 01, 2017 with original capital
contributions of P300,000, P100,000, P200,000 and P400,000, respectively. On Jan. 01, 2019 capital
accounts of Mr. Chow, Ms King, Mr. Jolly and Ms. Bee showed the beginning balance for the year of
P450,000, P300,000, P250,000, and P400,000 , respectively. On Sept. 30 Mr. Chow and Ms. King
invested P100,000 each. Ms. Bee withdrew her investment of P100,000 on Oct. 01 for personal
reasons. The partnership suffered a net loss of P240,000.

● How much is the share of Ms. Jolly on the loss for 2019 if there is no agreement on the
distribution of profit and loss?
(48,000)

● How much is the share of Ms. Chow on the loss for 2019 if there is no agreement on the
distribution of profit and loss?
(72,000)

● How much is the average capital balance of Ms. King for the year 2019?
325,000

● How much is the average capital balance of Mr. Jolly for the year 2019?
250,000

● How much is the average capital balance of Mr. Bee for the year 2019?
375,000

50. YET Partnership began its first year of operations with investment from Y, P143,000, E, P104,000, and
T, P143,000. The Articles of Partnership provides that profit and losses be assigned in the following
manner:
a. Y and T were to be given annual salary of P26,000 and P13,000, respectively,
b. Each partner was to be given interest of 10% on capital balance as of the first day of the year,
c. Remainder was to be distributed on 5:2:3 ratio respectively for Y, E, and T.

Each Partner was allowed to withdraw up to P13,000 each year. For the first year of operation, the
partnership incurred a net loss of P26,000. In the second year, it earned net income of P52,000. Each
partner withdraw the maximum amount from the business each year.*

● E’s share in net loss for the first year is

10400

● The balance of the capital of Y at the end of the first year is

118300

● Y’s share in the net income for the second year is

28080

● The balance of the capital of T at the end of the second year is

132860

51. Assume the following data for GH Partnership:

 Assets Liabilities and Capital

Cash 3,000 Liabilities 9,000

Non-cash Assets 39,000 G, Capital (60%) 24,000

G, Loan 3,000 H, Capital (40%) 12,000

Total 45,000 Total 45,000

The % in parentheses represents the P/L ratio. The partners agree to admit J to the partnership. J must
invest cash of P28,800 equivalent to 37.50% interest in total agreed capital of P76,800. Assets are to
be revalued. *

● The amount of revaluation is

12000

● The revised capital of H after the admission of J is

16800

The % in parentheses represents the P/L ratio. The partners agree to admit J to the Partnership and the
total agreed capital after admission is P48,000. J invests P12,000 for 35% interest in the firm.

● The capital of H after the admission of J is

10,080 12480

● The capital credit of J is

16800

The % in parentheses represent the P/L ratio. The partners agree to admit J to the partnership. J
conveyed a tangible assets with a fair value of P30,000 with an assumed mortgage of P6,000 in
exchange for a 30% interest in capital with bonus being to be recognized, keeping in mind that J would
be acquiring a 1/4 interest in profits.

● The capital of G after the admission of J is

27600

52. Edwin and Darren have decided to form a partnership. Edwin contributes P80,000 cash and
merchandise inventory with a current market value of P20,000. Darren contributes a parcel of land
which was acquired two years ago at P100,000 but with a current value of P130,000. If Darren is to
make additional cash investment to have a 60% in the business, how much cash should he invest?
20000

53. John, Jeff and Jane decided to engage in a real estate venture as a partnership. John invested
P100,000 cash and Jeff provided office equipments that is carried on his books at P82,000. The
partners agree that the equipment has a fair value of P110,000. There is a P30,000 note payable
remaining on the equipment to be assumed by the partnership. Although Jane has non physical assets
to invest in the partnership, both John and Jedd believe that her experience as a real estate appraiser
 is a valuable skill needed by the partnership and is a basis for granting her a capital interest in the
partnership.

Assume that each partner is to receive an equal capital interest in the partnership and an upward
revaluation of assets by P90,000 is to be recorded.

● The capital of Jane upon formation is

90000

Assume that each partner is to receive an equal capital interest in the partnership and bonus method is
applied.
● The amount of capital transferred from John is
40000

● The capital of Jeff upon formation is

60000

54. The partnership of PP, EE and TT asked you to assist in winding up its business. You complete the
following information. The trial balance of the partnership on June 30, 20x4, is:

ACCOUNTS DEBIT CREDIT

Cash 6,000

Accounts receivable (net) 22,000

Inventory 14,000

Plant and equipment (net) 99,000

Accounts payable 17,000

PP, Capital 55,000

EE, Capital 45,000

TT, Capital 24,000

Total 141,000 141,000

The partners share profit and losses as follows: PP, 50 percent; EE, 30 percent; and TT, 20 percent.
Cash is to be distributed to the partners at the end of each month. A summary of the liquidation
transactions follows:

July
1 P16,500 collected on accounts receivable balance is uncollectible
2 P10,000 received for the entire inventory
3 P1,000 liquidation expense paid
4 P17,000 paid to creditors
5 P8,000 cash retained in the business at the end of the month
August
6 P1,500 in liquidation expense paid
7 As part payment of his capital, TT accepted an item that he develop, which had a book value of
P4,000. The part of P10,000 should be placed on this item for liquidation purposes
8 P2,500 cash retained in the business at the end of the month

September
9 P75,000 received on sale of remaining plant and equipment
10 P1,000 liquidation expenses paid. No cash retained in the business

● The amount received by PP in August cash distribution is ______.

0

● In the final cash distribution, the amount received by PP is ______.

41500

● The amount of cash available for distribution to partners in August is _______.

4000

● The amount of cash available for final distribution to partners is ______.

76500

● The amount of cash available for distribution to partners in July is ______.

6500

● In the final cash distribution, the amount received by TT is ______.

8600

● In the final cash distribution, the amount received by EE is ______.

26400

● The amount received by EE in July cash distribution is ______.

6500

The partners share profit and losses as follows: PP, 50 percent; EE, 30 percent; and TT, 20 percent.

The partners are considering an offer of P100,000 for the accounts receivable, inventory and plant and
equipment as of June 30. The P100,000 will be paid to creditors and the partners in installments, the
number and amount of which are to be negotiated.

● The partner who is most vulnerable to losses is

PP

● If the offer to sell the assets is accepted, the amount of cash to be received by TT is
17000

● The partner who first receives cash is

EE
 ● If the offer to sell the assets is accepted, the amount of cash to be received by EE is
34500

● If the offer to sell the assets is accepted, the amount of cash to be received by PP is
37500

55. In the absence of partnership agreement, the law says that income (and loss) should allocated based
on:
The ratio of capital investments

56. In a cash priority program for use in installment liquidation, the partner with the highest loss absorption
balance is the most vulnerable partner. The amount of cash to be distributed to partners in installment
liquidation can be determined by preparing a cash priority program.
Only statement 2 is true

57. Statement 1: A limited partner is liable only to the extent of his her contribution in the partnership.
Statement 2: A limited partner can use the right of offset against his capital deficiency, but he is not
required to make additional contribution out of his/her personal properties.
Only the first statement is true

58. An entry is not required in the liquidation of a partnership to record the

Allocation of a capital deficiency to partners with credit balances when the deficient partner is
solvent

59. Statement 1: In case the partnership is insolvent, the general partners are liable to pay the partnership
creditors from his/her personal properties
Statement 2: A deficient partner may apply the right of offset to a loan balance owing to him or her by
the partnership.
Both statements are true

60. Statement 1: In the event of liquidation, outside creditors has priority claim over the partnership assets.
Statement 2: When a partner becomes insolvent, the claim against his separate properties shall be paid
first to his personal creditors.
Both statements are true

61. A deficiency occurs for a partner when

Hi share in the losses of the partnership is more than his capital balance

62. Statement 1: Liquidation is the process of winding up the affairs of the business towards its termination.
Statement 2: The deficiency of a partner absorbed by the other partners is allocated based on capital
contribution.
Only the first statement is true

63. Statement 1: If A’s capital is deficient but there is a loan payable to B, the right of offset can be applied.
Statement 2: A partner whose personal assets are less than his personal liabilities is deficient.
Both statements are false

64. Partner Morgan is personally insolvent, owing P600,000. Personal assets will only bring P200,000
when liquidated. At the same time, Morgan has a credit capital balance in the partnership of P120,000.
 The capital amounts of the other partners total a credit balance of P250,000. Under the doctrine of
marshalling of assets, how much the personal creditors of Morgan can collect?
P320,000

65. Statement 1: When a partner dies and the remaining partners decide to terminate the business is called
dissolution.
Statement 2: In liquidation, the sale of non-cash assets is called realization.
Only the second statement is true

66. Statement 1: Gain or loss on realization is the difference between the cash proceeds and the book
value of the assets sold.
Statement 2: Loss on realization would decrease the partner’s capital account.
Both statements are true

67. A, B and C decided to liquidate their partnership business. The financial position of the partnership
shows: A, Capital (30%) P210,000; B, Capital (20%) P150,000; C, Capital (50%) P210,000. Upon
liquidation, all of the partnership’s assets are sold and sufficient cash is realized to pay all liabilities
except on for P30,000. All partners are solvent except C.

● By what amount would the capital of A change?

234,000 decrease

● How much is the additional contribution required of B?

6,000

68. ABC Partnership is liquidated and the non-cash assets are considered worthless. A and C are
general partners while B is a limited partner. The creditors will look to whose partner’s personal
assets for settlement of their claims?
The personal assets of Partners A and C

69. Charlize and Megan are partners with capitals of P80,000 and P40,000, respectively. They share profits
in the ratio of 3:1. The partners agree to admit Caleb as a member of the firm.

● If bonus is recognized and Caleb invests P30,000 for a 15% interest in the firm, what is Megan’s
capital after the admission of Caleb?
P41,875

70. 1. All the partners in a general partnership are personally liable for all debts incurred by the partnership.
2. A limited partnership must have at least one general partner.
Both statements are true

71. The accounts of the partnership of R, S and T at the end of the fiscal year November 30, 2020 are as
follows:
Cash 103,750
Non-cash assets 707,500
Loans to R 15,000
Liabilities 262,500
Loans from S 20,000
R, Capital 266,250
 S, Capital 136,250
T, Capital 141,250

R, S and T have been sharing profits and losses in the ratio 5:3:2 respectively.

● If in the first cash distribution, S received 50,000, the amount received by R is _______.
74167

● The most vulnerable among the partners is _______.

R

● If in the first cash distribution, S received 50,000, the amount realized from the first sale of non-
cash assets is _______.
900000 353,333 333333 559167

● If in the first cash distribution, T received P50,000 and assets with carrying value of P300,000
were sold, the gain or loss recognized on the sale of these assets is _______.
(48750)

72. Egay and Egoe who share profits and losses equally have a capital balance of 200,000 and 240,000
respectively. They admit Engyl for a 1/3 interest in partnership capital and profits for an investment of
250,000.

By how much were the net assets undervalued?

60,000

73. Partners Roger, Sergio and Tito, who share profit and loss in the ratio of 3:5:2, respectively have
decided to liquidate their partnership. The Statement of Financial Position of the partnership at the time
of liquidation is shown below:
Assets Liabilities and Capital
Cash P120,000 Accounts Payable P93,000
Other Assets 360,000 Loan from Sergio 30,000
Roger, Capital 108,000
Sergio, Capital 120,000
Tito, Capital 129,000
P480,000 P480,000

The partners desire to prepare an installment distribution schedule showing how cash would be
distributed to partners as assets are realized.

● The schedule of possible losses on capital balances would indicate that the first cash distributed
after the payment of outside creditors would be distributed to
Tito, in the amount of P57,000

● If Roger has received P30,000, how much would Sergio had received?
20,000

● In the schedule of maximum absorbable loss, the maximum absorbable loss for each partner
would be
 Roger, 360,000; Sergio, 300,000; Tito, 645,000

● Assuming that the first sale of other assets having book value of P150,000 realized P45,000
and all available cash is distributed, the partners would receive
Roger, P9,000; Sergio, P0; Tito, P63,00

74. Statement 1: A deficient and insolvent partner will still have a chance to receive cash from the
partnership if there is a loan payable to him which is higher than his capital deficiency.
Statement 2: A deficient and limited partner who has a loan to the partnership can apply the right of
offset to eliminate his deficiency.
Both statements are true
Both statements are false
Only the first statement is true
Only the second statement is true

75. Jurado, Katindig, Lazaro, and Marcelo are partners sharing earnings in the ratio of 3:4:6:8. The balance
of their capital accounts on December 31, 2015 are as follows:
Jurado P1,000
Katinding 25,000
Lazaro 25,000
Marcelo 9,000

The partners decide to liquidate, and they accordingly convert the non-cash assets into P23,200 of
cash. After paying the liabilities amounting to P3,000, they have P22,000 to divide.

● Assume that a debit balance in any of partner’s capital is uncollectible. The share of Jurado in
the loss upon conversion of the non-cash assets into cash was:
P5,400

● Assume that a debit balance in any of partner’s capital is uncollectible. The book value of non-
cash assets amounted to:
P61,000

● Assume that a debit balance in any of partner’s capital is uncollectible. When the P22,200 was
divided, Lazaro got
P8,320

76. The statement of Financial Position for the partnership of Eclavo, Eclara, and Elorda, who share profits
and losses in the ratio 4:5:1, is as follows:
Cash P100,000 Accounts Payable P300,000
Inventory 720,000 Eclavo, Capital 320,000
Eclara, Capital 90,000
Elorda, Capital 110,000
P820,000 P820,000

● Assuming Elorda is a limited partner, and the inventory is sold for P360,000, how much should
she receive upon liquidation of the partnership?
74,000
 ● Assuming Eclara is an insolvent partner, and the inventory is sold for P360,000, how much
should Eclavo receive upon liquidation of the partnership?
104,000

● If the inventory is sold for P600,000, how much should Eclavo receive upon liquidation of the
partnership?
P272,000

77. The following is the priority sequence on which liquidation proceeds will be distributed for a partnership:
Partnership liabilities, partnership loans, partnership capital balances

78. Statement 1: Solvent partners are partners with sufficient remaining personal assets after deducting or
liquidating the personal liabilities.
Statement 2: Right of offset is a legal right to apply a part or all of the amount owing to a partner against
his or her capital deficiency.
Both statements are true

79. Statement 1: A deficient partner has to make an additional investment to make up for his deficiency in
all instances.
Statement 2: Partnership creditors have priority over partnership properties; in the same manner that
the partners’ personal creditors have priority over partners’ personal properties.
Only the second statement is true

80. Iyah, Ayah and Mia operate a business as a partnership and share net income and net loss in a 3:3:4
ratio, respectively. The personal assets and liabilities of the partners, gathered from their personal
records show:

Partner Assets Liabilities

Iyah (General Partner) P470,000 P450,000

Ayah (General Partner) 200,000 280,000

Mia (Limited Partner) 305,000 300,000

The statement of financial position is as shown below. Assets are sold for P175,000. Liabilities are paid
as soon as cash is available. Creditors collect from solvent partners whenever necessary.

Cash P10,000 Accounts Payable P200,000

Non-Cash 375,000 Loan, Mia 5,000

Iyah, Capital 50,000

Ayah, Capital 70,000

Mia, Capital 60,000

● How much cash was received by Mia in the final settlement?

20,000
 5,000
0
10,000

● How much is the capital balance of Iyah after the sale of non-cash assets?
(P10,000)

● How much additional investment was made by Mia?

P0

● How much cash was received by Ayah in the final settlement?

0

● Who among the partners have received the cash in the final settlement?
Mia

● How much is the additional investment made by Ayah?

0

● How much is the share of Mia from the gain (loss) on sale of non-cash assets?
(P80,000)

● How much is the additional investment made by Iyah?

20,000

81. As of December 31, the books of AME Partnership showed capital balances of: A- P40,000; M-
P25,000; E-P5,000. The partners’ profit and loss ratio was 3:2:1, respectively. The partners decided to
dissolve and liquidate. They sold all the non-cash assets for P37,000 cash. After settlement of all
liabilities amounting to P12,000, they still have P28,000 cash left for distribution.

● The loss on the realization of the non-cash assets was

P42,000

● Assuming that any partner’s capital debit balance is uncollectible, the share of A in the 28,000
cash for distribution would be
P17,800

82. The statement of financial position of the partnership A, B, and C shows: Cash, P22,400; Other Assets,
P212,000; Liabilities, P38,400; A, Capital (50%) P76,000; B, Capital (25%) P64,000, and C, Capital
(25%) P56,000.

● If B received a total of P31,000 from partnership liquidation, how much was the loss on
realization?
P127,000

● If C received P10,000 from the first cash distribution, how much was the total cash distributed to
partners?
P28,000
 ● How much is the additional contribution required of B?
P6,000

● The partners realized P56,000 from the first installment sale of non-cash assets with total
carrying amount of P120,000. How much did B receive from the partial liquidation?
P24,000

● If A received a total of P10,000 from partnership liquidation, how much was the proceeds from
the sale of all non-cash assets?
P85,000

83. The order of the liquidation process is

Sell assets, pay liabilities, disburse cash to partners

84. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk
Partnership. The partner’s capital balances are P300,000 and P190,000, respectively.

● Before the realization of non-cash assets, the partnership has a zero balance in its cash
account and a P200,000 balance in its liabilities. If on final settlement of partners’ claims Jack
received P261,000, how much was the net proceeds from the sale of non-cash assets?
P560,000

● If all partnership assets and liabilities are realized and settled at their carrying amounts, how
much would Beans receive from liquidation?
P190,000

● If all partnership assets are realized and all liabilities are settled, the partnership has remaining
cash of P120,000, how much would Beans receive from the liquidation?
None

● If on final settlement of partners’ claims Beans received P99,000, how much did Jack receive?
P261,000

● The partnership has total liabilities of P200,000. If all partnership assets are realized for
P500,000, how much would Jack receive from the liquidation?
243,000

85. The liabilities and capital balances of the partners before the sale of the assets and payments of
liabilities including personal assets and liabilities of the partners were:

Partnership Personal Assets Personal Liabilities

Cash P10,000

Liabilities 70,000

Kath 65,000 P1,200,000 P1,500,000

Pau 20,000 2,500,000 2,490,000

 Jas 15,000 3,000,000 3,200,000

After the assets were sold the capital balances of the partners were as follows: Kath, P48,000; Pau,
P12,000; and Jas, (P10,000)

● How much cash was received by Jas in the final settlement?

P0

● What is the P/L ratio of Jas? [34% - Kath; 16% - Pau]

50%

● How much is the gain/(loss) from sale of non-cash assets?

(P50,000)

● How much is the proceeds from sale of non-cash assets?

P110,000

● How much is the non-cash assets?

P160,000

86. Clyde, Warren and Neil formed a partnership on Jan. 1,2020 with investments of 100,000, 150,000, and
200,000 respectively. For division of income, they agreed the following conditions:
a. interest of 10% of the beginning capital balance each year.
b. annual compensation of 10,000 to Warren and
c. sharing of the remainder of the income or loss in a ratio of 20% for Clyde and 40% each for
Warren and Neil.

Net income was 150,000 in 2020 and 180,000 in 2021. Each partner withdrew 1,000 for personal use
every month during 2020 and 2021.

● The capital balance of Clyde at the end of 2021 is _______.

139420

● The capital balance of Warren at the end of 2021 is _______.

264540

● The capital balance of Neil at the end of 2021 is _______.

304040

● The share of Neil in the net income for 2021 is

70040

● The share of Warren in the net income for 2020 is

63000

● The capital balance of Clyde at the end of 2020 is _______.

117000
87. Chua and Wong are forming a partnership. Chua will invest a building that currently is being used by
another business owned by Chua. The building has a market value of P900,000. Also, the partnership
will assume responsibility for a P300,000 note secured by a mortgage on that building. Wong will invest
P500,000 cash. For the partnership, the amounts to be recorded for the building and for Chua’s Capital
account are:
Building, P900,000 and Chua, Capital, P600,000

88. The partner’s personal account which was collected by the partnership and credited to its accounts
receivable is a violation of the
Business entity concept

89. Partner B is investing in a partnership with Partner A. B contributes as part of his initial investments.
Accounts Receivable of P60,000, an Allowance for Doubtful Accounts of P9,000, Furniture of P30,000
with accumulated depreciation of P8,500 and P6,000 cash. The partners agreed that prepaid expenses
of P2,000 and accrued expenses of P1,800 have to be recognized. The entry that the partnership
makes to record B’s initial contribution includes a
Credit to B, Capital at P78,700

90. Jack holds an ownership interest of 63% and Teresa holds an ownership interest of 37% in the J and T
Partnership. This year, in order to further develop the business, Jack contributes an additional P6800
and Teresa contributes an additional P3200 to the partnership. Which of the following is TRUE of this
scenario?
Individual contributions of P6800 by Jack and P3200 by Teresa will be recorded

91. Partners’ non-cash investments are valued at

Market value

92. 1. One of the partners in a proposed partnership is a multi-millionaire. The stipulation in the articles of
partnership that this partner shall be excluded from sharing in the profits of the partnership is void.
2. A partnership may be established for charity.
Only statement 1 is true.

93. 1. The essence of partnership is that each partner must share in the profits or losses of the venture.
2. As long as the action is within the scope of the partnership, any partner can bind the partnership.
Both statements are true

94. In the absence of a partnership agreement, the law says that income (and loss) should be allocated
based on
The ratio of capital investments

95. Steve owns 64% and Mark owns 36% of a partnership business. They purchase equipment with a
suggested value of P9600. The current market value of the equipment at the time of purchase was
P9100. At the time of the balance sheet preparation, depreciation of P160 was recorded. Based on the
information provided, which of the following is TRUE of the partnership?
The equipment account will be debited at P9100 on the date of purchase

96. 1. A partnership has a limited life because any change in the relationship of the partners dissolves the
partnership.
2. In a limited partnership, the general partner’s liability is limited to his investment.
 Only statement 1 is true

97. 1. All partners in a general partnership are personally liable for all debts incurred by the partnership.
2. A limited partnership must have at least one general partner.
Both statements are true

98. Which of the following statements about partnerships is incorrect?

Right over profits and right over assets represent claims of partners that are allocated based on
partners’ capital accounts.

99. 1. A limited partnership normally has one or more general partners whose liability is unlimited.
2. A partnership is a legal entity separate and apart from its owners.
Both statements are true

100. Airamae and Aimery agreed to form AiAi Partnership. Airamae’s business which amounted to
P500,000 was audited and appraised at 75% of its book value.

● If they agreed that Aimery should invest cash equal to 60% of Airamae’s investment, Aimery
should invest?
P225,000

● If they agreed that Aimery should invest P325,000 cash and that each partner should be
credited for an equal share based on total actual contributions, Airamae’s capital credit should
be
P375,000
P350,000
P412,500
P500,000

● If they agreed that Aimery should invest cash equal to 60% of Airamae’s investment, the total
partnership capitalization would be
P600,000

● If they agreed that Aimery should invest P325,000 cash and that each partner should be
credited for an equal share based on total actual contributions, the bookkeeper should
recognize
Bonus for Aimery

101. Edwin and Darren have decided to form a partnership. Edwin contributes P80,000 cash and
merchandise inventory with a current market value of P17,000. Darren contributes P2400 cash and
office furniture with a current market value of P3200.

● When journalizing these transactions _____

Office Furniture will be debited for P3200

● If the partners decide to have equal interest in the partnership and the total actual contributions
is equal to total agreed capital, which statement is true?
There is bonus
102. Alana & Ansley enter into a partnership agreement in which Alana will be given 60% interest in
capital and profits. Alana contributes the following:
Land - P500,000 ?
Building - 5,000,000 fair value is 60% of its cost
Equipment - 1,000,000 fair value is 75% of its cost
There is P1,000,000 mortgage on the building which the partners agreed to assume.
The partners agreed that the total partnership capitalization should be P6M.

● Alana, Capital should be credited for

P3,600,000

● How much should be Ansley’s agreed capitalization?

P2,400,000

● Land should be recorded in the amount of

P850,000

103. Rica is a sole proprietor who invested her grocery when she invited Belle to form a new
partnership business. The following are the assets and liabilities of the grocery:

Cash P50,000

Merchandise 30,000 (book value)

20,000 (market value)

Fixed assets (P100,000 less Accumulated 90,000 (book value)

Depreciation of P10,000)

70% of cost (market value)

Accounts Payable 20,000

Accrued Expenses 7,000

Belle invested the following:

Cash P60,000

Land (mortgaged with a balance of P50,000 200,000 (book value)

plus accrued interest for 6 months at 18%)

500,000 (market value)

Store furniture (costing P40,000 less 30,000

accumulated depreciation of P10,000)

● The total assets of the newly formed partnership would be

P730,000

● If the mortgage note plus interest is to be assumed by the partnership, Belle. Capital should be
credited for
 P535,500

● The total liabilities of the newly formed partnership would be

P81,500

104. In comparison to a corporation, the owners of a general partnership ___

Have an unlimited personal liability for the debts of the business

105. In comparison to a corporation, the owners of a general professional partnership ___

Have an unlimited personal liability for the debts of the business

106. 1. An advantage of the partnership form of business is that each partner’s potential loss is
limited to that partner’s investment in the partnership.
2. Ownership is easily transferred in a partnership.
Both statements are false

107. 1. There is no income tax imposed on a partnership.

2. Mutual agency means that each partner has the right to bind the partnership to contracts
Only statement 2 is true

108. Partnership capital and drawings accounts are similar to the corporate
Paid in capital, retained earnings, and dividends accounts

109. An advantage of the partnership as a form of business organization would be

A partnership is created by mere agreement of the partners

110. Harold and Dwayne formed Hayne’s Partnership, with Harold investing cash of P150,000.

● If Dwayne is given 60% interest in assets and profits, how much is the partnership total agreed
capitalization?
P375,000

● How much should Dwayne invest for a 60% interest in assets and profits?
P225,000

111. The Metro Fashion partnership owned by Mary and May is terminated when creditor claims
exceed partnership assets by P40,000. Partner May is a millionaire and Mary has no personal assets.
Mary’s partnership interest is 75% and May’s 25%. Creditors
May collect the entire P40,000 from May

112. Jameson and Larry are forming a partnership. Jameson will invest a truck with a book value of
P100,000 and fair market value of P140,000. Larry will invest a building with a book value of P300,000
and a fair market value of P420,000, with a mortgage of P150,000.

● What amount should be recorded in Larry’s capital account?

P270,000

● At what amount should the building be recorded?

P420,000
 ● If it was agreed that both partners will have equal share in the net assets, using the cash
method, how much should be the additional cash investment by Jameson?
P130,000

113. Which of the following is specified in the articles of partnership?

Procedures for withdrawal of assets by the partners

114. Partner B is investing in a partnership with Partner A. B contributes as part of his initial
investments. Accounts Receivable of P60,000, an Allowance for Doubtful Accounts of P9,000; and
P6,000 cash. The entry that the partnership makes to record B’s initial contribution includes a
Credit to B, Capital for P57,000

115. Bob is investing in a partnership with Jerry. Bob contributes equipment that originally cost
P63,000, has a book value of P30,000, and a fair market value of P39,000. The entry that the
partnership makes to record Bob’s initial contribution includes a
Debit to Equipment for P39,000

116. A loan due from a partner is classified in the statement of financial position as a/an
Current assets

117. Tim and Michelle have decided to form a partnership with a 60/40 partnership interest ratio. Tim
contributes P7,500 cash and merchandise inventory with a market value of P1,500. While journalizing
this transaction___.
Tim, Capital will be credited for P9,000

118. Which one of the following would not be considered a disadvantage of the partnership form of
organization?
Ease of Formation

119. Andrea invested the following in the partnership:

Cash P10,000

Accounts receivable 50,000

Allowance for Bad Debts 5,000

Merchandise Inventory 120,000

Furnitures & Fixtures 75,000

Accumulated Depreciation 7,500

● If the Accounts Receivable has a net realizable value of P40,000 and there is an Accounts
Payable amounting to P60,000. How much should be credited to Andrea, Capital?
P177,500

● Accounts Receivable, Merchandise Inventory, and Furniture & Fixtures will respectively be
debited at the Partnership books for:
 45,000; 110,000; 60,000

● If the current fair value of the furniture and fixtures is P60,000 and that of the merchandise
inventory is 110,000, Andrea should be credited for
P225,000

120. 1. A nominal partner actively participates in the management of the business.

2. An ostensible partner is unknown to the public that he/she is a partner.
Both statements are false

121. A firm has two partners: Jim and Bill. Jim owns 60% of the partnership and Bill owns 40%. In
which of the following transactions will the partnership be held responsible for an individual partners’
actions?
Bill signs a contract to buy furniture for official use in the partnership

122. Partnership JB has two partners: Jim and Bill. Jim owns 60% of the partnership and Bill owns
40%. In which of the following transactions will the partnership be held responsible for an individual
partners’ transactions?
Bill signs a contract to buy furniture for official use in the partnership

123. If a partner’s capital account is credited with the amount that he or she contributed in cash,
which of the following financial statements will be affected?
The statement of partners’ equity

124. Edwin and Darren have decided to form a partnership. Edwin contributes P80,000 cash and
merchandise inventory with a current market value of P20,000. Darren contributes a parcel of land
which was acquired two years ago at P100,000 but with a current value of P130,000. If Darren is to
make additional cash investment to have a 60% in the business, how much cash should he invest?
P20,000

125. Rica is a sole proprietor who invested her grocery when she invited Belle to form a new
partnership business. The following are the assets and liabilities of the grocery:

Cash P50,000

Merchandise 30,000 (book value)

20,000 (market value)

Fixed assets (P100,000 less Accumulated 90,000 (book value)

Depreciation of P10,000)

70% of cost (market value)

Accounts Payable 20,000

Accrued Expenses 7,000

● Rica’s Capital account should be credited for

P113,000
126. Which of the following is TRUE of a partnership?
Partnership firms have a limited life

127. The partners have the following rights, except?

Transfer ownership at will

128. A characteristic describing a partnership as a judicial personality which can acquire, sell, or
dispose properties and incur obligations is called
Legal Entity

129. A partnership is a _______

Business with two or more owners that is not organized as a corporation

130. Which of the following is TRUE of a partnership balance sheet?

Each partner’s equity will be shown separately

131. In a partnership, mutual agency means that___

Any partner can bind the business to a contract within the scope of its regular business
operations

132. Blau and Rubi are partners who share profits and losses in the ratio of 6:4, respectively. On May
1, 2018, 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 P40,000. The new partnership began with a total capital of P150,000 immediately after
Lind’s admission, Blau’s capital should be
P54,000

133. When a partner retires and receives in cash less than his capital balance, how should the
difference be treated?
The difference should be credited to the remaining partners in their remaining profit and loss
ratio

134. LOV Partnership decided to admit E, who purchased a 20% interest from L, whose capital
balance was P400,000. E paid her P100,000.

● The effect of this transaction is a/an

Decrease in L’s capital

● The journal entry to record the admission of E will include a

Debit to L, Capital

135. LOV Partnership decided to admit E, who purchased a 30% interest from L, whose capital
balance was P400,000. E paid her P125,000.

● The effect of this transaction is a/an

Increase in E’s capital
 ● The journal entry to record the admission of E will include a:
Credit to E, Capital

136. Which of the following conditions constitutes a legal dissolution of a partnership?

All of the choices given

137. If the new partner is admitted by purchase of interest of an old partner at an amount higher than
its book value, this will result in
No change in partnership’s net assets

138. The capital accounts of the partnership of R and O on January 30, 2014, are as follows:
R, Capital P80,000
O, Capital P40,000

The partners share profits and losses in the ratio of 6:4. The partnership is desperate for cash and they
agreed to admit Y as a new partner with a 1/3 interest in capital and profits upon the latter’s capital
infusion of P30,000.

After Y’s admission, what are the corresponding capital balances of R, O, and Y, respectively, assuming
assets and liabilities are fairly valued?
P68,000; P32,000; P50,000

139. Charlize and Megan are partners with capitals of P80,000 and P40,000, respectively. They
share profits in the ratio of 3:1. The partners agree to admit Caleb as a member of the firm.

● If no bonus is recognized and Caleb invests P80,000 for a 50% interest in the firm, what is
Charlize’s capital after the admission of Caleb?
P65,000

● If no bonus is recognized and Caleb invests P30,000 for a 20% interest in the firm, what is
Megan's capital after the admission of Caleb?
P40,000

● If total agreed capital is based on Caleb’s contribution and Caleb Invests P30,000 for a 15%
interest in the firm, What is Megan’s capital after the admission of Caleb?
P52,500

● If no bonus is recognized and Caleb invests P80,000 for a 50% interest in the firm, what is the
profit sharing ratio of Charlize after the admission of Caleb?
37.5%

140. Charlize and Megan are partners with capitals of P80,000 and P40,000, respectively. They
share profits in the ratio of 2:3. The partners agree to admit Caleb as a member of the firm.
● If no bonus is recognized and Caleb invests P80,000 for a 50% interest in the firm, what is the
profit sharing ratio of Charlize after the admission of Caleb?
20%
141. CAR Partnership decided to admit E who invested P100,000 for a 25% interest in the
partnership with a total capitalization of P500,000.

● The capital credit of E is

P125,000

● The journal entry to record the admission of E will include

A recognition of bonus to E

● The effect of this transaction is a/an

Increase in capital

142. CAR Partnership decided to admit E who invested P120,000 for a 25% interest in the
partnership with a total capitalization of P500,000.

● The capital credit of E is

P100,000

143. Egay and Egoe who share profits and losses equally have capital balances of P200,000 and
P240,000, respectively. They admit Engyl for a 1/3 interest in partnership capital and profits for an
investment of P260,000.

By how much were the net assets undervalued? (Engyl is credited for his capital contribution)
P80,000

144. Which of the following best describes the admission of new partner by investing an amount
more than his capital credit under the bonus method?
Increase on both net assets and total capital

145. The partnership of Lim and Mallorca provides for equal sharing of profits and losses. Prior to the
admission of a third partner Zamora, the capital accounts are Lim, P75,000 and Mallorca, P105,000.
Zamora invests P90,000 for a P75,000 interest and partners agreed that the net assets of the new
partnership would be P270,000. This admission involves
Bonus to old partners of P15,000

146. Peter, Queen and Roy are partners with capital balances of P300,000. P300,000 and P200,000,
respectively, and sharing profits and losses equally. Roy is to retire and it is agreed that he will take
certain office equipment with a second hand value of P50,000 and a note for his interest. The office
equipment carried in the books at P65,000 but brand new would cost P80,000. Roy’s acquisition of the
office equipment would result in
Reduction in capital of P55,000 for Roy

147. On June 30, 2018 the condensed balance sheet for the partnership of Eddy, Fox and Grimm
together with their respective profit and loss sharing percentage was as follows
Assets, net of liabilities P 320,000
Eddy , Capital (50%) P 160,000
Fox, Capital (30%) P 96,000
Grimm, Capital (20%) P 64,000
P 320,000
 ● Eddy decided to retire from the partnership and by mutual agreement is to be paid P180,000 out
of partnership funds for his interest. Total goodwill implicit in the agreement is to be recorded.
After Eddy’s retirement, what are the capital balances of the other partner?
108,000 (Fox) 72,000 (Grimm)

● Assume that Eddy remains in the partnership and that Hamm is admitted as a new partner with
a 25% interest in the capital of the new partnership for a cash payment of P140,000. Total
goodwill implicit in the transaction is to be recorded. Immediately after admission of Hamm,
Eddy’s capital account balance should be
P210,000

148. Matthew, Paulo and Claude share partnership profits in the ratio 2:3:5. On September, 30
Claude opted to retire from the partnership. Prior to Claude’s investment, the capital balances of the
three partners are P25,000 ,P40,000 and P35,000, respectively.

● How much is Paulo’s capital after Claude’s retirement if Claude is paid P30,000 in full settlement
of his partnership interest?
P43,000

● How much is the capital of Matthew after Claude’s retirement if Claude is paid P39,000 in full
settlement of his partnership interest?
P23,400

● How much is the capital of Matthew after Claude’s retirement if Claude is paid P25,000 in full
settlement of his partnership interest?
P31,000
P29,000
P26,600
P23,400

149. When Jill retired from the partnership of Jill, Bill and Hill, the final settlement of her interest
exceeded her capital balance. Under the bonus method, the excess
Reduced the capital balance of Bill and Hill

150. When Jill retired from the partnership of Jill, Bill and Hill, the final settlement of her interest is
less than her capital balance. Under the bonus method, the difference
Increased the capital balance of Bill and Hill

151. Jeric, Ken, and Lemuel are partners sharing profits in the ratio 5:3:2 respectively, as of
December 31, 2013, their capital balances were P95,000 for Julian, P80,000 for Ken and P60,000 for
Lemuel.

On January 1, 2019 the partners admitted Mark as a new partner and according to their agreement
Mark will contribute P80,000 in cash to the partnership and also pay P10,000 for 15% for Ken’s share.
Mark will be given a 20% share in profits. While the original partners’ share will be proportionately the
same as before. After the admission of Mark, the total capital will be P330,000 and Mark’s capital will
be P70,000
 ● The bonus in the admission of Mark would be
P22,000

● The balance of Ken’s Capital after the admission of Mark would be

P79,100

● The amount of asset revaluation is

P15,000

152. Which of the following best characterizes the bonus method of recording a new partner’s
investment in a partnership?
Assuming that recorded assets are properly valued, the book value of the new partner is equal
to the book value of the previous partnership and the investment of the new partner.

153. B and N are partners sharing profits and losses in the ratio 7:3. On January 1,2013 their credit
balance capital accounts are P30,000 for B and P20,000 for N, W is to be admitted as a partner by
buying 50% of B’s interest for P20,000.

The capital balance of B after W’s admission is

P15,000

154. B and N are partners sharing profits and losses in the ratio 7:3. On January 1,2013 their credit
balance capital accounts are P70,000 for B and P30,000 for N, W is to be admitted as a partner by
buying 50% of B’s interest for P40,000.

The capital balance of B after W’s admission is

P35,000

155. Mike and Tess are partners with capital balances of P70,000 and P50,000 respectively. They
share profits and losses in the ratio of 3:1, respectively. Voce is to be admitted in the partnership for a
cash contribution of P60,000 for a ½ interest in the partnership capital and in future profits and losses.

If Voce would be given a capital credit of P90,000, how much would be charged to Mike’s capital
account?
P15,000

156. Mike and Tess are partners with capital balances of P70,000 and P50,000 respectively. They
share profits and losses in the ratio of 3:1, respectively. Voce is to be admitted in the partnership for a
cash contribution of P70,000 for a ½ interest in the partnership capital and in future profits and losses.

If Voce would be given a capital credit of P80,000, how much would be charged to Mike’s capital
account? (no asset revaluation)
P7,500

157. Partner’s Nitz, Pat and Candy share profits and losses 50:30:20 respectively. Capital balances
are P74,000 P130,000 and P96,000 respectively. The carrying values of assets and liabilities are equal
to their fair values. Emmie is to be admitted as a new partner with a 20% capital interest and a 20%
share of profits and losses in exchange for a cash contribution. No bonus is to be effected.
 How much should Emmie contribute?
P75,000

158. J decided to withdraw from the JOY Partnership. A cash settlement was made by the
partnership this will
Decrease Assets

159. The partnership of Noynoy, Manny and Gibo have capital balances as follows: Noynoy -
P35,000, Manny - P50,000, Gibo - P40,000. Their profit and loss ratio are 30% 50% and 20%
respectively, With the consent of Noynoy and Manny, Gibo sold one-half of his interest to Erap for
P30,000 , Gibo was paid in cash by Erap.

● What is the Capital Balance of Noynoy after the admission of Erap to the partnership?
P35,000

● What is the Capital Balance of Manny after the admission of Erap to the partnership?
P50,000

160. An adjustment of the assets and liabilities of the partnership to their fair market values before
dissolution is called
Asset revaluation

161. Paul, Melvin and Elrick are partners sharing profits and losses in the ratio of 2:2:1. On July 31,
2018, their capital balances are as follows: Paul - P700,000; Melvin - P500,000; Elrick - P400,000. The
partners agree to admit Laurence on the following conditions:
A. Laurence is to pay Paul P400,000 for 1/2 of Paul’s interest:
B. Laurence is also to invest P400,000 in the partnership
C. The total interest of Laurence is 25% of the total partnership capital, which is also his share in
the new partnership profit and loss sharing ratio. The old partners are sharing in their old ratio

● How much is Paul’s capital after the admission of Laurence?

P450,000

● What is the percentage of Elrick’s share in the new profit and loss sharing ratio?
15%

162. A partnership agreement most likely will stipulate that assets be reappraised when
A partner retires

163. A partnership agreement most likely will stipulate that assets be reappraised when
New partner is admitted to the partnership

164. The following transactions will affect the balance of the total partnership capital except
Admission by purchase

165. The following transactions will affect the balance of the total partnership capital except
Retirement of a partner by selling interest to another partner
166. Ben and Ric are partners who share profits and losses in the ratio of 6:4, respectively. On May
1, 2019, their respective capital accounts were as follows:
Ben P60,000
Ric P50,000

On that date, Lito was admitted as a partner with a one-third interest in capital and profits for an
investment of P40,000. The new partnership began with a total capital of P150,000. Immediately after
Lito’s admission, Ben’s capital account balance should be
P54,000

167. The admission of a new partner involving bonus will result in

Bonus to either old or new, but not both

168. Statement 1: The admission of new partner through his direct investment in the partnership will
increase the partnership capital even under bonus method
Statement 2: The admission of new partner through purchase of interest of existing partner will increase
partnership capital
Only statement 1 is true

169. Luke and Mark, who share profits and losses equally, agree to take John into the partnership for
a 40% share in capital and profits. Luke and Mark retain 30% interest each. Luke and Mark have
Capital balances of P100,000 and P140,000 respectively before the admission of John. John pays
P120,000 directly to Luke and Mark for his 40% interest. All assets of the partnership, except for land
are fairly valued.

● What would be the capital balance of Mark, immediately after the admission of John?
P102,000

● By how much was land undervalued?

P60,000

170. Dada and Elma are partners with capital balances of P400,000 and P600,000, respectively.
They share profits and losses equally. They decided to admit Jhai as a partner who will invest P200,000
for a 16% interest. Total agreed capital is P1,250,000. Which of the following statements is true?
There is revaluation of assets equal to P50,000

171. On June 30, 2018 the balance sheet for the partnership of Coll, Maduro and Prieto together with
their respective profit and loss ratios was as follows
Assets, at cost 180,000
Coll, Loan 9,000
Coll, Capital (20%) 42,000
Maduro,Capital (20%) 39,000
Prieto, Capital (60%) 90,000
Total 180,000

Coll decided to retire from the partnership by mutual agreement, the assets are to be adjusted to their
fair value of P216,000 at June 30,2018. It was agreed that the partnership would pay Coll P61,200 cash
for Coll’s partnership interest,including Coll loan which is to be repaid in full. No goodwill is to be
recorded. No goodwill is to be recorded.
 After Coll’s retirement, what is the balance of Maduro's capital account?
P45,450

172. Pascual invested P400,000 for a 10% interest in a partnership that has a total capital of
P3,000,000 after admitting Pascual. Which of the following is true?
The original partners received a bonus of P100,000

173. B and N are partners sharing profits and losses in the ratio 7:3. On January 1, 2014 their credit
balance capital accounts are P30,000 for B and P20,000 for N. W is to be admitted for a 25% interest in
the capital directly from the partners for P45,000.

Each partner’s capital account is to be charged pro rata for amounts in their capital ratio that will
provide W with the 25% interest.

The capital balance of B after W’s admission is

P22,500

174. Partnership A has an existing capital of P70,000. Two partners currently own the partnership
and split profits of 50/50. A new partner is to be admitted and will contribute net assets with a fair value
of P90,000. For no goodwill or bonus (depending in whichever method is used) to be recognized, what
is the interest in the partnership granted the new partner?
56.25%

175. Total partners’ equity remains the same if a new partner is admitted by purchase of interest.
In partnership dissolution, bonus is computed as a percentage of net income.
Only statement 1 is true.

176. The capital accounts of Ed, Nick and Vic are presented below with their respective profit and
loss ratio:
Ed P139,000 (½)
Nick 209,000 (⅓)
Vic 96,000 (⅙)

Tony was admitted to the partnership when he purchased directly, for P132,000 a proportionate interest
from Ed and Nick in the net assets and profits of the partnership. As a result, Tony acquired a one-fifth
interest in the net assets and profits of the firm. Assuming no revaluation of net assets is recorded, what
is the combined gain realized by Ed and Nick upon the sale of a portion of their interests in the
partnership to Tony?
P43,200

177. At December 31, Rod and Sol are partners with capital balances of P40,000 and P20,000, and
they share profits and losses in the ratio of 2:1, respectively. On this date Pete invests P17,000 in cash
for a one-fifth interest in the capital and profit of the new partnership. Assuming that assets are not
revalued, how much should be credited to Pete’s capital account on December 31?
P15,400
178. In lump-sum liquidation, capital deficiency resulting from division of loss from realization must be
eliminated before making any payment to partners. Any resulting capital deficiency of an insolvent
partner is eliminated by charging the capital accounts of the remaining partners.
Both statements are true

179. Partners Ray and Allan received a salary of P150,000 and P300,000, and share profit and loss
at 2:1 ratio, respectively. If the partnership suffered a P150,000 loss in 2020, by how much Allan’s
capital account would increase or decrease?
100,000

180. Two sole proprietors, E and J, agreed to form a partnership on January 1, 2021. The trial
balance for each proprietor is shown below as of January 1, 2021.

E E J J

BV FV BV FV

Cash 40,000 40,000 30,000 30,000

AR (net) 60,000 52,000 70,000 56,000

Merchandise 100,000 94,000 100,000 114,000

Inventory

Building (net) 280,000 320,000 250,000 280,000

Furniture and 60,000 64,000 40,000 44,000

fixtures (net)

AP 110,000 110,000 80,000 80,000

Mortgage Payable 200,000 200,000 150,000 150,000

E, Capital 230,000

J, Capital 260,000

The EJ partnership will take over the assets and assume the liabilities of the proprietors as of January
1, 2021.

● The total capital of the partnership amounts to

554000

● The total assets of the partnership amounts to

1094000

● The total liabilities of the partnership amounts to

540000

181. Total partners’ equity changes if a new partner is admitted by purchase of interest.
In partnership dissolution, bonus is computed as a percentage of net income.
Only statement 2 is true
Only statement 1 is true
 Both statements are false
Both statements are true

182. Partner Fe is investing in a partnership with Partner Ann. Fe contributes as part of her initial
investment. Accounts Receivable of P80,000; an Allowance for Doubtful Accounts of P12,000. Accounts
of P8,000 should be written off. The entry that the partnership makes to record Fe’s initial contribution
includes a
Credit to Fe, Capital for P68,000

183. Faith, Hope, and Love are partners sharing profits and losses in the ratio 2:2:1 and have capital
balances of P800,000, P800,000, and P400,000, respectively. Mercy pays P220,000 directly to Love for
½ of her share in the partnership. Partners agree that it is time to revalue the assets of the partnership
using as a basis, the amount Mercy is willing to pay.

● Total partnership capital after the admission of Mercy is

P2,200,000

184. Partner’s Nitz, Pat and Candy share profits and losses 50:30:20 respectively. Capital balances
are P74,000 P130,000 and P96,000 respectively. The carrying values of assets and liabilities are equal
to their fair values. Emmie is to be admitted as a new partner with a 40% capital interest and a 40%
share of profits and losses in exchange for a cash contribution. No bonus is to be effected.

How much should Emmie contribute?

P200,000

185. Mini Partnership was formed on January 2021. According to the partnership agreement, each
partner has an equal capital balance accounted for under goodwill (revaluation of asset) approach.
Partnership net income or loss is allocated 60:40 to Mi and Ni, respectively. Mi originally contributed
assets costing P30,000 with a fair value of P60,000 on January 1, 2021, while Ni invested P20,000 in
cash. Partners’ drawings during 2021 totaled P3,000 by Mi and P9,000 by Ni. Net income for 2021 was
P25,000.**

● The capital credit of Mi upon partnership formation is

60000

● The share of N in the net income for 2021 is

10000

186. Ben and Ric are partners who share profits and losses in the ratio of 6:4, respectively. On May
1, 2019, their respective capital accounts were as follows:
Ben P50,000
Ric P50,000

On that date, Lito was admitted as a partner with a one-third interest in capital and profits for an
investment of P50,000. The new partnership began with a total capital of P150,000. Immediately after
Lito’s admission, Ben’s capital account balance should be
P60,000
P56,667
P54,000
 P50,000

187. Partners Piolo and Jericho received a salary of P400,000 and P600,000 and share in profit and
loss at 60%; 40% ratio, respectively. If the partnership generated a net profit of P540,000 in 2020, by
how much Jericho’s capital account would increase or decrease?
124,000
(276,000)
416,000
(184,000)

188. Statement 1: When a new partner enters into a partnership by purchasing in existing partner’s
interest, the total assets and equity of the business increase.
Statement 2: When a new partner is admitted to a partnership by purchasing an existing partner’s
interest, the business’s accounting records do not record the transfer of cash from the new partner to
the existing partner.
Only statement 2 is true

189. Ace and Hoby formed a partnership on May 29, 2019 by contributing P300,000 and P500,000,
respectively. Ace and hoby agreed to receive 10% interest on capital contribution, and that Ace will
receive a monthly salary of P10,000 starting August 1, 2019. The remaining balance will be divided
according to capital contribution. At the end of the year, the partnership generated a revenue of
P800,000 and expenses of P650,000.

How much is the share of Hoby from the net profit?

80,000
87,500
62,500

How much is the share of Ace from the net profit?

87,500

190. Faith, Hope, and Love are partners sharing profits and losses in the ratio 2:2:1 and have capital
balances of P800,000, P800,000, and P400,000, respectively. Grace purchases half of Faith’s interest
by paying her directly for an amount that earned her a profit of P60,000.

● The entry to record the admission of Grace in the partnership includes a

Credit to Grace, Capital, P400,000

191. Statement 1: A bonus to the remaining partners results when a retiring partner receives
partnership assets which are less than his or her capital balance on the date of withdrawal.
Statement 2: If a new partner invests in a partnership at book value and acquires ¼ interest in total
partnership capital, it indicates that a bonus was paid to the original partners.
Only statement 1 is true

192. The partnership agreement of Adrian and Arzel provides a 5% capital interest on the initial
capital contributions of P300,000 and P500,000 respectively. The agreement also provides a salary
allowance of P200,000 to Adrian. The agreed profit and loss ratio is 40% for Adrian and 60% for Arzel.
The partnership generated a net profit of P180,000 in 2020. How much is the share of Arzel on the
profit?
 (11,000)

193. Bel and May have capital balances of P900,000, and P1,300,000 as of December 31, 2020. Bel
and May share 40% and 60% in the profits and losses. The partners believe that the following assets
should be adjusted:
Accounts receivable - (book value) - P240,000; (market value) - P200,000
Inventory - (book value) - P400,000; (market value) - P450,000

Len is interested in buying 40% interest from anyone of the partner.

● If May is willing to sell 40% of her interest and profit at a price that will earn her a profit of
P25,000. How much will Len pay?
P547,400
P545,000
P520,000
P522,400
● After recording the adjustments, the revised capital of Bel is
P904,000

194. This method of distributing Profit and Loss discourages additional investments
Capital balances, beginning
Capital balances, end
Average capital balances
Original capital contribution

195. The admission of a new partner involving asset revaluation will result in:
Unequal total agreed equity and total capital contribution

196. One of the provisions in the ABC Partnership is for A to receive a 10% interest on her average
capital balance for the year 2021. A first contributed P20,000 of capital on February 1, 2021. On June 1,
she contributed another P20,000. On September 1, she withdrew P15,000 from the partnership.
Withdrawals in excess of P5,000 are charged to the partner’s capital account. The partnership’s fiscal
year ends in December 31.

The amount of interest allocated to A is ____

2667

197. Partners Deeca and Annel received a salary of P280,000 and P320,00, and share profit and
loss at 3:5 ratio, respectively. If the partnership generated a net profit of P440,000 in 2020, by how
much Deeca’s capital account would increase or decrease?
220,000

198. Statement 1: New partners will always be admitted to a partnership at a contribution equal to or
greater than the book value of their interest.
Statement 2: When a partner sells his interest to another party, the journal entry simply credits the
withdrawing partner’s capital account and debits the new partner’s capital.
Both statements are false

199. What are the considerations in determining the best method in distributing profit?
All of the above
200. Which among the following is not correct in the distribution of profit or loss?
Original capital contribution may prove equitable if there are material changes in the capital
accounts during the year

201. Dada and Elma are partners with capital balances of P400,000 and P600,000, respectively.
They share profits and losses equally. They decided to admit Jhai as a partner who will invest P200,000
for a 15% interest. Total agreed capital is P1,250,000. Which of the following statements is true?
Jhai’s capital is credited for P187,500

202. Statement 1: If the proceeds from sale is less than the book value of the non-cash assets sold,
this will increase the partnership assets but decrease the partner’s equity.
Statement 2: The feature of unlimited liability covers all partners except industrial partner
Both statements are false

203. The admission of a new partner effected through purchase of interest in the partnership is
Recorded in the partnership books as a transfer within equity

204. When mill retired from the partnership, the final settlement of Mill’s interest exceeded Mill’s
capital balance. Under the bonus method, the excess
Reduced the capital balances of the remaining partners

205. In the absence of agreement as to distribution of losses but there is an agreement for
distribution of profits, the industrial partner shall share losses based on
Shall not be liable for any losses

206. The most equitable distribution of partnership profit based on capital contributions uses which of
the following capital concept?
Average Capital
1. Tom and Jerry formed a management consulting partnership on January 1, 2021. The fair value of net
assets invested by each partner follows:

Tom Jerry

Cash 13,000 12,000

Accounts receivable 8,000 6,000

Office 2,000 800

Office equipment 30,000

Land 30,000

Accounts payable 2,000 5,000

Mortgage payable 18,800

During the year, Tom withdrew P15,000 and Jerry withdrew P12,000 in anticipation of operating
profits.Net profit for 2021 was P50,000 which is to be allocated based on the original net capital
investment.

● The capital balance of Tom on December 31, 2021 is

69,553

● The capital balance of Jerry on December 31, 2021 is

29,447

2. Robert, Mico and Aaron formed a partnership on March 1, 2019 with original capital contributions of
P300,000, P100,000, and P400,000, respectively. On April 30, 2019, agreed to invest additional capital
of P100,000 each. On August 1, all partners agreed to have the same level of contributed capital of
P500,000.

● How much is the average capital balance of Mico for the 10-month period ending December 31,
2019?
330,000

● How much is the average capital balance of Robert for the 10-month period ending December
31, 2019?
430,000

● How much is the average capital balance of Mico for the 10-month period ending December 31,
2019?
Robert of P100,000. Mico of P300,000 and nothing from Aaron

3. Dino, Doods, and Dong have the following accounts and their normal balances on January 31, 2021,
the date the partners agreed to liquidate their 3D Partnership:

Cash P20,000 Accounts Payable P10,000

 Accounts Receivable 25,000 Notes Payable 27,000

Allowance for Bad Debts 5,000 Loans due to Dino 5,000

Merchandise Inventory 60,000 Loans due to Doods 7,000

Furniture & Equipment 50,000 Dino, Capital 20,000

Accumulated Depreciation 5,000 Doods, Capital 40,000

Dong, Capital 36,000

The partners divide profit and losses 4:1:5, respectively. Sales proceed follows:
Accounts Receivable P10,000
Merchandise Inventory 30,000
Furniture & Equipment 20,000

● Assuming that Dino is a limited partner, the cash paid to Dong is?
0

● If Dino is a limited partner, the cash paid to Doods is

32500

● Assuming that Dino is a limited partner, how much additional investment should Dong give?
1500

● How much is the non-cash assets?

125000

● Assuming that any deficiency will be immediately paid, the cash paid to Doods
40500

● Assuming that any deficiency is uncollectible, the cash paid to Dong?

2667

● The sale of non-cash assets resulted in a total loss of

65000

● How much is the cash available for distribution to the partners?

43000

● The sale resulted in a capital deficiency for

Dino

4. Felicity and Gregory are partners with capital balances of P700,000 and P500,000, respectively. They
agree to accept Randell who will contribute land costs him P500,000, but with a market value of
P600,000.

Randell will be given 30% interest in the partnership and bonus is to be recognized.
 ● The revised capital of Felicity after the admission of Randell is
P735,000

● Who gives the bonus?

Randell

Randell will be given 40% interest in the partnership.

● Assuming bonus is to be recognized, how much is the bonus?

120,000

● Assuming bonus is to be recognized, who gets the bonus?

Randell

5. Felicity and Gregory are partners with capital balances of P700,000 and P500,000, respectively. They
agree to accept Randell who will contribute land costs him P500,000 but with a market value of
P600,000. Randell will be given 30% interest in the partnership but assets should first be revalued
using Randell’s investment and interest as basis.

● How much is the total agreed capital?

P2,000,000

● How much is the total asset revaluation?

200,000

6. Felicity and Gregory are partners with capital balances of P700,000 and P500,000, respectively. They
agree to accept Randell who will contribute land costs him P500,000 but with a market value of
P600,000. Randell will be given 40% interest in the partnership but assets should first be revalued
using Randell’s investment and interest as basis.

● Total asset revaluation amounts to

P(300,000)

7. Ara, Bea, and Cai agreed to admit a new partner on January 1, 2021 when their capital balances were
250,000, 150,000, and 200,000, respectively. Profit and loss ratio is 2:1:2, respectively. A new partner,
Dell was admitted for cash investment that will give her 25% interest in the partnership.

How much should Dell invest?

200,000

8. Ara, Bea, and Cai agreed to admit a new partner on January 1, 2021 when their capital balances were
250,000, 150,000, and 200,000, respectively. Profit and loss ratio is 2:1:2, respectively.

Ara retired and the partnership paid her P240,000 after the assets were revalued.

● Bea’s capital after Ara’s retirement is

P145,000

Ara retired and the partnership paid her P280,000 after the assets were revalued.
 ● Total capital after Ara’s retirement is
P395,000

9. Ara, Bea, and Cai agreed to admit a new partner on January 1, 2021 when their capital balances were
250,000, 150,000, and 200,000, respectively. Profit and loss ratio is 2:1:2, respectively. A new partner,
Dell was admitted for cash investment of 100,000 for a 20% interest in an agreed capitalization of
700,000. The accountant recognized
Bonus to new partner

10. Ali and Bebe formed a partnership. The partnership agreement stipulates the following:
a. Ali shall contribute non-cash assets with a carrying amount of P60,000 and fair value of
P100,000.
b. Bebe shall contribute cash of P200,000
c. Ali and Bebe have an interest of 80% and 20%, respectively, on both initial and subsequent
partnership profits and losses
d. No outside cash settlement shall be made between the partners. *

● The entry to record the contribution of Bebe includes a credit to Ali’s capital in the amount of
140000

● The total partnership capital after the formation is ________.

300000

● The adjusted capital account of Bebe after the formation is ________.

60000

11. The partners in the ABC partnership have the capital balances as follows:
A - 70 000 ; B - 70, 000 ; C - 105 000
Profits and losses are shared 30%, 20%, 50%, respectively. On this date, C withdraws and the partners
agree to pay him P140,000 out of partnership cash. *

● Using the total revelation of asset method, the revised capital of B after the withdrawal of C is
84000

● Using partial revaluation of asset method, the revised capital of A after the withdrawal of C is
70000

● Using bonus method, the revised capital of A after the withdrawal of C is

91000 49000

12. Jack holds an ownership interest of 63% and Teresa holds an ownership interest of 37% in the J and T
partnership. This year, in order to fully develop the business, Jack contributes an additional P6800 and
Teresa contributes an additional P3200 to the partnership. Which of the following is TRUE of this
scenario
Individual contributions of P6800 by Jack and P3200 by Teresa will be recorded.

13. Assume that after operations and partners’ withdrawals during 20x2 and 20x3, DE partnership has a
book value of P120,000 and profit and loss (P&L) percentage on January 1, 20x4 as follows:
 a. Capital balances of P72,000 and P48,000 for D and E, respectively.
b. P/L ratio of 7:3 to D and E, respectively.

On this date, G is admitted to the partnership. G purchased one-fourth of D’s interest for P21,600 and
one-fourth of E’s interest for P14,400 making direct payment to D and E. The new partner will have a
one-fourth share in the profits and losses. The old partners continue to use their profit and loss ratios.

● The capital of E after the admission of G is _______.

36000

● The revised profit or loss percentage of D is _______.

52.5%

On this date, G is admitted to the partnership. G paid P28,000 directly in exchange for a one-third
interest of D.

● The capital account credit to G is _______.

24,000

14. Rica is a sole proprietor who invested her grocery when she invited Belle to form a new partnership
business. The following are the assets and liabilities of the grocery:

Cash 50,000

Merchandise 30,000 Book Value

P20,000 Market Value

Fixed Asset (100k less Acc. Depn 10K) 90,000 Book Value

70% of cost Market Value

Accounts Payable 20,000

Accrued Expenses 7,000

Belle invested the following:

Cash P60,000

Land (mortgage balance of 200,000 Book Value

P500k plus accrued interest
for 6 mos at 18%)

500,000 Market Value

Store furniture (costing 30,000

P40k less acc depn of 10k)

The total liabilities of the newly formed partnership would be

81,500
15. A statement of financial position of the partnership of X, Y, Z contains the following account balances:

Cash P240,000 Accounts Payable P300,000

Accounts Receivable 280,000 Notes Payable 200,000

Loans to Z 40,000 Loans from Y 20,000

Inventories 400,000 X, Capital 340,000

Property, Plant, and 440,000 Y, Capital 340,000

Equipment

Z, Capital 200,000

In January 2021, the loan to Z, was offset against his capital balance, P200,000 of accounts receivable
were collected and inventories with carrying value of P160,000 were sold for P200,000. Available cash
was distributed. **

X, Y, and Z share profits and losses in the ratio of 5:3:2, respectively.

● After the first distribution of cash, the equity of Y is ________.

220000

● If Z received P30,000 during the first cash distribution, the amount that should have been
received by X is ________.
15000

● If P40,000 cash was withheld for possible liquidation expenses, the amount of cash received by
Y in the first cash distribution is ________.
100000

● If X received a total of P240,000 in full settlement of his interest in the partnership, the total loss
incurred on the liquidation of the partnership is ________.
200000

● The amount of cash available for distribution to partners is ________.

140000

16. Brian Snow and Wendy Waite formed a partnership on July 1, 20x2. Brian invested P20,000 cash,
inventory valued at P15,000, and equipment valued at P67,000. Wendy invested P50,000 cash and
land valued P120,000. The partnership assumed the P40,000 mortgage on the land.

On June 30, 20x3, the partnership reported a net loss of P24,000. The partnership contract specified
that income and losses were to be allocated by allowing 10% interest on the original capital investment,
salaries of P15,000 to Brian and P20,000 to Wendy, and the remainder to be divided in the ratio of
40:60.
 On July 1, 20x3, Alan Young was admitted into the partnership with a P70,000 cash investment. Alan
was given 30% interest in the partnership because of his special skills. The partners elect to use the
bonus method to record the admission. Any bonus should be divided in the old ratio of 40:60.*

On June 30, 20x4, the partnership reported a net income of P150,000. The new partnership contract
stipulated that income and losses were to be divided a fixed ratio of 20:50:30

On July 2, 20x4, Brian withdrew from the partnership for personal reasons. Brian was given P40,000
cash and a P60,000 note for his capital interest.

● The share of Snow in the net loss for the first year is ________.
(16,320) 7680

● The share of Snow in the net income for the second year is ________.
30000

● The decrease in the capital of Waite upon the admission of Alan is ________.
8040

● Upon formation the amount credited to the capital account of Waite is ________.
130 000

● The entry to record the withdrawal of Snow includes a credit to Waite, Capital in the amount of
11850

17. A 1:3:2 ratio is the same as

⅙:½:⅓

18. Mickey, Donald, and Minnie are partners sharing profit and loss in the ratio of 2:1:1, respectively. Their
capital balances are P400,000 for Mickey, P200,000 for Donald and P100,000 for Minnie. Claims of
suppliers amounted to 500,000 including the loan extended by Minnie, P50,000. The cash balance
amounted to P300,000 and it increased to P1,050,000 as a result of the sale of the non-cash assets.

● How much cash was received by Donald in the final settlement?

162,500

● How much cash was received by Mickey in the final settlement?

325,000

● How much was the non-cash assets of the partnership?

900,000

● How much was the loss from sale of non-cash assets?

150,000

● How much was the cash proceeds from sale of non-cash assets?
750,000

● How much cash will Minnie receive?

 112,500

19. Partnership JB has two partners, Jim and Bill. Jim own 60% of the partnership and Bill owns 40%. In
which of the following transactions will the partnership be held responsible for an individual partners'
actions
Bill signs a contract to buy furniture for official use in the partnership.

20. Carlin and Marley have a partnership agreement which includes the following provisions regarding
sharing net income or net loss.
* A salary allowance of P120,000 to Carlin and P100,000 to Marley.
* An interest allowance of 10% on capital balances at the beginning of the year.
* A bonus of 20% to Carlin,
* The remainder is to be divided 40% to Carlin and 60% to Marley.

The capital balances on January 1, 2018 for Carlin and Marley was P90,000 and P120,000,
respectively. During 2018, the Carlin and Marley partnership had sales of P2,000,000, cost of goods
sold of P1,100,000, and operating expenses of P400,000. Income Tax rate is 30%.

● If bonus is computed based on net income before bonus, salary allowances, and interest on
capital, the total share of C in the partnership is ________.
214600

● If bonus is computed based on net income after bonus, salary allowances, and interest on
capital, the total share of C in the partnership is ________.
183500

21. On January 1, 2021, Am and Boy agreed to form a partnership. The partners’ contribution are as
follows:

Am Boy

Cash 50,000 120,000

AR 360,000 1,080,000

Inventories 216,000 360,000

Land 1,080,000

Building 900,000

Equipment 90,000 90,000

AP 336,000 450,000

Capital 1,460,000 2,100,000

The partners agreed to the following:

A. The recoverable amounts of the partners’ accounts receivable are P300,000 and P760,000 for
and Boy , respectively
B. The inventory contributed by Boy includes obsolete items with a recorded cost of P200,000
 C. The land contributed by Am has an attached mortgage of P180,000. The partnership shall
assume the mortgage
D. The equipment contributed by Boy has a fair value of P130,000
E. Has an unrecorded accounts payable of P100,000. The partnership assumes the obligation of
settling the account *

● The total assets of Amboy Partnership is

3986000

● The adjusted capital balance of Am is

1120000

● The adjusted capital balance of Boy is

1800000

22. Assume that AA and BB partners of AB Partnership (who share net income and loss in 80%:20%)
organize A & B Corporation to take over the net assets of the partnership. The balance sheet of the
partnership on June 20, 20x4, the date of incorporation, is as follows: **

Assets:

Cash 14,400

Trade AR 33,720

Allowance for doubtful accounts (720)

Inventories 30,600

Equipment 72,000

A/D (31,200)

Total Assets 118,800

Liabilities and Partners Capital

Trade AP 42,000

AA, Capital 57,588

BB, Capital 19,212

Total Liabilities and Partners Capital 118,800

After an appraisal of the equipment and an audit of the partnership’s financial statements, the partners
agree that the following adjustments are required to restate the net assets of the partnership to current
fair value:
A. Increase the allowance for doubtful accounts to P1,200
B. Increase the inventories to current replacement cost of P36,000
 C. Increase the equipment to its reproduction cost new, P84,000, less accumulated depreciation on
this basis, P36,600; that is to current fair value , P47,400
D. Recognize accrued liabilities of P1,320
E. Recognize goodwill of P12,000

A & B Corporation is authorized to issue 12,000 shares of P10 par common stock. It issues 9,000
shares of common stock valued at P11 a share to the partnership in exchange for the net assets of the
partnership

● In the books of the corporation, the amount credited to Paid in Capital in Excess of Par is
9000

● The adjusted capital of AA is

75348

● The adjusted capital of BB is

23652

● The total net adjustment is

22200

23. An advantage of the partnership as a form of business

A partnership is created by a mere agreement of the partners

24. Luz, Vi and Minda are partners when the partnership earned a profit of P30,000. Their agreement
provides the following regarding the allocation of profit and losses:
a. 8% interest in partner’s ending capital in excess of P75,000
b. Salaries of P20,000 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 P60,000, P80,000 and P100,000 for partners Luz, Vi and Minda,
respectively. What is the amount of profit allocated for Minda, if each provision of the profit and loss
agreement is satisfied to whatever extent possible using the priority order shown above?
P2,000

25. Partners AA and BB have profit and loss agreement with the following provisions: salaries of P30,000
and P45,000 for AA and BB, respectively; a bonus to AA of 10% of net income after salaries and bonus,
and interest of 10% on average capital balances of P20,000 and P35,000 for AA and BB, respectively.
One-third of any remaining profits will be allocated to AA and the balance to BB.

● If the partnership has net income of P102,500, how much should be allocated to Partner AA?
P41,000

● If the partnership has net income of P102,500, how much should be allocated to Partner BB?
P61,500

● If the partnership had net income of P22,000, how much should be allocated to partner AA,
assuming that the provision of the profit and loss agreement are ranked by order of priority
starting with salaries?
 P8,800

26. Hope & Faith Co. reports net income after 30% tax of P235,000 by the end of 2018. The partnership
agreement provides for division of profit or loss on the ratio of the partners’ capital balances. At the end
of 2017, each partner had a capital balance of P220,000. During 2018, Hope made additional
investment of P50,000 on April 1 and withdrew P70,000 of her capital on September 30. Faith, on the
other hand, made additional investment of P80,000 on October 1.

● The share of Hope in the net profit using the ratio of weighted average capital is ____
P117,500

27. The partnership agreement of Rossi and Olson provides for salary allowances of P45,000 to Rossi and
P35,000 to Olson, with the remaining income or loss to be divided equally. During the year, Rossi and
Olson each withdraw cash equal to 80% of their salary allowances. If partnership net income is
P100,000, Rossi’s equity in the partnership would
Increase more than Olson’s

28. Nancy and Betty enter into a partnership agreement where they decide to share profits according to the
following rules.
● Nancy and Berry will receive salaries of P1700 and P14500 respectively as the from allocation.
● The next allocation is based on 20% of each partner’s capital balances.
● Any remaining profit or loss is to be allocated completely to betty

The partnership net income for the first year is P50,000. Nancy’s capital balance is P83,000 and Betty's
capital is P11,000 at the end of the year. Calculate the share of profit/loss to be allocated to Betty.
P31,700

29. The most appropriate basis for dividing partnership net income when the partners do not plan to take
an active role in daily operation is
On a ratio based average capital balances

30. XYZ Partnership provided for the following in the distribution of profits and losses:
First: X is to receive 10% of net income up to P100,000 and 20% of the amount in excess thereof.
Then: Y and Z are each to receive a 5% of the remaining income in excess of P150,000 after X’s share.
Lastly: The balance is to be distributed equally to the three partners.

● If the partnership income is P250,000, what is the total share of X?

P108,000

31. Tamayo, Banson and Vidal, a partnership formed on january 1, 2018, had the following initial
investments.

Tamayo 100,000

Banson 150,000

Vidal 225,000
 The partnership agreement profits and losses are to be shared equally by the partners after
consideration is made for the following:
a. Salaries allowed to partners: P60,000 for Tamayo; P48,000 for Banson and P36,000 for Vidal.
b. Average partner’s capital balances during the year shall be allowed 10% interest.

Additional information:
A. On June 30,2018, Tamayo invested an additional P60,000.
B. Vidal withrew P70,000 from the partnership on September 30, 2018.
C. Share on the remaining profit was P3,000 for each partner.

● The average capital of Vidal is ________.

207500

● The partnership net profit for 2018 before salaries, interest and partner’s share on the
remainder is _______.
201750

● The average capital of Tamayo is ________.

130000

● Interest on average capital balances of the partners totals

48750

● Total Partnership Capital

666750

32. Mariano and Lucas entered into partnership on March 1, 2018, investing P125,000 and P75,000
respectively. It was agreed that Mariano, the managing partner, was to receive a salary of P12,000 per
year and also 10% bonus on the profit after adjustment for the salary, the balance of the profit was to
be divided in the ratio of the original capital. On December 31, 2018, account balances are as follows:

Cash 70,000 Accounts payable 60,000

Accounts receivable 67,000 Sales 233,000

Furniture and Fixtures 45,000 Mariano, Capital 125,000

Purchases 196,000 Lucas Capital 75,000

Sales returns & allowances 5,000 Mariano Drawing (20,000)

Operating expenses 60,000 Lucas Drawing (30,000)

Inventories on December 31, 2018 were merchandise, P73,000; Supplies P2,500. Prepaid insurance
was P950 and accrued liabilities totaled P1,550. Depreciation on Furniture & Fixtures is to be computed
at 20% per year. Income tax rate is 35%.

● The distribution of net profit to Mariano is _______.

20342
 ● The distribution of net profit to Lucas is _______.
5268

● After closing the net profit and drawing accounts, the capital of Lucas is _______.
50268

● After closing the net profit and drawing accounts, the capital of Mariano is _______.
125342

33. Sison, Torres and Velasco are partners in an accounting firm. Their capital account balances at year-
end were: Sison, P50,000; Torres, P110,000; Velasco, P50,000. They share profits and losses in a
4:4:2 ratio, after the following terms;
a. Partners Velasco is to receive a bonus of 10% of net profit after bonus.
b. Interest of 10% shall be paid on the portion of a partner’s capital in excess of P100,000.
c. Salaries of P10,000 and P12,000 shall be paid to partners Sison and Velasco, respectively.

● Assuming a net profit of P22,000 for the year, the profit share of Sison was ________.
8800

● Assuming a net profit of P22,000 for the year, the profit share of Torres was ________.
(200)

● Assuming a net profit of P22,000 for the year, the profit share of Velasco was ________.
13400

● Assuming a net profit of P44,000 for the year, the profit share of Sison was ________.
16800

● Assuming a net profit of P44,000 for the year, the profit share of Torres was ________.
7800

● Assuming a net profit of P44,000 for the year, the profit share of Velasco was ________.
19400

34. Carlin and Maley have a partnership agreement which includes the following provisions regarding
sharing net income or net loss:
❖ A salary allowance of P120,000 to Carlin and P100,000 to Maley.
❖ An investment allowance of 10% on capital balances at the beginning of the year.
❖ A bonus of 20% Carlin
❖ The remainder to be divided 40% to Carlin and 60% to Maley.

The capital balance on January 1, 2018 for Carlin and Maley was P90,000 and P120,000, respectively.
During 2018, the Carlin and Maley partnership had sales of P2,000,000 cost of goods sold of
P1,100,000 and operating expenses of P400,000. Income tax rate is 30%.

● If bonus is computed based on net income before bonus, salary allowances, and interest on
capital, the total share of C in the partnership is __________.
P214,600
 ● If bonus is computed based on net income after bonus, salary allowances, and interest on
capital, the total share of C in the partnership is __________.
P183,500

35. Which one of the following would not be considered an expense of a partnership in determining income
for the period?
Salary allowance to partners

36. A partners share of net income is recognized in the accounts through

Closing entries

37. Jaime, Madrid and Soriano are partners sharing profits on a 5:3:2 ratio. On January 1, 2018, Matias
was admitted into the partnership with a 20% share in the profits. The old partners continue to
participate in profits proportionate to their original ratios. For the year 2018, the partnership books
showed a net profit of P250,000. It was disclose however, that the errors shown below were made:

● Assuming that income tax rate is 35%, the share of Jaime in the corrected net profit is
________.
96100

● Assuming that income tax rate is 35%, the share of Madrid in the corrected net profit is
________.
57660

● Assuming that income tax rate is 35%, the share of Soriano in the corrected net profit is
________.
38440

● Assuming that income tax rate is 35%, the share of Matias in the corrected net profit is
________.
48050

● The new profit and loss ratio of Jaime is ________.

40%

● The new profit and loss ratio of Madrid is ________.

24%

● The new profit and loss ratio of Soriano is _______.

16%

38. The net income of the Rice and Wynn partnership is P120,000. The partnership agreement specifies
that Rice and Wynn have a salary allowance of P32,000 and P48,000 respectively. The partnership
agreement also specifies an interest allowance of 10% on capital balances at the beginning of the year.
Each partner had a beginning capital balance of P80,000. Any remaining net income or net loss is
shared equally.

● What is Rice’s share of the P120,000 net income?

P52,000
 ● What is the balance of Wynn’s Capital account at the end of the year after net income has been
distributed?
P148,000

39. The BLUE Company, a partnership, was formed on January 1, 2018 with four partners, Belen, Lorna,
and Edna. Capital contributions were as follows:

Belen 100,000

Lorna 50,000

Ursula 50,000

Edna 40,000

The partnership agreement provides that each partner shall receive 5% interest on the amount
of his/her capital contribution. In addition, Belen is to receive a salary of P10,000 and Lorna a salary
of P6,000 per annum which are to be charged as expenses of the business. The agreement further
provides that Ursula shall receive a minimum of P5,000 per annum from the partnership and Edna a
minimum of P12,000 per annum, both including the profits is to be distributed in the following
proportion: Belen 30% Lorna 30% Ursula 20% Edna 20%.

● The amount that must be earned by the partnership during 2018, before any change for interest
on capital or partners salaries in order that Belen may receive an aggregate of P25,000
including interest, salary and share of profits would be _________. (Disregard income tax.
Round your final answer to the nearest peso. Do not use peso sign, comma, and decimal.)
64667

● Using the amount that must be earned by the partnership during 2018, before any change for
interest in capital or partners salaries in order that Belen may receive an aggregate of P25,000,
including interest, salary and share of profits, the total earnings of Ursula would be
_________. (Disregard income tax. Round your final answer to the nearest peso. Do not use
peso sign, comma, and decimal.)
9167

● Using the amount that must be earned by the partnership during 2018, before any change for
interest in capital or partners salaries in order that Belen may receive an aggregate of P25,000,
including interest, salary and share of profits, the total earnings of Lorna would be _________.
(Disregard income tax. Round your final answer to the nearest peso. Do not use peso sign,
comma, and decimal.)
18500

40. On October 31, 2018, Zita and Jones formed a partnership by investing cash of P300,000 and
P200,000, respectively, The partners agreed to receive and annual salary allowance of P360,000 and
to give Zita a bonus 20% of the net income after partner’s salaries, the bonus being treated as an
expense.
 If the profits after salaries and bonuses are to be divided equally, and the profits on December 31,
2018 after partner’s salaries but before bonus of Zita are P360,000, how much is the share of Zita in
the profits?
P270,000

41. RK is trying to decide whether to accept a salary of P40,000 or a salary of P25,000 plus a bonus of
10% of net income after salaries and bonus as a means of allocating profit among partners. Salaries
traceable to the other partners are estimated to be P100,000. What amount of income would be
necessary so that RK would consider choices to be equal?
P290,000

42. A, B, and C are capitalist partners while D is an industrial partner. The partnership reported a net loss of
P100,000. How much is the share of D in the reported net loss?
P-0-

43. A partner’s share of net income is recognized in the accounts through

Closing entries

44. If the partnership agreement does not specify how income is to be allocated, profits and losses should
be allocated
In accordance with their capital contribution

45. Lori and Mike enter into a partnership and decide to share profits and losses as follows:
● The first allocation is a salary allowance with Lori receiving P12,000 and Mike receiving
P25,000.
● The second allocation is 20% of the partners’ capital balances at year end. On December 31,
2019, the capital balances for Lori and Mike are P86,000 and P344,000, respectively.
● Any remaining profit or loss is allocated equally.

For the year ending December 31, 2019, the partnership reported a net loss of P122,000. The journal
entry to record the loss allocation will _______.
Debit Lori, Capital for P93,300

46. The Smith and Jones partnership agreement stipulates that profits and losses will be shared equally
after salary allowances of P120,000 for Smith and P60,000 for Jones. At the beginning of the year,
Smith’s Capital account had a balance of P240,000, while Jones’ Capital account had a balance of
P210,000. Net income for the year was P150,000 The balance of Jones’ Capital account at the end of
the year after closing is
P255,000

47. David, Chris, and John formed a partnership on July 31, 2019. They decided to share profits equally,
but inserted a clause in the partnership agreement where any losses would be allocated in the ratio of
5:2:3, respectively. For the year ended December 31, 2019, the firm earned a net income of P50,000.
However, for the year ended December 31, 2020, the firm incurred a loss of P60,000. Assuming that
John had an initial capital contribution of P43,000 and made no withdrawals, what is the balance of
John’s capital account as of december 30, 2020? (Assume that none of the partners made any further
contributions to their capital accounts. Do not round any percentage calculations. Round all monetary
calculations to the nearest peso)
P41,667
48. DOER partnership was organized on March 1, 2021. On formation date, Dory invested P150,000 and
Erwin invested land and building with fair value of P80,000 and P100,000. Erwin also invested P60,000
cash in the partnership on November 1, 2021 to meet the additional liquidity requirements of the
business. The Article of Co-partnership stipulates the following:
A. Annual salary of P18,000 o Dory and P24,000 to Erwin
B. 10% annual interest on average capital account balance, and the
C. Remainder to be shared 6:4 to Dory and Erwin, respectively.

The annual salary was to be withdrawn by each partner in twelve monthly installments, During the fiscal
year ended, February 28, 2022, DOER had net sales of P500,000, cost of sales of P280,000, and total
operating expenses of P100,000 (excluding salaries and interest on average capital balance of
partners). Each partners made monthly cash drawings in accordance with the agreement.

Assume that the annual salary is to be recognized as operating expenses and the total operating
expenses of P100,000 includes the partners’ salaries but excluding interest on partners’ average capital
account balances.

● The capital balance of Dory at the end of the fiscal year is

216000

● The capital balance of Erwin at the end of the fiscal year is

294000

● The share of Dory in the net income is

66000

● The share of Erwin in the net income is

54000

DOER partnership was organized on March 1, 2021. On formation date, Dory invested P150,000 and
Erwin invested land and building with fair value of P80,000 and P100,000. Erwin also invested P60,000
cash in the partnership on November 1, 2021 to meet the additional liquidity requirements of the
business. The Article of Co-partnership stipulates the following:
D. Annual salary of P18,000 o Dory and P24,000 to Erwin
E. 10% annual interest on average capital account balance, and the
F. Remainder to be shared 6:4 to Dory and Erwin, respectively.

The annual salary was to be withdrawn by each partner in twelve monthly installments, During the fiscal
year ended, February 28, 2022, DOER had net sales of P500,000, cost of sales of P280,000, and total
operating expenses of P100,000 (excluding salaries and interest on average capital balance of
partners). Each partners made monthly cash drawings in accordance with the agreement.

Walang assume that annual salary blablabla.

● The capital balance of Dory at the end of the fiscal year is

190800
49. Mr Chow, Ms. King, Mr. Jolly and Ms. Bee formed a partnership on Jan. 01, 2017 with original capital
contributions of P300,000, P100,000, P200,000 and P400,000, respectively. On Jan. 01, 2019 capital
accounts of Mr. Chow, Ms King, Mr. Jolly and Ms. Bee showed the beginning balance for the year of
P450,000, P300,000, P250,000, and P400,000 , respectively. On Sept. 30 Mr. Chow and Ms. King
invested P100,000 each. Ms. Bee withdrew her investment of P100,000 on Oct. 01 for personal
reasons. The partnership suffered a net loss of P240,000.

● How much is the share of Ms. Jolly on the loss for 2019 if there is no agreement on the
distribution of profit and loss?
(48,000)

● How much is the share of Ms. Chow on the loss for 2019 if there is no agreement on the
distribution of profit and loss?
(72,000)

● How much is the average capital balance of Ms. King for the year 2019?
325,000

● How much is the average capital balance of Mr. Jolly for the year 2019?
250,000

● How much is the average capital balance of Mr. Bee for the year 2019?
375,000

50. YET Partnership began its first year of operations with investment from Y, P143,000, E, P104,000, and
T, P143,000. The Articles of Partnership provides that profit and losses be assigned in the following
manner:
a. Y and T were to be given annual salary of P26,000 and P13,000, respectively,
b. Each partner was to be given interest of 10% on capital balance as of the first day of the year,
c. Remainder was to be distributed on 5:2:3 ratio respectively for Y, E, and T.

Each Partner was allowed to withdraw up to P13,000 each year. For the first year of operation, the
partnership incurred a net loss of P26,000. In the second year, it earned net income of P52,000. Each
partner withdraw the maximum amount from the business each year.*

● E’s share in net loss for the first year is

10400

● The balance of the capital of Y at the end of the first year is

118300

● Y’s share in the net income for the second year is

28080

● The balance of the capital of T at the end of the second year is

132860

51. Assume the following data for GH Partnership:

 Assets Liabilities and Capital

Cash 3,000 Liabilities 9,000

Non-cash Assets 39,000 G, Capital (60%) 24,000

G, Loan 3,000 H, Capital (40%) 12,000

Total 45,000 Total 45,000

The % in parentheses represents the P/L ratio. The partners agree to admit J to the partnership. J must
invest cash of P28,800 equivalent to 37.50% interest in total agreed capital of P76,800. Assets are to
be revalued. *

● The amount of revaluation is

12000

● The revised capital of H after the admission of J is

16800

The % in parentheses represents the P/L ratio. The partners agree to admit J to the Partnership and the
total agreed capital after admission is P48,000. J invests P12,000 for 35% interest in the firm.

● The capital of H after the admission of J is

10,080 12480

● The capital credit of J is

16800

The % in parentheses represent the P/L ratio. The partners agree to admit J to the partnership. J
conveyed a tangible assets with a fair value of P30,000 with an assumed mortgage of P6,000 in
exchange for a 30% interest in capital with bonus being to be recognized, keeping in mind that J would
be acquiring a 1/4 interest in profits.

● The capital of G after the admission of J is

27600

52. Edwin and Darren have decided to form a partnership. Edwin contributes P80,000 cash and
merchandise inventory with a current market value of P20,000. Darren contributes a parcel of land
which was acquired two years ago at P100,000 but with a current value of P130,000. If Darren is to
make additional cash investment to have a 60% in the business, how much cash should he invest?
20000

53. John, Jeff and Jane decided to engage in a real estate venture as a partnership. John invested
P100,000 cash and Jeff provided office equipments that is carried on his books at P82,000. The
partners agree that the equipment has a fair value of P110,000. There is a P30,000 note payable
remaining on the equipment to be assumed by the partnership. Although Jane has non physical assets
to invest in the partnership, both John and Jedd believe that her experience as a real estate appraiser
 is a valuable skill needed by the partnership and is a basis for granting her a capital interest in the
partnership.

Assume that each partner is to receive an equal capital interest in the partnership and an upward
revaluation of assets by P90,000 is to be recorded.

● The capital of Jane upon formation is

90000

Assume that each partner is to receive an equal capital interest in the partnership and bonus method is
applied.
● The amount of capital transferred from John is
40000

● The capital of Jeff upon formation is

60000

54. The partnership of PP, EE and TT asked you to assist in winding up its business. You complete the
following information. The trial balance of the partnership on June 30, 20x4, is:

ACCOUNTS DEBIT CREDIT

Cash 6,000

Accounts receivable (net) 22,000

Inventory 14,000

Plant and equipment (net) 99,000

Accounts payable 17,000

PP, Capital 55,000

EE, Capital 45,000

TT, Capital 24,000

Total 141,000 141,000

The partners share profit and losses as follows: PP, 50 percent; EE, 30 percent; and TT, 20 percent.
Cash is to be distributed to the partners at the end of each month. A summary of the liquidation
transactions follows:

July
1 P16,500 collected on accounts receivable balance is uncollectible
2 P10,000 received for the entire inventory
3 P1,000 liquidation expense paid
4 P17,000 paid to creditors
5 P8,000 cash retained in the business at the end of the month
August
6 P1,500 in liquidation expense paid
7 As part payment of his capital, TT accepted an item that he develop, which had a book value of
P4,000. The part of P10,000 should be placed on this item for liquidation purposes
8 P2,500 cash retained in the business at the end of the month

September
9 P75,000 received on sale of remaining plant and equipment
10 P1,000 liquidation expenses paid. No cash retained in the business

● The amount received by PP in August cash distribution is ______.

0

● In the final cash distribution, the amount received by PP is ______.

41500

● The amount of cash available for distribution to partners in August is _______.

4000

● The amount of cash available for final distribution to partners is ______.

76500

● The amount of cash available for distribution to partners in July is ______.

6500

● In the final cash distribution, the amount received by TT is ______.

8600

● In the final cash distribution, the amount received by EE is ______.

26400

● The amount received by EE in July cash distribution is ______.

6500

The partners share profit and losses as follows: PP, 50 percent; EE, 30 percent; and TT, 20 percent.

The partners are considering an offer of P100,000 for the accounts receivable, inventory and plant and
equipment as of June 30. The P100,000 will be paid to creditors and the partners in installments, the
number and amount of which are to be negotiated.

● The partner who is most vulnerable to losses is

PP

● If the offer to sell the assets is accepted, the amount of cash to be received by TT is
17000

● The partner who first receives cash is

EE
 ● If the offer to sell the assets is accepted, the amount of cash to be received by EE is
34500

● If the offer to sell the assets is accepted, the amount of cash to be received by PP is
37500

55. In the absence of partnership agreement, the law says that income (and loss) should allocated based
on:
The ratio of capital investments

56. In a cash priority program for use in installment liquidation, the partner with the highest loss absorption
balance is the most vulnerable partner. The amount of cash to be distributed to partners in installment
liquidation can be determined by preparing a cash priority program.
Only statement 2 is true

57. Statement 1: A limited partner is liable only to the extent of his her contribution in the partnership.
Statement 2: A limited partner can use the right of offset against his capital deficiency, but he is not
required to make additional contribution out of his/her personal properties.
Only the first statement is true

58. An entry is not required in the liquidation of a partnership to record the

Allocation of a capital deficiency to partners with credit balances when the deficient partner is
solvent

59. Statement 1: In case the partnership is insolvent, the general partners are liable to pay the partnership
creditors from his/her personal properties
Statement 2: A deficient partner may apply the right of offset to a loan balance owing to him or her by
the partnership.
Both statements are true

60. Statement 1: In the event of liquidation, outside creditors has priority claim over the partnership assets.
Statement 2: When a partner becomes insolvent, the claim against his separate properties shall be paid
first to his personal creditors.
Both statements are true

61. A deficiency occurs for a partner when

Hi share in the losses of the partnership is more than his capital balance

62. Statement 1: Liquidation is the process of winding up the affairs of the business towards its termination.
Statement 2: The deficiency of a partner absorbed by the other partners is allocated based on capital
contribution.
Only the first statement is true

63. Statement 1: If A’s capital is deficient but there is a loan payable to B, the right of offset can be applied.
Statement 2: A partner whose personal assets are less than his personal liabilities is deficient.
Both statements are false

64. Partner Morgan is personally insolvent, owing P600,000. Personal assets will only bring P200,000
when liquidated. At the same time, Morgan has a credit capital balance in the partnership of P120,000.
 The capital amounts of the other partners total a credit balance of P250,000. Under the doctrine of
marshalling of assets, how much the personal creditors of Morgan can collect?
P320,000

65. Statement 1: When a partner dies and the remaining partners decide to terminate the business is called
dissolution.
Statement 2: In liquidation, the sale of non-cash assets is called realization.
Only the second statement is true

66. Statement 1: Gain or loss on realization is the difference between the cash proceeds and the book
value of the assets sold.
Statement 2: Loss on realization would decrease the partner’s capital account.
Both statements are true

67. A, B and C decided to liquidate their partnership business. The financial position of the partnership
shows: A, Capital (30%) P210,000; B, Capital (20%) P150,000; C, Capital (50%) P210,000. Upon
liquidation, all of the partnership’s assets are sold and sufficient cash is realized to pay all liabilities
except on for P30,000. All partners are solvent except C.

● By what amount would the capital of A change?

234,000 decrease

● How much is the additional contribution required of B?

6,000

68. ABC Partnership is liquidated and the non-cash assets are considered worthless. A and C are
general partners while B is a limited partner. The creditors will look to whose partner’s personal
assets for settlement of their claims?
The personal assets of Partners A and C

69. Charlize and Megan are partners with capitals of P80,000 and P40,000, respectively. They share profits
in the ratio of 3:1. The partners agree to admit Caleb as a member of the firm.

● If bonus is recognized and Caleb invests P30,000 for a 15% interest in the firm, what is Megan’s
capital after the admission of Caleb?
P41,875

70. 1. All the partners in a general partnership are personally liable for all debts incurred by the partnership.
2. A limited partnership must have at least one general partner.
Both statements are true

71. The accounts of the partnership of R, S and T at the end of the fiscal year November 30, 2020 are as
follows:
Cash 103,750
Non-cash assets 707,500
Loans to R 15,000
Liabilities 262,500
Loans from S 20,000
R, Capital 266,250
 S, Capital 136,250
T, Capital 141,250

R, S and T have been sharing profits and losses in the ratio 5:3:2 respectively.

● If in the first cash distribution, S received 50,000, the amount received by R is _______.
74167

● The most vulnerable among the partners is _______.

R

● If in the first cash distribution, S received 50,000, the amount realized from the first sale of non-
cash assets is _______.
900000 353,333 333333 559167

● If in the first cash distribution, T received P50,000 and assets with carrying value of P300,000
were sold, the gain or loss recognized on the sale of these assets is _______.
(48750)

72. Egay and Egoe who share profits and losses equally have a capital balance of 200,000 and 240,000
respectively. They admit Engyl for a 1/3 interest in partnership capital and profits for an investment of
250,000.

By how much were the net assets undervalued?

60,000

73. Partners Roger, Sergio and Tito, who share profit and loss in the ratio of 3:5:2, respectively have
decided to liquidate their partnership. The Statement of Financial Position of the partnership at the time
of liquidation is shown below:
Assets Liabilities and Capital
Cash P120,000 Accounts Payable P93,000
Other Assets 360,000 Loan from Sergio 30,000
Roger, Capital 108,000
Sergio, Capital 120,000
Tito, Capital 129,000
P480,000 P480,000

The partners desire to prepare an installment distribution schedule showing how cash would be
distributed to partners as assets are realized.

● The schedule of possible losses on capital balances would indicate that the first cash distributed
after the payment of outside creditors would be distributed to
Tito, in the amount of P57,000

● If Roger has received P30,000, how much would Sergio had received?
20,000

● In the schedule of maximum absorbable loss, the maximum absorbable loss for each partner
would be
 Roger, 360,000; Sergio, 300,000; Tito, 645,000

● Assuming that the first sale of other assets having book value of P150,000 realized P45,000
and all available cash is distributed, the partners would receive
Roger, P9,000; Sergio, P0; Tito, P63,00

74. Statement 1: A deficient and insolvent partner will still have a chance to receive cash from the
partnership if there is a loan payable to him which is higher than his capital deficiency.
Statement 2: A deficient and limited partner who has a loan to the partnership can apply the right of
offset to eliminate his deficiency.
Both statements are true
Both statements are false
Only the first statement is true
Only the second statement is true

75. Jurado, Katindig, Lazaro, and Marcelo are partners sharing earnings in the ratio of 3:4:6:8. The balance
of their capital accounts on December 31, 2015 are as follows:
Jurado P1,000
Katinding 25,000
Lazaro 25,000
Marcelo 9,000

The partners decide to liquidate, and they accordingly convert the non-cash assets into P23,200 of
cash. After paying the liabilities amounting to P3,000, they have P22,000 to divide.

● Assume that a debit balance in any of partner’s capital is uncollectible. The share of Jurado in
the loss upon conversion of the non-cash assets into cash was:
P5,400

● Assume that a debit balance in any of partner’s capital is uncollectible. The book value of non-
cash assets amounted to:
P61,000

● Assume that a debit balance in any of partner’s capital is uncollectible. When the P22,200 was
divided, Lazaro got
P8,320

76. The statement of Financial Position for the partnership of Eclavo, Eclara, and Elorda, who share profits
and losses in the ratio 4:5:1, is as follows:
Cash P100,000 Accounts Payable P300,000
Inventory 720,000 Eclavo, Capital 320,000
Eclara, Capital 90,000
Elorda, Capital 110,000
P820,000 P820,000

● Assuming Elorda is a limited partner, and the inventory is sold for P360,000, how much should
she receive upon liquidation of the partnership?
74,000
 ● Assuming Eclara is an insolvent partner, and the inventory is sold for P360,000, how much
should Eclavo receive upon liquidation of the partnership?
104,000

● If the inventory is sold for P600,000, how much should Eclavo receive upon liquidation of the
partnership?
P272,000

77. The following is the priority sequence on which liquidation proceeds will be distributed for a partnership:
Partnership liabilities, partnership loans, partnership capital balances

78. Statement 1: Solvent partners are partners with sufficient remaining personal assets after deducting or
liquidating the personal liabilities.
Statement 2: Right of offset is a legal right to apply a part or all of the amount owing to a partner against
his or her capital deficiency.
Both statements are true

79. Statement 1: A deficient partner has to make an additional investment to make up for his deficiency in
all instances.
Statement 2: Partnership creditors have priority over partnership properties; in the same manner that
the partners’ personal creditors have priority over partners’ personal properties.
Only the second statement is true

80. Iyah, Ayah and Mia operate a business as a partnership and share net income and net loss in a 3:3:4
ratio, respectively. The personal assets and liabilities of the partners, gathered from their personal
records show:

Partner Assets Liabilities

Iyah (General Partner) P470,000 P450,000

Ayah (General Partner) 200,000 280,000

Mia (Limited Partner) 305,000 300,000

The statement of financial position is as shown below. Assets are sold for P175,000. Liabilities are paid
as soon as cash is available. Creditors collect from solvent partners whenever necessary.

Cash P10,000 Accounts Payable P200,000

Non-Cash 375,000 Loan, Mia 5,000

Iyah, Capital 50,000

Ayah, Capital 70,000

Mia, Capital 60,000

● How much cash was received by Mia in the final settlement?

20,000
 5,000
0
10,000

● How much is the capital balance of Iyah after the sale of non-cash assets?
(P10,000)

● How much additional investment was made by Mia?

P0

● How much cash was received by Ayah in the final settlement?

0

● Who among the partners have received the cash in the final settlement?
Mia

● How much is the additional investment made by Ayah?

0

● How much is the share of Mia from the gain (loss) on sale of non-cash assets?
(P80,000)

● How much is the additional investment made by Iyah?

20,000

81. As of December 31, the books of AME Partnership showed capital balances of: A- P40,000; M-
P25,000; E-P5,000. The partners’ profit and loss ratio was 3:2:1, respectively. The partners decided to
dissolve and liquidate. They sold all the non-cash assets for P37,000 cash. After settlement of all
liabilities amounting to P12,000, they still have P28,000 cash left for distribution.

● The loss on the realization of the non-cash assets was

P42,000

● Assuming that any partner’s capital debit balance is uncollectible, the share of A in the 28,000
cash for distribution would be
P17,800

82. The statement of financial position of the partnership A, B, and C shows: Cash, P22,400; Other Assets,
P212,000; Liabilities, P38,400; A, Capital (50%) P76,000; B, Capital (25%) P64,000, and C, Capital
(25%) P56,000.

● If B received a total of P31,000 from partnership liquidation, how much was the loss on
realization?
P127,000

● If C received P10,000 from the first cash distribution, how much was the total cash distributed to
partners?
P28,000
 ● How much is the additional contribution required of B?
P6,000

● The partners realized P56,000 from the first installment sale of non-cash assets with total
carrying amount of P120,000. How much did B receive from the partial liquidation?
P24,000

● If A received a total of P10,000 from partnership liquidation, how much was the proceeds from
the sale of all non-cash assets?
P85,000

83. The order of the liquidation process is

Sell assets, pay liabilities, disburse cash to partners

84. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk
Partnership. The partner’s capital balances are P300,000 and P190,000, respectively.

● Before the realization of non-cash assets, the partnership has a zero balance in its cash
account and a P200,000 balance in its liabilities. If on final settlement of partners’ claims Jack
received P261,000, how much was the net proceeds from the sale of non-cash assets?
P560,000

● If all partnership assets and liabilities are realized and settled at their carrying amounts, how
much would Beans receive from liquidation?
P190,000

● If all partnership assets are realized and all liabilities are settled, the partnership has remaining
cash of P120,000, how much would Beans receive from the liquidation?
None

● If on final settlement of partners’ claims Beans received P99,000, how much did Jack receive?
P261,000

● The partnership has total liabilities of P200,000. If all partnership assets are realized for
P500,000, how much would Jack receive from the liquidation?
243,000

85. The liabilities and capital balances of the partners before the sale of the assets and payments of
liabilities including personal assets and liabilities of the partners were:

Partnership Personal Assets Personal Liabilities

Cash P10,000

Liabilities 70,000

Kath 65,000 P1,200,000 P1,500,000

Pau 20,000 2,500,000 2,490,000

 Jas 15,000 3,000,000 3,200,000

After the assets were sold the capital balances of the partners were as follows: Kath, P48,000; Pau,
P12,000; and Jas, (P10,000)

● How much cash was received by Jas in the final settlement?

P0

● What is the P/L ratio of Jas? [34% - Kath; 16% - Pau]

50%

● How much is the gain/(loss) from sale of non-cash assets?

(P50,000)

● How much is the proceeds from sale of non-cash assets?

P110,000

● How much is the non-cash assets?

P160,000

86. Clyde, Warren and Neil formed a partnership on Jan. 1,2020 with investments of 100,000, 150,000, and
200,000 respectively. For division of income, they agreed the following conditions:
a. interest of 10% of the beginning capital balance each year.
b. annual compensation of 10,000 to Warren and
c. sharing of the remainder of the income or loss in a ratio of 20% for Clyde and 40% each for
Warren and Neil.

Net income was 150,000 in 2020 and 180,000 in 2021. Each partner withdrew 1,000 for personal use
every month during 2020 and 2021.

● The capital balance of Clyde at the end of 2021 is _______.

139420

● The capital balance of Warren at the end of 2021 is _______.

264540

● The capital balance of Neil at the end of 2021 is _______.

304040

● The share of Neil in the net income for 2021 is

70040

● The share of Warren in the net income for 2020 is

63000

● The capital balance of Clyde at the end of 2020 is _______.

117000
87. Chua and Wong are forming a partnership. Chua will invest a building that currently is being used by
another business owned by Chua. The building has a market value of P900,000. Also, the partnership
will assume responsibility for a P300,000 note secured by a mortgage on that building. Wong will invest
P500,000 cash. For the partnership, the amounts to be recorded for the building and for Chua’s Capital
account are:
Building, P900,000 and Chua, Capital, P600,000

88. The partner’s personal account which was collected by the partnership and credited to its accounts
receivable is a violation of the
Business entity concept

89. Partner B is investing in a partnership with Partner A. B contributes as part of his initial investments.
Accounts Receivable of P60,000, an Allowance for Doubtful Accounts of P9,000, Furniture of P30,000
with accumulated depreciation of P8,500 and P6,000 cash. The partners agreed that prepaid expenses
of P2,000 and accrued expenses of P1,800 have to be recognized. The entry that the partnership
makes to record B’s initial contribution includes a
Credit to B, Capital at P78,700

90. Jack holds an ownership interest of 63% and Teresa holds an ownership interest of 37% in the J and T
Partnership. This year, in order to further develop the business, Jack contributes an additional P6800
and Teresa contributes an additional P3200 to the partnership. Which of the following is TRUE of this
scenario?
Individual contributions of P6800 by Jack and P3200 by Teresa will be recorded

91. Partners’ non-cash investments are valued at

Market value

92. 1. One of the partners in a proposed partnership is a multi-millionaire. The stipulation in the articles of
partnership that this partner shall be excluded from sharing in the profits of the partnership is void.
2. A partnership may be established for charity.
Only statement 1 is true.

93. 1. The essence of partnership is that each partner must share in the profits or losses of the venture.
2. As long as the action is within the scope of the partnership, any partner can bind the partnership.
Both statements are true

94. In the absence of a partnership agreement, the law says that income (and loss) should be allocated
based on
The ratio of capital investments

95. Steve owns 64% and Mark owns 36% of a partnership business. They purchase equipment with a
suggested value of P9600. The current market value of the equipment at the time of purchase was
P9100. At the time of the balance sheet preparation, depreciation of P160 was recorded. Based on the
information provided, which of the following is TRUE of the partnership?
The equipment account will be debited at P9100 on the date of purchase

96. 1. A partnership has a limited life because any change in the relationship of the partners dissolves the
partnership.
2. In a limited partnership, the general partner’s liability is limited to his investment.
 Only statement 1 is true

97. 1. All partners in a general partnership are personally liable for all debts incurred by the partnership.
2. A limited partnership must have at least one general partner.
Both statements are true

98. Which of the following statements about partnerships is incorrect?

Right over profits and right over assets represent claims of partners that are allocated based on
partners’ capital accounts.

99. 1. A limited partnership normally has one or more general partners whose liability is unlimited.
2. A partnership is a legal entity separate and apart from its owners.
Both statements are true

100. Airamae and Aimery agreed to form AiAi Partnership. Airamae’s business which amounted to
P500,000 was audited and appraised at 75% of its book value.

● If they agreed that Aimery should invest cash equal to 60% of Airamae’s investment, Aimery
should invest?
P225,000

● If they agreed that Aimery should invest P325,000 cash and that each partner should be
credited for an equal share based on total actual contributions, Airamae’s capital credit should
be
P375,000
P350,000
P412,500
P500,000

● If they agreed that Aimery should invest cash equal to 60% of Airamae’s investment, the total
partnership capitalization would be
P600,000

● If they agreed that Aimery should invest P325,000 cash and that each partner should be
credited for an equal share based on total actual contributions, the bookkeeper should
recognize
Bonus for Aimery

101. Edwin and Darren have decided to form a partnership. Edwin contributes P80,000 cash and
merchandise inventory with a current market value of P17,000. Darren contributes P2400 cash and
office furniture with a current market value of P3200.

● When journalizing these transactions _____

Office Furniture will be debited for P3200

● If the partners decide to have equal interest in the partnership and the total actual contributions
is equal to total agreed capital, which statement is true?
There is bonus
102. Alana & Ansley enter into a partnership agreement in which Alana will be given 60% interest in
capital and profits. Alana contributes the following:
Land - P500,000 ?
Building - 5,000,000 fair value is 60% of its cost
Equipment - 1,000,000 fair value is 75% of its cost
There is P1,000,000 mortgage on the building which the partners agreed to assume.
The partners agreed that the total partnership capitalization should be P6M.

● Alana, Capital should be credited for

P3,600,000

● How much should be Ansley’s agreed capitalization?

P2,400,000

● Land should be recorded in the amount of

P850,000

103. Rica is a sole proprietor who invested her grocery when she invited Belle to form a new
partnership business. The following are the assets and liabilities of the grocery:

Cash P50,000

Merchandise 30,000 (book value)

20,000 (market value)

Fixed assets (P100,000 less Accumulated 90,000 (book value)

Depreciation of P10,000)

70% of cost (market value)

Accounts Payable 20,000

Accrued Expenses 7,000

Belle invested the following:

Cash P60,000

Land (mortgaged with a balance of P50,000 200,000 (book value)

plus accrued interest for 6 months at 18%)

500,000 (market value)

Store furniture (costing P40,000 less 30,000

accumulated depreciation of P10,000)

● The total assets of the newly formed partnership would be

P730,000

● If the mortgage note plus interest is to be assumed by the partnership, Belle. Capital should be
credited for
 P535,500

● The total liabilities of the newly formed partnership would be

P81,500

104. In comparison to a corporation, the owners of a general partnership ___

Have an unlimited personal liability for the debts of the business

105. In comparison to a corporation, the owners of a general professional partnership ___

Have an unlimited personal liability for the debts of the business

106. 1. An advantage of the partnership form of business is that each partner’s potential loss is
limited to that partner’s investment in the partnership.
2. Ownership is easily transferred in a partnership.
Both statements are false

107. 1. There is no income tax imposed on a partnership.

2. Mutual agency means that each partner has the right to bind the partnership to contracts
Only statement 2 is true

108. Partnership capital and drawings accounts are similar to the corporate
Paid in capital, retained earnings, and dividends accounts

109. An advantage of the partnership as a form of business organization would be

A partnership is created by mere agreement of the partners

110. Harold and Dwayne formed Hayne’s Partnership, with Harold investing cash of P150,000.

● If Dwayne is given 60% interest in assets and profits, how much is the partnership total agreed
capitalization?
P375,000

● How much should Dwayne invest for a 60% interest in assets and profits?
P225,000

111. The Metro Fashion partnership owned by Mary and May is terminated when creditor claims
exceed partnership assets by P40,000. Partner May is a millionaire and Mary has no personal assets.
Mary’s partnership interest is 75% and May’s 25%. Creditors
May collect the entire P40,000 from May

112. Jameson and Larry are forming a partnership. Jameson will invest a truck with a book value of
P100,000 and fair market value of P140,000. Larry will invest a building with a book value of P300,000
and a fair market value of P420,000, with a mortgage of P150,000.

● What amount should be recorded in Larry’s capital account?

P270,000

● At what amount should the building be recorded?

P420,000
 ● If it was agreed that both partners will have equal share in the net assets, using the cash
method, how much should be the additional cash investment by Jameson?
P130,000

113. Which of the following is specified in the articles of partnership?

Procedures for withdrawal of assets by the partners

114. Partner B is investing in a partnership with Partner A. B contributes as part of his initial
investments. Accounts Receivable of P60,000, an Allowance for Doubtful Accounts of P9,000; and
P6,000 cash. The entry that the partnership makes to record B’s initial contribution includes a
Credit to B, Capital for P57,000

115. Bob is investing in a partnership with Jerry. Bob contributes equipment that originally cost
P63,000, has a book value of P30,000, and a fair market value of P39,000. The entry that the
partnership makes to record Bob’s initial contribution includes a
Debit to Equipment for P39,000

116. A loan due from a partner is classified in the statement of financial position as a/an
Current assets

117. Tim and Michelle have decided to form a partnership with a 60/40 partnership interest ratio. Tim
contributes P7,500 cash and merchandise inventory with a market value of P1,500. While journalizing
this transaction___.
Tim, Capital will be credited for P9,000

118. Which one of the following would not be considered a disadvantage of the partnership form of
organization?
Ease of Formation

119. Andrea invested the following in the partnership:

Cash P10,000

Accounts receivable 50,000

Allowance for Bad Debts 5,000

Merchandise Inventory 120,000

Furnitures & Fixtures 75,000

Accumulated Depreciation 7,500

● If the Accounts Receivable has a net realizable value of P40,000 and there is an Accounts
Payable amounting to P60,000. How much should be credited to Andrea, Capital?
P177,500

● Accounts Receivable, Merchandise Inventory, and Furniture & Fixtures will respectively be
debited at the Partnership books for:
 45,000; 110,000; 60,000

● If the current fair value of the furniture and fixtures is P60,000 and that of the merchandise
inventory is 110,000, Andrea should be credited for
P225,000

120. 1. A nominal partner actively participates in the management of the business.

2. An ostensible partner is unknown to the public that he/she is a partner.
Both statements are false

121. A firm has two partners: Jim and Bill. Jim owns 60% of the partnership and Bill owns 40%. In
which of the following transactions will the partnership be held responsible for an individual partners’
actions?
Bill signs a contract to buy furniture for official use in the partnership

122. Partnership JB has two partners: Jim and Bill. Jim owns 60% of the partnership and Bill owns
40%. In which of the following transactions will the partnership be held responsible for an individual
partners’ transactions?
Bill signs a contract to buy furniture for official use in the partnership

123. If a partner’s capital account is credited with the amount that he or she contributed in cash,
which of the following financial statements will be affected?
The statement of partners’ equity

124. Edwin and Darren have decided to form a partnership. Edwin contributes P80,000 cash and
merchandise inventory with a current market value of P20,000. Darren contributes a parcel of land
which was acquired two years ago at P100,000 but with a current value of P130,000. If Darren is to
make additional cash investment to have a 60% in the business, how much cash should he invest?
P20,000

125. Rica is a sole proprietor who invested her grocery when she invited Belle to form a new
partnership business. The following are the assets and liabilities of the grocery:

Cash P50,000

Merchandise 30,000 (book value)

20,000 (market value)

Fixed assets (P100,000 less Accumulated 90,000 (book value)

Depreciation of P10,000)

70% of cost (market value)

Accounts Payable 20,000

Accrued Expenses 7,000

● Rica’s Capital account should be credited for

P113,000
126. Which of the following is TRUE of a partnership?
Partnership firms have a limited life

127. The partners have the following rights, except?

Transfer ownership at will

128. A characteristic describing a partnership as a judicial personality which can acquire, sell, or
dispose properties and incur obligations is called
Legal Entity

129. A partnership is a _______

Business with two or more owners that is not organized as a corporation

130. Which of the following is TRUE of a partnership balance sheet?

Each partner’s equity will be shown separately

131. In a partnership, mutual agency means that___

Any partner can bind the business to a contract within the scope of its regular business
operations

132. Blau and Rubi are partners who share profits and losses in the ratio of 6:4, respectively. On May
1, 2018, 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 P40,000. The new partnership began with a total capital of P150,000 immediately after
Lind’s admission, Blau’s capital should be
P54,000

133. When a partner retires and receives in cash less than his capital balance, how should the
difference be treated?
The difference should be credited to the remaining partners in their remaining profit and loss
ratio

134. LOV Partnership decided to admit E, who purchased a 20% interest from L, whose capital
balance was P400,000. E paid her P100,000.

● The effect of this transaction is a/an

Decrease in L’s capital

● The journal entry to record the admission of E will include a

Debit to L, Capital

135. LOV Partnership decided to admit E, who purchased a 30% interest from L, whose capital
balance was P400,000. E paid her P125,000.

● The effect of this transaction is a/an

Increase in E’s capital
 ● The journal entry to record the admission of E will include a:
Credit to E, Capital

136. Which of the following conditions constitutes a legal dissolution of a partnership?

All of the choices given

137. If the new partner is admitted by purchase of interest of an old partner at an amount higher than
its book value, this will result in
No change in partnership’s net assets

138. The capital accounts of the partnership of R and O on January 30, 2014, are as follows:
R, Capital P80,000
O, Capital P40,000

The partners share profits and losses in the ratio of 6:4. The partnership is desperate for cash and they
agreed to admit Y as a new partner with a 1/3 interest in capital and profits upon the latter’s capital
infusion of P30,000.

After Y’s admission, what are the corresponding capital balances of R, O, and Y, respectively, assuming
assets and liabilities are fairly valued?
P68,000; P32,000; P50,000

139. Charlize and Megan are partners with capitals of P80,000 and P40,000, respectively. They
share profits in the ratio of 3:1. The partners agree to admit Caleb as a member of the firm.

● If no bonus is recognized and Caleb invests P80,000 for a 50% interest in the firm, what is
Charlize’s capital after the admission of Caleb?
P65,000

● If no bonus is recognized and Caleb invests P30,000 for a 20% interest in the firm, what is
Megan's capital after the admission of Caleb?
P40,000

● If total agreed capital is based on Caleb’s contribution and Caleb Invests P30,000 for a 15%
interest in the firm, What is Megan’s capital after the admission of Caleb?
P52,500

● If no bonus is recognized and Caleb invests P80,000 for a 50% interest in the firm, what is the
profit sharing ratio of Charlize after the admission of Caleb?
37.5%

140. Charlize and Megan are partners with capitals of P80,000 and P40,000, respectively. They
share profits in the ratio of 2:3. The partners agree to admit Caleb as a member of the firm.
● If no bonus is recognized and Caleb invests P80,000 for a 50% interest in the firm, what is the
profit sharing ratio of Charlize after the admission of Caleb?
20%
141. CAR Partnership decided to admit E who invested P100,000 for a 25% interest in the
partnership with a total capitalization of P500,000.

● The capital credit of E is

P125,000

● The journal entry to record the admission of E will include

A recognition of bonus to E

● The effect of this transaction is a/an

Increase in capital

142. CAR Partnership decided to admit E who invested P120,000 for a 25% interest in the
partnership with a total capitalization of P500,000.

● The capital credit of E is

P100,000

143. Egay and Egoe who share profits and losses equally have capital balances of P200,000 and
P240,000, respectively. They admit Engyl for a 1/3 interest in partnership capital and profits for an
investment of P260,000.

By how much were the net assets undervalued? (Engyl is credited for his capital contribution)
P80,000

144. Which of the following best describes the admission of new partner by investing an amount
more than his capital credit under the bonus method?
Increase on both net assets and total capital

145. The partnership of Lim and Mallorca provides for equal sharing of profits and losses. Prior to the
admission of a third partner Zamora, the capital accounts are Lim, P75,000 and Mallorca, P105,000.
Zamora invests P90,000 for a P75,000 interest and partners agreed that the net assets of the new
partnership would be P270,000. This admission involves
Bonus to old partners of P15,000

146. Peter, Queen and Roy are partners with capital balances of P300,000. P300,000 and P200,000,
respectively, and sharing profits and losses equally. Roy is to retire and it is agreed that he will take
certain office equipment with a second hand value of P50,000 and a note for his interest. The office
equipment carried in the books at P65,000 but brand new would cost P80,000. Roy’s acquisition of the
office equipment would result in
Reduction in capital of P55,000 for Roy

147. On June 30, 2018 the condensed balance sheet for the partnership of Eddy, Fox and Grimm
together with their respective profit and loss sharing percentage was as follows
Assets, net of liabilities P 320,000
Eddy , Capital (50%) P 160,000
Fox, Capital (30%) P 96,000
Grimm, Capital (20%) P 64,000
P 320,000
 ● Eddy decided to retire from the partnership and by mutual agreement is to be paid P180,000 out
of partnership funds for his interest. Total goodwill implicit in the agreement is to be recorded.
After Eddy’s retirement, what are the capital balances of the other partner?
108,000 (Fox) 72,000 (Grimm)

● Assume that Eddy remains in the partnership and that Hamm is admitted as a new partner with
a 25% interest in the capital of the new partnership for a cash payment of P140,000. Total
goodwill implicit in the transaction is to be recorded. Immediately after admission of Hamm,
Eddy’s capital account balance should be
P210,000

148. Matthew, Paulo and Claude share partnership profits in the ratio 2:3:5. On September, 30
Claude opted to retire from the partnership. Prior to Claude’s investment, the capital balances of the
three partners are P25,000 ,P40,000 and P35,000, respectively.

● How much is Paulo’s capital after Claude’s retirement if Claude is paid P30,000 in full settlement
of his partnership interest?
P43,000

● How much is the capital of Matthew after Claude’s retirement if Claude is paid P39,000 in full
settlement of his partnership interest?
P23,400

● How much is the capital of Matthew after Claude’s retirement if Claude is paid P25,000 in full
settlement of his partnership interest?
P31,000
P29,000
P26,600
P23,400

149. When Jill retired from the partnership of Jill, Bill and Hill, the final settlement of her interest
exceeded her capital balance. Under the bonus method, the excess
Reduced the capital balance of Bill and Hill

150. When Jill retired from the partnership of Jill, Bill and Hill, the final settlement of her interest is
less than her capital balance. Under the bonus method, the difference
Increased the capital balance of Bill and Hill

151. Jeric, Ken, and Lemuel are partners sharing profits in the ratio 5:3:2 respectively, as of
December 31, 2013, their capital balances were P95,000 for Julian, P80,000 for Ken and P60,000 for
Lemuel.

On January 1, 2019 the partners admitted Mark as a new partner and according to their agreement
Mark will contribute P80,000 in cash to the partnership and also pay P10,000 for 15% for Ken’s share.
Mark will be given a 20% share in profits. While the original partners’ share will be proportionately the
same as before. After the admission of Mark, the total capital will be P330,000 and Mark’s capital will
be P70,000
 ● The bonus in the admission of Mark would be
P22,000

● The balance of Ken’s Capital after the admission of Mark would be

P79,100

● The amount of asset revaluation is

P15,000

152. Which of the following best characterizes the bonus method of recording a new partner’s
investment in a partnership?
Assuming that recorded assets are properly valued, the book value of the new partner is equal
to the book value of the previous partnership and the investment of the new partner.

153. B and N are partners sharing profits and losses in the ratio 7:3. On January 1,2013 their credit
balance capital accounts are P30,000 for B and P20,000 for N, W is to be admitted as a partner by
buying 50% of B’s interest for P20,000.

The capital balance of B after W’s admission is

P15,000

154. B and N are partners sharing profits and losses in the ratio 7:3. On January 1,2013 their credit
balance capital accounts are P70,000 for B and P30,000 for N, W is to be admitted as a partner by
buying 50% of B’s interest for P40,000.

The capital balance of B after W’s admission is

P35,000

155. Mike and Tess are partners with capital balances of P70,000 and P50,000 respectively. They
share profits and losses in the ratio of 3:1, respectively. Voce is to be admitted in the partnership for a
cash contribution of P60,000 for a ½ interest in the partnership capital and in future profits and losses.

If Voce would be given a capital credit of P90,000, how much would be charged to Mike’s capital
account?
P15,000

156. Mike and Tess are partners with capital balances of P70,000 and P50,000 respectively. They
share profits and losses in the ratio of 3:1, respectively. Voce is to be admitted in the partnership for a
cash contribution of P70,000 for a ½ interest in the partnership capital and in future profits and losses.

If Voce would be given a capital credit of P80,000, how much would be charged to Mike’s capital
account? (no asset revaluation)
P7,500

157. Partner’s Nitz, Pat and Candy share profits and losses 50:30:20 respectively. Capital balances
are P74,000 P130,000 and P96,000 respectively. The carrying values of assets and liabilities are equal
to their fair values. Emmie is to be admitted as a new partner with a 20% capital interest and a 20%
share of profits and losses in exchange for a cash contribution. No bonus is to be effected.
 How much should Emmie contribute?
P75,000

158. J decided to withdraw from the JOY Partnership. A cash settlement was made by the
partnership this will
Decrease Assets

159. The partnership of Noynoy, Manny and Gibo have capital balances as follows: Noynoy -
P35,000, Manny - P50,000, Gibo - P40,000. Their profit and loss ratio are 30% 50% and 20%
respectively, With the consent of Noynoy and Manny, Gibo sold one-half of his interest to Erap for
P30,000 , Gibo was paid in cash by Erap.

● What is the Capital Balance of Noynoy after the admission of Erap to the partnership?
P35,000

● What is the Capital Balance of Manny after the admission of Erap to the partnership?
P50,000

160. An adjustment of the assets and liabilities of the partnership to their fair market values before
dissolution is called
Asset revaluation

161. Paul, Melvin and Elrick are partners sharing profits and losses in the ratio of 2:2:1. On July 31,
2018, their capital balances are as follows: Paul - P700,000; Melvin - P500,000; Elrick - P400,000. The
partners agree to admit Laurence on the following conditions:
A. Laurence is to pay Paul P400,000 for 1/2 of Paul’s interest:
B. Laurence is also to invest P400,000 in the partnership
C. The total interest of Laurence is 25% of the total partnership capital, which is also his share in
the new partnership profit and loss sharing ratio. The old partners are sharing in their old ratio

● How much is Paul’s capital after the admission of Laurence?

P450,000

● What is the percentage of Elrick’s share in the new profit and loss sharing ratio?
15%

162. A partnership agreement most likely will stipulate that assets be reappraised when
A partner retires

163. A partnership agreement most likely will stipulate that assets be reappraised when
New partner is admitted to the partnership

164. The following transactions will affect the balance of the total partnership capital except
Admission by purchase

165. The following transactions will affect the balance of the total partnership capital except
Retirement of a partner by selling interest to another partner
166. Ben and Ric are partners who share profits and losses in the ratio of 6:4, respectively. On May
1, 2019, their respective capital accounts were as follows:
Ben P60,000
Ric P50,000

On that date, Lito was admitted as a partner with a one-third interest in capital and profits for an
investment of P40,000. The new partnership began with a total capital of P150,000. Immediately after
Lito’s admission, Ben’s capital account balance should be
P54,000

167. The admission of a new partner involving bonus will result in

Bonus to either old or new, but not both

168. Statement 1: The admission of new partner through his direct investment in the partnership will
increase the partnership capital even under bonus method
Statement 2: The admission of new partner through purchase of interest of existing partner will increase
partnership capital
Only statement 1 is true

169. Luke and Mark, who share profits and losses equally, agree to take John into the partnership for
a 40% share in capital and profits. Luke and Mark retain 30% interest each. Luke and Mark have
Capital balances of P100,000 and P140,000 respectively before the admission of John. John pays
P120,000 directly to Luke and Mark for his 40% interest. All assets of the partnership, except for land
are fairly valued.

● What would be the capital balance of Mark, immediately after the admission of John?
P102,000

● By how much was land undervalued?

P60,000

170. Dada and Elma are partners with capital balances of P400,000 and P600,000, respectively.
They share profits and losses equally. They decided to admit Jhai as a partner who will invest P200,000
for a 16% interest. Total agreed capital is P1,250,000. Which of the following statements is true?
There is revaluation of assets equal to P50,000

171. On June 30, 2018 the balance sheet for the partnership of Coll, Maduro and Prieto together with
their respective profit and loss ratios was as follows
Assets, at cost 180,000
Coll, Loan 9,000
Coll, Capital (20%) 42,000
Maduro,Capital (20%) 39,000
Prieto, Capital (60%) 90,000
Total 180,000

Coll decided to retire from the partnership by mutual agreement, the assets are to be adjusted to their
fair value of P216,000 at June 30,2018. It was agreed that the partnership would pay Coll P61,200 cash
for Coll’s partnership interest,including Coll loan which is to be repaid in full. No goodwill is to be
recorded. No goodwill is to be recorded.
 After Coll’s retirement, what is the balance of Maduro's capital account?
P45,450

172. Pascual invested P400,000 for a 10% interest in a partnership that has a total capital of
P3,000,000 after admitting Pascual. Which of the following is true?
The original partners received a bonus of P100,000

173. B and N are partners sharing profits and losses in the ratio 7:3. On January 1, 2014 their credit
balance capital accounts are P30,000 for B and P20,000 for N. W is to be admitted for a 25% interest in
the capital directly from the partners for P45,000.

Each partner’s capital account is to be charged pro rata for amounts in their capital ratio that will
provide W with the 25% interest.

The capital balance of B after W’s admission is

P22,500

174. Partnership A has an existing capital of P70,000. Two partners currently own the partnership
and split profits of 50/50. A new partner is to be admitted and will contribute net assets with a fair value
of P90,000. For no goodwill or bonus (depending in whichever method is used) to be recognized, what
is the interest in the partnership granted the new partner?
56.25%

175. Total partners’ equity remains the same if a new partner is admitted by purchase of interest.
In partnership dissolution, bonus is computed as a percentage of net income.
Only statement 1 is true.

176. The capital accounts of Ed, Nick and Vic are presented below with their respective profit and
loss ratio:
Ed P139,000 (½)
Nick 209,000 (⅓)
Vic 96,000 (⅙)

Tony was admitted to the partnership when he purchased directly, for P132,000 a proportionate interest
from Ed and Nick in the net assets and profits of the partnership. As a result, Tony acquired a one-fifth
interest in the net assets and profits of the firm. Assuming no revaluation of net assets is recorded, what
is the combined gain realized by Ed and Nick upon the sale of a portion of their interests in the
partnership to Tony?
P43,200

177. At December 31, Rod and Sol are partners with capital balances of P40,000 and P20,000, and
they share profits and losses in the ratio of 2:1, respectively. On this date Pete invests P17,000 in cash
for a one-fifth interest in the capital and profit of the new partnership. Assuming that assets are not
revalued, how much should be credited to Pete’s capital account on December 31?
P15,400
178. In lump-sum liquidation, capital deficiency resulting from division of loss from realization must be
eliminated before making any payment to partners. Any resulting capital deficiency of an insolvent
partner is eliminated by charging the capital accounts of the remaining partners.
Both statements are true

179. Partners Ray and Allan received a salary of P150,000 and P300,000, and share profit and loss
at 2:1 ratio, respectively. If the partnership suffered a P150,000 loss in 2020, by how much Allan’s
capital account would increase or decrease?
100,000

180. Two sole proprietors, E and J, agreed to form a partnership on January 1, 2021. The trial
balance for each proprietor is shown below as of January 1, 2021.

E E J J

BV FV BV FV

Cash 40,000 40,000 30,000 30,000

AR (net) 60,000 52,000 70,000 56,000

Merchandise 100,000 94,000 100,000 114,000

Inventory

Building (net) 280,000 320,000 250,000 280,000

Furniture and 60,000 64,000 40,000 44,000

fixtures (net)

AP 110,000 110,000 80,000 80,000

Mortgage Payable 200,000 200,000 150,000 150,000

E, Capital 230,000

J, Capital 260,000

The EJ partnership will take over the assets and assume the liabilities of the proprietors as of January
1, 2021.

● The total capital of the partnership amounts to

554000

● The total assets of the partnership amounts to

1094000

● The total liabilities of the partnership amounts to

540000

181. Total partners’ equity changes if a new partner is admitted by purchase of interest.
In partnership dissolution, bonus is computed as a percentage of net income.
Only statement 2 is true
Only statement 1 is true
 Both statements are false
Both statements are true

182. Partner Fe is investing in a partnership with Partner Ann. Fe contributes as part of her initial
investment. Accounts Receivable of P80,000; an Allowance for Doubtful Accounts of P12,000. Accounts
of P8,000 should be written off. The entry that the partnership makes to record Fe’s initial contribution
includes a
Credit to Fe, Capital for P68,000

183. Faith, Hope, and Love are partners sharing profits and losses in the ratio 2:2:1 and have capital
balances of P800,000, P800,000, and P400,000, respectively. Mercy pays P220,000 directly to Love for
½ of her share in the partnership. Partners agree that it is time to revalue the assets of the partnership
using as a basis, the amount Mercy is willing to pay.

● Total partnership capital after the admission of Mercy is

P2,200,000

184. Partner’s Nitz, Pat and Candy share profits and losses 50:30:20 respectively. Capital balances
are P74,000 P130,000 and P96,000 respectively. The carrying values of assets and liabilities are equal
to their fair values. Emmie is to be admitted as a new partner with a 40% capital interest and a 40%
share of profits and losses in exchange for a cash contribution. No bonus is to be effected.

How much should Emmie contribute?

P200,000

185. Mini Partnership was formed on January 2021. According to the partnership agreement, each
partner has an equal capital balance accounted for under goodwill (revaluation of asset) approach.
Partnership net income or loss is allocated 60:40 to Mi and Ni, respectively. Mi originally contributed
assets costing P30,000 with a fair value of P60,000 on January 1, 2021, while Ni invested P20,000 in
cash. Partners’ drawings during 2021 totaled P3,000 by Mi and P9,000 by Ni. Net income for 2021 was
P25,000.**

● The capital credit of Mi upon partnership formation is

60000

● The share of N in the net income for 2021 is

10000

186. Ben and Ric are partners who share profits and losses in the ratio of 6:4, respectively. On May
1, 2019, their respective capital accounts were as follows:
Ben P50,000
Ric P50,000

On that date, Lito was admitted as a partner with a one-third interest in capital and profits for an
investment of P50,000. The new partnership began with a total capital of P150,000. Immediately after
Lito’s admission, Ben’s capital account balance should be
P60,000
P56,667
P54,000
 P50,000

187. Partners Piolo and Jericho received a salary of P400,000 and P600,000 and share in profit and
loss at 60%; 40% ratio, respectively. If the partnership generated a net profit of P540,000 in 2020, by
how much Jericho’s capital account would increase or decrease?
124,000
(276,000)
416,000
(184,000)

188. Statement 1: When a new partner enters into a partnership by purchasing in existing partner’s
interest, the total assets and equity of the business increase.
Statement 2: When a new partner is admitted to a partnership by purchasing an existing partner’s
interest, the business’s accounting records do not record the transfer of cash from the new partner to
the existing partner.
Only statement 2 is true

189. Ace and Hoby formed a partnership on May 29, 2019 by contributing P300,000 and P500,000,
respectively. Ace and hoby agreed to receive 10% interest on capital contribution, and that Ace will
receive a monthly salary of P10,000 starting August 1, 2019. The remaining balance will be divided
according to capital contribution. At the end of the year, the partnership generated a revenue of
P800,000 and expenses of P650,000.

How much is the share of Hoby from the net profit?

80,000
87,500
62,500

How much is the share of Ace from the net profit?

87,500

190. Faith, Hope, and Love are partners sharing profits and losses in the ratio 2:2:1 and have capital
balances of P800,000, P800,000, and P400,000, respectively. Grace purchases half of Faith’s interest
by paying her directly for an amount that earned her a profit of P60,000.

● The entry to record the admission of Grace in the partnership includes a

Credit to Grace, Capital, P400,000

191. Statement 1: A bonus to the remaining partners results when a retiring partner receives
partnership assets which are less than his or her capital balance on the date of withdrawal.
Statement 2: If a new partner invests in a partnership at book value and acquires ¼ interest in total
partnership capital, it indicates that a bonus was paid to the original partners.
Only statement 1 is true

192. The partnership agreement of Adrian and Arzel provides a 5% capital interest on the initial
capital contributions of P300,000 and P500,000 respectively. The agreement also provides a salary
allowance of P200,000 to Adrian. The agreed profit and loss ratio is 40% for Adrian and 60% for Arzel.
The partnership generated a net profit of P180,000 in 2020. How much is the share of Arzel on the
profit?
 (11,000)

193. Bel and May have capital balances of P900,000, and P1,300,000 as of December 31, 2020. Bel
and May share 40% and 60% in the profits and losses. The partners believe that the following assets
should be adjusted:
Accounts receivable - (book value) - P240,000; (market value) - P200,000
Inventory - (book value) - P400,000; (market value) - P450,000

Len is interested in buying 40% interest from anyone of the partner.

● If May is willing to sell 40% of her interest and profit at a price that will earn her a profit of
P25,000. How much will Len pay?
P547,400
P545,000
P520,000
P522,400
● After recording the adjustments, the revised capital of Bel is
P904,000

194. This method of distributing Profit and Loss discourages additional investments
Capital balances, beginning
Capital balances, end
Average capital balances
Original capital contribution

195. The admission of a new partner involving asset revaluation will result in:
Unequal total agreed equity and total capital contribution

196. One of the provisions in the ABC Partnership is for A to receive a 10% interest on her average
capital balance for the year 2021. A first contributed P20,000 of capital on February 1, 2021. On June 1,
she contributed another P20,000. On September 1, she withdrew P15,000 from the partnership.
Withdrawals in excess of P5,000 are charged to the partner’s capital account. The partnership’s fiscal
year ends in December 31.

The amount of interest allocated to A is ____

2667

197. Partners Deeca and Annel received a salary of P280,000 and P320,00, and share profit and
loss at 3:5 ratio, respectively. If the partnership generated a net profit of P440,000 in 2020, by how
much Deeca’s capital account would increase or decrease?
220,000

198. Statement 1: New partners will always be admitted to a partnership at a contribution equal to or
greater than the book value of their interest.
Statement 2: When a partner sells his interest to another party, the journal entry simply credits the
withdrawing partner’s capital account and debits the new partner’s capital.
Both statements are false

199. What are the considerations in determining the best method in distributing profit?
All of the above
200. Which among the following is not correct in the distribution of profit or loss?
Original capital contribution may prove equitable if there are material changes in the capital
accounts during the year

201. Dada and Elma are partners with capital balances of P400,000 and P600,000, respectively.
They share profits and losses equally. They decided to admit Jhai as a partner who will invest P200,000
for a 15% interest. Total agreed capital is P1,250,000. Which of the following statements is true?
Jhai’s capital is credited for P187,500

202. Statement 1: If the proceeds from sale is less than the book value of the non-cash assets sold,
this will increase the partnership assets but decrease the partner’s equity.
Statement 2: The feature of unlimited liability covers all partners except industrial partner
Both statements are false

203. The admission of a new partner effected through purchase of interest in the partnership is
Recorded in the partnership books as a transfer within equity

204. When mill retired from the partnership, the final settlement of Mill’s interest exceeded Mill’s
capital balance. Under the bonus method, the excess
Reduced the capital balances of the remaining partners

205. In the absence of agreement as to distribution of losses but there is an agreement for
distribution of profits, the industrial partner shall share losses based on
Shall not be liable for any losses

206. The most equitable distribution of partnership profit based on capital contributions uses which of
the following capital concept?
Average Capital
True-False Statements

1. A partnership is an association of two or more investors to carry on as co-owners a

business for profit. - TRUE

2. Only individuals are allowed to be partners in a partnership. - FALSE

3. Proprietorships and partnerships are similar in that they are both easily formed. - TRUE

4. Proprietorships and partnerships are different in that proprietors have unlimited legal

the partnership. - FALSE

5.
partnership is unable to meet its obligations. - TRUE
6. Partnerships are not required to prepare financial statements in accordance with
Generally Accepted Accounting Principles unless they have publicly traded debt or are
required to follow GAAP by a creditor. - TRUE

7. For a partnership to get an unqualified audit opinion, the financial records must conform
to Generally Accepted Accounting Principles. - FALSE

8. Most small partnerships maintain their financial information in accordance with

Generally Accepted Accounting Principles. FALSE

9. Tax authorities basically view partnerships and proprietorships as extensions of their

owners. TRUE

10. Partnerships are not required to pay any taxes. FALSE

11. The taxable income of all partners does not necessarily sum to the net income of the
partnership. TRUE

12. The only accounting difference that must exist between partnerships and corporations is
the reporting of the ownership equity. TRUE

13. The manner in which a partnership and a corporation are formed is very similar. FALSE

14. It is generally easier to transfer ownership interest in a corporate form of business than in
a partnership. TRUE

15. A partnership legally ceases to exist each time a new partner joins the partnership or an
existing partner leaves the partnership TRUE

16. The proprietary theory of equity is based on the notion that a business entity is distinct
from the owners. FALSE

17. The entity theory of equity is based on the notion that a business entity is distinct from
the owners. TRUE

18.
entity theory of equity. FALSE

19. The dissolution of a partnership because of the admission of a new partner or withdrawal
of an existing partner is an example of the proprietary theory of equity. TRUE

20. The fact that partnerships can enter into contracts is an example of the proprietary theory
of equity. FALSE

21. Contributed assets becoming property of the partnership is an example of the entity
theory of equity. TRUE
22. The Uniform Partnership Act is the basis for partnership laws in many states. TRUE

23. A written agreement is required to form a partnership. FALSE

24. When a partnership is formed without a written agreement, the state laws where the
partnership is formed will establish the legal relationship between partners. TRUE

25. All provisions of state partnership law must be applied when a partnership is formed.
FALSE

26. Partners make contributions of equal size when forming a partnership FALSE

27. There are different ways the partnership can value noncash assets contributed to the
partnership. TRUE

28. Appraisals are not necessarily required when assigning value to noncash assets
contributed to the partnership. TRUE

29.
of gain or loss if the asset is sold. TRUE

30.
accounts of partners. FALSE

31. The tax basis of contributed noncash assets must be used to determine partnership
income allocation for tax reporting purposes. TRUE

32. Partnerships are required to file an informational return (Form 1065) with the IRS
indicating the amount of partnership income allocated to each partner. TRUE

33. The income assigned to each partner for financial accounting purposes will equal the
return.
FALSE

34. The market value of noncash assets contributed to the partnership may be used for
income. FALSE

35.
assets contributed but a market value assignment is not required. TRUE

36. The market value of noncash assets contributed to a partnership is the only relevant value
balances. FALSE

37. The assumption of a liability by the partnership with regard to a noncash asset

capital account. TRUE

38. The tax basis of a noncash asset contributed to a partnership with an accompanying
liability will not change as a result of the contribution. FALSE

39. When a noncash asset is contributed to a partnership with an accompanying liability, the

financial records. FALSE

40. The assumption of a liability related to a noncash asset contributed to a partnership

reduces the value contributed. TRUE

41. Initial partner capital balances must equal the sum of the net assets contributed to the
partnership by the partner. FALSE

42. Initial partner capital balances are determined by agreement among the partners. TRUE

43. Only tangible assets contributed to the partnership can be considered when creating
initial capital balances. FALSE

44. There are two ways to consider unidentifiable intangible assets contributed to a
partnership: the bonus method and the goodwill method. TRUE

45. The bonus method of recognizing unidentifiable intangible assets contributed at a

equity.
TRUE

46. The bonus method of recognizing unidentifiable intangible assets contributed at a

equal.
FALSE

47. The bonus method of recognizing unidentifiable intangible assets contributed at a

increasing.
FALSE

48. Application of the goodwill method when forming a partnership requires partners to
agree on the amount of goodwill to be assigned to a partner(s). TRUE

49. At the date the partnership is formed, the total partner capital will be the same regardless
of whether the bonus method or the goodwill method is used to recognize unidentifiable
intangible assets. FALSE

50. Goodwill can be assigned to more than one partner at the date the partnership is formed.
TRUE

51. The ability of partners to withdraw resources from the partnership is controlled
exclusively by the laws of the state where the partnership resides. FALSE

52. The articles of partnership often control the size of withdrawals partners are allowed to
make. TRUE
 53. If a partnership makes a payment on behalf of a partner, a withdrawal has occurred.
TRUE
54. Partnerships are required to indicate the manner in which profits and losses are to be
allocated among the partners. FALSE

55. With the exception of the residual profit and loss ratio, partners can agree to apply profit
and loss allocation components in any order. TRUE

56. The interest component of partnership profit and loss allocation rewards the partner for
labor and expertise brought into the partnership. FALSE

57. The purpose of the interest on capital balances component of partnership profit and loss
allocation is to reward partners for contributing economic resources to the partnership.
TRUE

58. The interest on capital balances component of partnership profit and loss allocation is
balance. FALSE

59. The interest on capital balances component of partnership profit and loss allocation is
generally stated as a percentage of the capital balance. TRUE

60. The salary portion of the profit and loss allocation is set in the articles of partnership and
will not change over time. FALSE

61. The salary portion of the partnership profit and loss allocation is not included in the
statement. TRUE

62. The salary portion of the partnership profit and loss allocation is used to compensate
partners for the time and effort expected in the business. TRUE

63. Partnerships are required to have bonus clauses in the articles of partnership. FALSE

64. Bonus to partners can be based on any criteria on which the partners agree. TRUE

65. Partnership bonus arrangements must consider net income as part of the bonus
calculation. FALSE

66. A residual interest is always a component of partnership profit and loss allocation. TRUE

67. Partnership profit and loss residual percentages must be equal. FALSE

68. Partnership profit and loss residual percentages must be the same for profits as they are
for losses. FALSE
69. Partnership profit and loss residual percentages are used to allocate any remaining profit
or loss to partners after all other allocation components have been considered. TRUE

70. Partnership residual profit and loss percentages may be changed by agreement of the
partners. TRUE
71. Partnership residual profit and loss percentages do not have to be the last component
applied in the profit and loss allocation process. FALSE

72. When partnership profit and loss ratios are changed, the difference between market and
book values should be determined and allocated to partners based on the currently
existing profit and loss ratios. TRUE

73. Partnerships must revalue assets up and/or down when the profit and loss ratios are
adjusted. FALSE

74. When an error is discovered in the financial records of a partnership, it should be

corrected immediately. Allocation of any change to capital accounts as a result of an
error correction should be based on the profit and loss ratios that existed when the error
occurred. TRUE

75. The dissolution of a partnership occurs only when the partnership is terminating
operations and going out of business. FALSE

76. One reason a change in the number of partners in a partnership through the addition or
withdrawal of a partner is important because the partners have unlimited liability.
TRUE

77. A new partner in a partnership accepts unlimited liability for actions that occurred before
that partner joined the partnership. FALSE

78. The admission of a new partner into a partnership can occur without any new assets
being invested into the partnership. TRUE

79. If a new partner is going to acquire an ownership interest in a partnership directly from
another partner, the other partners do not need to approve the admission. FALSE

80. ity in the partnership, the

allocation. FALSE

81. When a new partner is joining a partnership by making a payment to the partnership for
an amount more than book value, the partners are required to choose one of three
value. FALSE

82. The revaluation of assets and liabilities at the date a new partner joins the partnership, by
investing assets directly into the partnership, does not eliminate the possibility that the
partnership might need to record bonuses or goodwill as part of the admission of the new
partner. TRUE

83. The amount that assets are revalued when a new partner joins a partnership is always
shared by existing partners equally. FALSE
84.
assets records.
FALSE

85. The recognition of a bonus to existing partners at the date a new partner is admitted to a
partnership often occurs in lieu of the recognition of goodwill for the existing partners.
TRUE

86. The bonus recognized by existing partners when a new partner is admitted to a
partnership is commonly shared among the existing partners based on the existing
ratios. TRUE

87. It is possible for a

than the market value of the identifiable assets invested. TRUE

88. New partners are never recipients of bonuses when they join the partnership. FALSE

89. A bonus paid to a new partner results in a reduction to the capital accounts of the existing
partners in proportion to their profit and loss sharing ratios. TRUE

90. The goodwill method of admitting a new partner to a partnership results in greater total
assets than the bonus method of admitting a new partner. TRUE

91. When the goodwill method is applied to recognize the admission of a new partner and

will always be established equal to the amount of the contribution to the partnership.
TRUE

92. The existing partners will always recognize goodwill when a new partner is admitted to
the company and the goodwill method is applied. FALSE

93. When the goodwill method is applied to recognize the admission of a new partner and

established at the amount of the contribution. FALSE

94. When new partner goodwill is recognized at the date the partner joins the partnership, the

admission TRUE

95. A partner may withdraw from a partnership at any time without notice given to the
existing partners. FALSE

96. A withdrawing partner may have his/her partnership interest acquired by an outside
investor agreed to by the remaining partners, the remaining partners, or the partnership.
TRUE

97. ng partners must

ratios. FALSE
98. The revaluation of assets when a partner withdraws from the partnership may be a
complete revaluation or a partial revaluation, reflecting the change in value with regard
interest. TRUE

99. revalued when a partner withdraws. FALSE

100.

cannot be acquired by an outside investor or the existing partners personally. FALSE

101. Withdrawing partners from a partnership may receive a bonus or pay a bonus to
remaining partners. TRUE

102.
be no bonus recorded. FALSE

103. A bonus can be recorded for a retiring partner only if the partnership acquires the equity
of the partner. TRUE

104. At the date a partner withdraws from a partnership, the partners must choose to either
recognize the goodwill with respect to the withdrawing partner or they can choose to
goodwill. FALSE

105. Any goodwill recognized at the date a partner withdraws from a partnership is usually
allocated to partners based on their residual profit and loss ratios. TRUE

106. Partnerships may have both a revaluation of assets and liabilities as well as goodwill
recognition at the date a partner withdraws from a partnership. TRUE

107. Which of the following is not a reason for forming a partnership?

a. Combine economic resources
b. Share managerial talent
c. Avoid complicated tax laws
d. Undertake a specific business objective

108. Which of the following business entity forms is (are) required to maintain their financial
information in accordance with Generally Accepted Accounting Principles?
a. Corporations
b. Corporation and Partnership
c. Partnership and Proprietorships
d. Corporation, Partnerships, and Proprietorships

109. Which of the following statements is not true with regard to tax issues of partnerships?
a. Partnerships are viewed as an extension of the owners
b. Partnerships are required to pay some forms of taxes
 c. The IRS must be informed as to the manner partnership income is allocated to the
partners
d. All of the above are true

110. Which of the following is not a similarity that exists between proprietorships and
partnerships?
a. Neither requires approval by a state to form
b. Both can use an accounting method that does not conform to GAAP
c. return
d. All of the above are similarities of proprietorships and partnerships

111. Which of the following is not an area where there are differences when comparing
partnerships and corporations?
a. The ease of formation
b. The level of owner legal liability
c. The ease of ownership transferability
d. All of the above are areas where partnerships and corporations differ

112. Which of the following is not a difference when comparing partnerships and
corporations?
a. Corporations must conform to GAAP whereas partnerships are not required to
conform to GAAP
b. Partnerships and corporations neither are required to attain state approval to form
c. Partners have unlimited liability while corporation shareholders generally do not
have unlimited liability
d. Corporations are required to pay income tax while partnerships are not required to
pay income taxes

113. What theory of equity is applicable for partnerships?

a. Proprietary theory
b. Entity theory
c. A mix of proprietary and entity theory
d. Partnership theory

114. Which of the following is not an example of the proprietary theory of equity?
a. Partners do not have claims to specific assets
b. Individual partners are liable for all debts of the partnership
c.
the partnership does not pay income taxes
d. Salaries of partners are viewed as distributions of income, not components of net
income

115. Which of the following is not an example of the entity theory of equity?
a. Continuity of the partnership when admission or withdrawal of partners occurs
b. A partnership can enter into contracts
 c. Assets contributed to the partnership retain the existing tax basis to the partner
contributing
d Partnership creditors have priority claim to partnership assets and the creditors of
liquidation

116. Which of the following statements is not true with regard to articles of partnership?
a. Written articles of partnership are not required to form a partnership
b. The Uniform Partnership Act provides a list of items that must be included in
articles of partnership
c. A written partnership agreement enables the partners to detail the agreed working
relationship among the partners
d. State law applies only if there is not agreement among the partners with regard to
that specific issue

117. When a partnership agreement is silent with regard to any aspect of a partnership
operations?
a. State law
b. Uniform Partnership Act
c. Majority vote of stockholders
d. Decision by senior partner

118. Which of the following valuation amounts is not allowed when assigning values to
noncash assets in a partnership formation?
a. value
b. basis
c. Market (appraised) value
d. All of the above valuation amounts are allowed

119. Which of the following statements is correct with regard to the creation of initial capital
records?
a. The capital accounts can be created for any dollar amount agreed by all partners
b. The market value of noncash assets must be considered when creating the initial
capital balances
c. -zero value assigned to it
d. All of the above statements are correct

120. Which of the following statements is not true with regard to assigning the carrying value
formation?
a. can result in the misstatement of the
accounts
b. Assigning the historical cost to noncash assets contributed to a partnership may
require the partnership agreement to address profit/loss distribution that will
occur when the contributed asset is sold
c. Assigning the historical cost to noncash assets contributed to a partnership will not

income
 d. All of the above statements are correct

121. Which of the following statements is true with regard to assigning a noncash asset
contributed to a partnership the tax basis of the contributing partner?
a. The tax basis of noncash assets contributed must be used if the partnership is a
taxable entity
b. The t
taxable partnership income
c.
records
d. None of the above statements are true

122. Which of the following statements is not true with regard to assigning the market value
formation?
a. Gains or losses would likely not be recorded if the asset were sold at the date for
partnership is formed
b. The
the difference between the market value and tax basis at the date the asset is
contributed to the partnership
c. The market value is the most commonly assigned value to contributed noncash
assets
d. All of the above statements are correct

123. Which of the following statements is correct with regard to the contribution of assets and
associated liabilities to a partnership?
a. Liabilities associated with assets contributed to a partnership remain the liability
of the contributing partner
b. Liabilities associated with assets contributed to a partnership become the liability
of the partnership
c. Liabilities associated with assets contributed to a partnership become the liability
of both the contributing partner and the partnership
d. Assets may not be contributed to a partnership if there is a liability associated
with the asset

124. The bonus method of recognizing unidentifiable intangible asset contributions to a

partnership does which of the following?
a. It recognizes that partners may contribute more than the observable assets to the
partnership
b. It increases total partnership capital
c. Can only increase partner capital accounts
d. b and c are correct

125. This method of recognizing unidentifiable intangible assets does not result in a change to
total contributed capital.
a. Goodwill method
b. Bonus method
 c. Reciprocal method
d. None of these methods will result in a change to total contributed capital

126. When can the bonus method be applied?

a. When a partnership is formed
b. When a new partner is added to the partnership
c. When an existing partner retires from the partnership
d. The bonus method can be applied in all three of the above circumstances

127. Shawn, Harris, and Derek are forming a partnership. The partners agree that Harris

capital accounts will have the dollar assigned dollar amounts altered due to the
recognition of the goodwill?
a. Shawn
b. Harris
c. Derek
d. altered.

128. This method of recognizing unidentifiable intangible assets results in a change to total
contributed capital.
a. Goodwill method
b. Bonus method
c. Reciprocal method
d. None of these methods will result in a change to total contributed capital

129. The goodwill method always results in which of the following?

a. accounts
b. account
c. An account
d.
capital account

130. For what purpose(s) might a drawing account be used for a partnership?
a. To keep a list of business contacts made by a partner
b. To recognize a loan made to a partner
c. To recognize inventory removed from the partnership by the partner
d. None of the above ore possible uses of a drawing account

131. drawing
account?
a. Removal of cash by a partner
b. partnership
c. Removal of inventory by a partner
d. All of the above may be found in a drawing account
132. Which of the following statements is correct with regard to drawing accounts that may be
used by a partnership?
a.
accounting period
b. Drawing accounts establish the amount that may be taken from the partnership by a
partner in a given time period
c. Drawing accounts are similar to Retained Earnings in a corporation
d. Drawing accounts appear on the balance sheet as a contra-equity account

133. Which of the following should not be done by the accountant with regard to partnership
profit and loss allocation?
a. Prepare an analysis of alternative methods to allocate profits and losses
b. Recommend a particular method for allocating profits and losses
c. Inform partners of different ways that profits and losses could be allocated
d. All of the above are reasonable duties of the accountant

134. What is the underlying purpose of the interest on capital balances component of
allocating partnership profits and losses?
a. Compensate partners who contribute economic resources to the partnership
b. Reward labor and expertise contributions
c. Reward for special responsibilities undertaken
d. None of the above

135. What is the underlying purpose of the salary component of allocating partnership profits
and losses?
a. Compensate partners who contribute economic resources to the partnership
b. Reward labor and expertise contributions
c. Reward for special responsibilities undertaken
d. None of the above

136. Which of the following interest component calculation bases is least susceptible to
manipulation when allocating profits and losses to partners?
a. Beginning capital account balance
b. Average of beginning and ending capital account balances
c. Weighted average capital account balance
d. Ending capital account balance

137. Which component of the partnership profit and loss allocation compensates partners for
the routine time and effort expended in the business?
a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest

138. Which component of the partnership profit and loss allocation is most commonly offered
to the partner who manages the business?
 a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest

139. bonus?
a. Operating income
b. Market share
c. Average cost per unit
d. All of bonus

140. Which component of the partnership profit and loss allocation must be performed last?
a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest

141. Which of the following statements is true with regard to partnership residual profit and
loss ratios?
a. ratio
b. Residual profit and loss ratios can be changed by agreement
c. The residual profit and loss ratio must always be applied
d. All of the above are true statements

142. Applying the partnership residual profit and loss ratio can have which of the following
loss?
a. Increase
b. Decrease
c. Increase or decrease
d. The residual profit and loss ratio is not used for the allocation or profit and/or loss

143. Which of the following should be done when the partnership profit and loss ratios are
changed?
a. The book and market value of assets and liabilities should be evaluated
b. The capital accounts should be modified to reflect the new profit and loss ratios
c. The creditors should be informed that the profit and loss ratios have been changed
d. The partners must draft new articles of partnership.

144. Which of the following is not a common way to address the difference between market
and book values of assets and liabilities when the partnership profit and loss ratios are
changed?
a. Assets and liabilities are revalued to market value
b. Assets with a difference between market and book value are sold and the profit is
distributed to partners based on existing profit and loss ratios
c. A list of differences between market value and book value are made
 d. Capital accounts of the partners are altered to reflect the difference between
market and book values at the date the profit and loss ratios change

145. Which of the following occurs every time a new partner is admitted to a partnership or an
existing partner leaves the partnership?
a. Dissolution
b. Termination
c. Dissolution and termination
d. None of the above occurs

146. Which of the following forms of new partner admission will not result in a change in the
assets?
a. Purchase of an ownership interest directly from the partnership
b. Purchase of an ownership interest directly from an existing partner
c. Either of the above
d. Neither of the above

147. Which of the following must occur for a new partner to enter the partnership by
acquiring an ownership interest directly from an existing partner?
a. Existing partners must know the amount the new partner is paying for the
ownership interest
b. interest
c. Existing partners must approve the admission of the new partner into the
partnership
d. The new partner must live in the same state as the other partners

148. Which of the following must be true when a new partner acquires an ownership interest
directly from an existing partner?
a. Capital must be assigned to the new partner
b.
account balance
c. The new partner must be allocated some amount of profit and loss
d.
liabilities to the new partner

149. When a new partner joins a partnership by investing assets into the partnership, what
method may be used to record the admission of the new partner?
a. Revaluation of existing assets
b. Recognition of goodwill
c. Application of the bonus method
d. Any of the three or a combination may be applied

150. Which of the following is a reason to not revalue partnership assets at the date a new
partner is admitted to the partnership?
a. There has been a change in ownership
b. A new legal entity exists
 c. The partnership has not ceased operations
d. All three are reasons to not revalue partnership assets at the date of a new
admission

151. A bonus is recognized by existing partners at the date a new partner joins a partnership
when which of the following relationships occur?
a.
capital after the investment is made
b.
capital after the investment is made
c.
capital after the investment is made
d. It is not possible to determine the answer to this question

152. Which of the following is not a criterion for recognizing a bonus to existing partners
when a new partner joins the partnership?
a. Only cash assets were contributed to the partnership by the new partner
b. The existing partners desire to not recognize goodwill on the balance sheet
c. The articles of partnership indicate that the bonus method will be used to admit
new partners
d. The new partner invests more into the partnership that his/her share of total
partnership capital after the investment is made

153. Which method of recording the admission of a new partner into a partnership potentially
value?
a. Bonus method
b. Goodwill method
c. Either bonus method or goodwill method
d.
into a partnership.

154. A bonus recognized by a new partner at the date of admission into the partnership is
generally shared by the existing partners in what way?
a. Equally
b. In proportion to capital account balances
c. In proportion to profit and loss residual ratios
d. In proportion to salaries

155. Which of the following is not a criterion for recognizing a bonus to a new partner when
the new partner joins the partnership?
a. Only cash assets were contributed to the partnership by the new partner
b. The existing partners desire to not recognize goodwill on the balance sheet
c. The articles of partnership indicate that the bonus method will be used to admit
new partners
d. The new partner invests less into the partnership that his/her share of total
partnership capital after the investment is made
156. When the goodwill method of recognizing the admission of a new partner is applied and
the existing partners contribute the goodwill, which of the following will result?
a. An increase in the capital accounts of existing partners
b. A decrease in the amount invested by the new partner
c. assets
d. than the amount invested

157. Which of the following will occur when the existing partners contribute goodwill and a
new partner is admitted to the partnership?
a. decreased
b. The existing partner will receive cash from the partnership
c. increased
d. The new partner will be required to reduce his/her profit and loss sharing ratio

158. Which of the following statements is false with regard to the goodwill recognized for a
new partner entering a partnership?
a. invested
b. unchanged
c. The amount invested by the new partner will be less than his/her proportion of the
value before goodwill is recognized
d. The three partners will have equal capital account balances when the transaction
is completed

159. Which of the following statements presents a reason that goodwill may be recorded with
regard to partnership?
a. The existing partnership is worth more than the appraised value of the tangible
net assets
b. The new partner has a strong desire to become a member of the partnership
c. The total value
the value of the identifiable net assets contributed
d. percent

160. revalued when a partner withdraws from

the partnership?
a. revalued
b. revalued
c.
revalued
d. Partnership assets may not be revalued when a partner withdraws

161. Who may acquire the ownership interest of a partner who is withdrawing from a
partnership?
a. Existing partners
b. New investor
c. The partnership
 d. All of the above

162. If existing partners acquire the equity of a withdrawing partner, in what manner do they
divide the equity?
a. In any manner they choose
b. Equally
c. Proportionate to their residual profit and loss ratios
d. Existing partners are not permitted to acquire the equity of a withdrawing partner

163. Which of the following must exist to create the potential for a retiring partner to have a
bonus recognized at the date of withdrawal?
a. The retiring partner must be paid more than the book value of his equity
b. The existing partners must decide to not admit a new partner to the partnership
c. partnership
d. All of the above are necessary for a bonus to be recognized

164. In what manner do the remaining partners share in the bonus paid to a withdrawing
partner?
a. In proportion to their residual profit and loss ratios
b. Equally
c. In proportion to their capital account balances
d. The partner with the greatest capital account is assigned the bonus

165. Which of the following statements is true with regard to a withdrawing partner?
a. A bonus must be paid to the retiring partner
b. A bonus may be paid to the retiring partner
c. A bonus must be paid to the retiring partner or to the remaining partners
d. Recognizing a bonus is not appropriate when a partner retires

166. capital accounts when a withdrawing partner

is assigned goodwill at the date of withdrawal?
a.
proportion of the goodwill assigned to the withdrawing partner
b. ital accounts increase
c. change
d. Goodwill cannot be recognized with regard to withdrawing partners

167. What amount of goodwill can be recognized at the date a partner withdraws from a
partnership?
a. The withdrawing goodwill
b. goodwill
c. Goodwill may not be recognized at the date a partner withdraws
d.
to the entire partnership
168. Which of the following will occur when the goodwill method is used to recognize the
withdrawal of a partner?
a. The partnership must acquire the equity of the withdrawing partner
b. The withdrawing partner will be paid the book value of his/her equity after the
goodwill is recognized
c. The existing partners will divide the salary of the withdrawing partner
d.
withdrawal

COMPUTATIONAL MC PROBLEMS
169. Paul, Jeremy, and Juan are forming a partnership. Juan contributes a building having an
historical cost, accumulated depreciation, and market value of $290,000, $100,000, and

Two years later the building is sold for a $270,000 gain.

What portion of the profit or loss should be allocated to Juan?
a. $20,000
b. $230,000
c. $210,000
d. $90,000

170. Philip, Ray, and Sarah are forming a partnership. Philip contributes cash of $100,000;
Ray contributes inventory with a value of $100,000; and Sarah contributes a building
with a market value of $300,000. The partnership also assumed the $210,000 mortgage
on the building. What is the amount of capital assigned to each partner?
Philip Ray Sarah
a. $30,000 $30,000 $230,000
b. $56,000 $56,000 $174,000
 c. $100,000 $100,000 $90,000
d. $100,000 $100,000 $300,000

171. Max, Ike, and Tony are forming a partnership. The appraised value of assets contributed
is $60,000, $80,000, and $100,000, respectively. In addition, Max and Tony agree that

applicable. What is the total capital recorded at the date the partnership is formed?
a. $210,000
b. $240,000
c. $270,000
d. Some other dollar amount

172. Richardson, Peterson, and Wilkerson are forming a partnership. The partners contribute
cash and noncash assets valued at $30,000, $50,000, and $25,000, respectively. The
partners choose to apply the bonus method where applicable. If the partners agree to
establish equal capital account balances when the partnership is formed, how much of a
bonus is received by Richardson?
a. $15,000
b. $10,000
c. $5,000
d. Richardson does not receive a bonus

173. Richardson, Peterson, and Wilkerson are forming a partnership. The partners contribute
cash and noncash assets valued at $30,000, $50,000, and $25,000, respectively. The
partners choose to apply the bonus method where applicable. If the partners agree to
establish equal capital account balances when the partnership is formed, how much
capital is Peterson sacrificing to give a bonus to Richardson and Wilkerson?
a. $15,000
b. $10,000
c. $5,000
d. Richardson does not receive a bonus

174. Albert, Claude, and Jamie form a partnership by contributing $25,000, $70,000, and
$80,000, respectively. In addition, the partners agree that Albert should receive $20,000
of goodwill because of his special skills relevant to this business. What amount of
capital will exist for Albert when the partnership is formed?
a. $20,000
b. $25,000
c. $65,000
d. $45,000

175. Albert, Claude, and Jamie form a partnership by contributing $25,000, $70,000, and
$80,000, respectively. In addition, the partners agree that Albert should receive $20,000
of goodwill because of his special skills relevant to this business. What amount of
capital will exist for Claude when the partnership is formed?
a. $60,000
 b. $65,000
c. $70,000
d. Some other amount

176. Chris and David are forming a partnership with contributions of $75,000 and $125,000,
respectively. In addition, they agree that they will recognize $25,000 goodwill with
exist
for the partnership immediately after it is formed?
a. $75,000
b. $125,000
c. $150,000
d. $225,000

177. Chris is a partner in a local partnership. The profit and loss sharing agreement includes
an interest allocation of 7 percent on the invested capital. The capital account of Chris
reveals that he had a beginning capital account balance of $50,000. He withdrew
$10,000 on May 1 and invested $25,000 on October 31. Rounded to the nearest dollar,

a. $57,500
b. $51,667
c. $47,500
d. $28,333

178. Richard is a partner in a local partnership. The profit and loss sharing agreement
includes an interest allocation of 8 percent on the invested capital. Richard had a
beginning capital balance of $60,000. He invested $30,000 on March 1, withdrew
$20,000 on August 1, and invested $40,000 on December 1. Rounded to the nearest
dollar, what dollar amount is allocated to Richard as interest on capital balance if the
weighted average capital balance is used as the basis of the computation?
a. $82,500
b. $6,400
c. $80,000
d. $6,600

179. Shawn is a managing partner in a local business. Part of his profit allocation is a bonus

excess of $200,000 after deducting the bonus. If operating income for the year is

a. $3,703
b. $40,000
c. $20,000
d. $4,000

180. James has a bonus as part of his partner profit allocation. The bonus is based on the
partnerships net income. James receives a bonus equal to 5 percent that the net income
 exceeds $150,000. If the net income in the current year is $180,000, how much bonus
does James receive?
a. $30,000
b. $7,500
c. $1,500
d. $9,000

181. Cheryl is the manager of a local store. She is also a partner in the company and she

increase in revenues recorded during the period. The bonus arrangement is that Cheryl
receives 1 percent of net income for every full percentage point growth for revenues in
excess of a 5 percent revenue growth. During the most recent period, revenues grew
from $500,000 to $540,000 and net income grew from $98,000 to $120,000. How much
bonus does Cheryl receive for this period?
a. $2,000
b. $1,100
c. $6,000
d. $3,600

182. Norman, Sarah, and Taylor are partners. The partnership income for the period is
$130,000. The partnership agreement assigns salaries to the partners of $10,000,
$15,000, and $18,000, respectively. In addition, the partners have profit and loss
residual ratios of 30%, 45%, and 25%. What is the amount of profit and loss allocated to
Sarah as a result of applying the residual ratios?
a. $39,150
b. $54,150
c. $58,500
d. $51,750

183. Jim and Scott are partners who have residual profit and loss ratios of 55% and 45%,
respectively. The partnership has income of $60,000 for the current period. How much
of this income is allocated to Scott?
a. $30,000
b. $33,000
c. $14,850
d. $27,000

184. Mike and Michelle are partners in a local business. The business has a $25,000 loss this
year. How much of this loss is allocated to Mike?
a. $12,500
b. $0
c. $25,000
d. Losses cannot be allocated without residual profit and loss ratios
185. Nick, Joe, and Mike are partners. The company has $150,000 net income for the period.
How is this income divided to the partners if the following profit and loss allocation
process is followed?
Nick Joe Mike
Weighted average capital $200,000 $350,000 $180,000
Salary 25,000 15,000 35,000
Bonus .1 (NI - $100,000)
Residual profit/loss ratios .25 .45 .30
Return on invested capital 9%

Nick Joe Mike

a. $43,000 $46,500 $60,500
b. $45,325 $50,685 $53,990
c. $50,000 $50,000 $50,000
d. $44,075 $48,435 $57,490

186. Harriet, Bob, and Tim are partners. Income for the current year is $500,000. The profit
and loss agreement states that salaries are $35,000, $50,000, and $40,000, respectively.
In addition, the residual profit and loss ratios are 40%, 30%, and 30%, respectively.
How much of the profit is allocated to Harriet?
a. $150,000
b. $185,000
c. $162,500
d. $152,500

187. Suzanne, Thomas, and Vicky are partners. They have average capital account balances
of $200,000, $250,000, and $400,000, respectively. In addition, they have residual profit
and loss ratios of 15%, 25%, and 60%, respectively. If income for the year is $300,000
and the partners earn 8 percent return on invested capital, how much will be allocated to
Thomas?
a. $78,000
b. $100,000
c. $50,800
d. $171,200

188. Johnson and Pritchard are partners. They are changing the profit and loss ratios from the
current 60/40 to 70/30. At the date of the change, vacant land owned by the partnership
has a book value of $50,000 and a market value of $60,000. The partners choose to
prepare an itemized list of assets with market values different from book values. If the
land is sold in the future for $80,000, how much of the gain will be assigned to Johnson?
a. $21,000
b. $18,000
c. $27,000
d. $20,000
189. Johnson and Pritchard are partners. They are changing the profit and loss ratios from the
current 60/40 to 70/30. At the date of the change, vacant land owned by the partnership
has a book value of $50,000 and a market value of $60,000. The partners choose to
prepare an itemized list of assets with market values different from book values. If the
land is sold in the future for $80,000, how much of the gain will be assigned to
Pritchard?
a. $12,000
b. $10,000
c. $9,000
d. $13,000

190. Karen and Andrea are currently changing their partnership profit and loss ratios from
75/25 to 60/40. They have created a list of assets that have market and book value
differences. One of the assets is a building with a $300,000 market value and $200,000
book value. Two years after changing the profit and loss ratios, the building is sold for
$380,000. How much of the profit is allocated to Karen?
a. $135,000
b. $108,000
c. $123,000
d. $183,000

191. Karen and Andrea are currently changing their partnership profit and loss ratios from
75/25 to 60/40. They have created a list of assets that have market and book value
differences. One of the assets is a building with a $300,000 market value and $200,000
book value. Two years after changing the profit and loss ratios, the building is sold for
$380,000. How much of the profit is allocated to Andrea?
a. $57,000
b. $45,000
c. $72,000
d. $97,000

192. Peter and Ronald are partners. They have shared profits and losses 65/35 for a number of
years. Peter has indicated that he is going to reduce his involvement in the partnership so
the profit and loss ratio is being modified to 45/55. At the date of the change in the
profit and loss ratio, the partnership own vacant land with a market value of $300,000
and a book value of $100,000. Peter and Ronald compile a list of assets with market and
book value differences. Two years after the change in the profit and loss ratios, the land
is sold for $450,000. How much of the gain is allocated to Peter?
a. $197,500
b. $227,500
c. $157,500
d. $287,500

193. Peter and Ronald are partners. They have shared profits and losses 65/35 for a number of
years. Peter has indicated that he is going to reduce his involvement in the partnership so
the profit and loss ratio is being modified to 45/55. At the date of the change in the
 profit and loss ratio, the partnership own vacant land with a market value of $300,000
and a book value of $100,000. Peter and Ronald compile a list of assets with market and
book value differences. Two years after the change in the profit and loss ratios, the land
is sold for $450,000. How much of the gain is allocated to Ronald?
a. $122,500
b. $192,500
c. $152,500
d. $262,500

194. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is

capital account at the date the land is revalued?

a. $72,000
b. $42,000
c. $30,000
d. $28,000

195. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is

account at the date the land is revalued?

a. $72,000
b. $42,000
c. $30,000
d. $28,000

196. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is

capital account at the date the land is sold?

a. $48,000
b. $67,500
c. $31,500
d. $36,000

197. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
 account at the date the land is sold?
a. $44,000
b. $82,500
c. $32,000
d. $60,000

198. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is

capital account at the date the building is revalued?

a. $105,000
b. $91,000
c. $45,000
d. $39,000

199. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is

capital account at the date the building is revalued?

a. $105,000
b. $91,000
c. $45,000
d. $39,000

200. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is

capital account at the date the building is sold?

a. $91,000
b. $78,000
c. $39,000
d. $52,000

201. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
 different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000.
capital account at the date the building is sold?
a. $91,000
b. $78,000
c. $39,000
d. $52,000

202. Theresa and Craig are partners. Their current profit and loss ratios (70/30) are being
changed to (60/40). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, land has a market value of
$250,000 a
adjusted at the date of the change in the profit and loss ratios?
a. $52,000 increase
b. $13,000 increase
c. $52,000 decrease
d. $13,000 decrease

203. Theresa and Craig are partners. Their current profit and loss ratios (70/30) are being
changed to (60/40). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, land has a market value of

adjusted at the date of the change in the profit and loss ratios?
a. $52,000 increase
b. $13,000 increase
c. $52,000 decrease
d. $13,000 decrease

204. Eric and Phillip have been partners for several years. During that time they have shared
profits and losses (60/40). They are currently revising the profit and loss ratios to
(70/30). Eric and Phillip decide to adjust the capital accounts at the date of the change to
reflect the difference between market value and book value of assets and liabilities. At
the date of the change, the partnership owns a building with a book value of $350,000

date of the change in the profit and loss ratios?

a. $25,000 increase
b. $50,000 increase
c. $25,000 decrease
d. $50,000 decrease

205. Eric and Phillip have been partners for several years. During that time they have shared
profits and losses (60/40). They are currently revising the profit and loss ratios to
(70/30). Eric and Phillip decide to adjust the capital accounts at the date of the change to
 reflect the difference between market value and book value of assets and liabilities. At
the date of the change, the partnership owns a building with a book value of $350,000

the date of the change in the profit and loss ratios?

a. $25,000 increase
b. $50,000 increase
c. $25,000 decrease
d. $50,000 decrease

206. Jenna is about to purchase some of C

partnership equity of $84,500. If Jenna pays Cynthia $30,000 for 30 percent of her
capital, what amount will be recorded in the partnership accounting records?
Jenna Cynthia
a. $30,000 credit $25,350 debit
b. $25,350 credit $25,350 debit
c. $30,000 credit $30,000 debit
d. $25,350 debit $25,350 credit

207. Sam and Ray are partners with capital accounts of $150,000 and $225,000, respectively.
They are considering allowing Richard to purchase 30 percent of Ra

and allocate any differences based on their 40/60 profit sharing agreement. Assume that
the net market versus book value differences is $100,000. What amount would Richard
pay for the 30 percent interest?
a. $67,500
b. $76,500
c. $97,500
d. The amount cannot be determined from the information provided

208. Jesse, Joseph, and Leslie are partners with capital accounts of $70,000, $120,000, and
$90,000, respectively. The partnership share profits and losses 45%, 30%, and 25%,
respectively. They are considering allowing Hans to join the partnership by investing

admission. Neith
book value $150,000, how much will Hans invest to acquire a 20% equity interest in the
partnership?
a. $107,500
b. $86,000
c. $70,000
d. $100,000

209. Sandra and Joshua are partners. They have capital account balances of $250,000 and
$200,000, respectively, and they share profits and losses 70/30. The partners are
considering admitting Judy as a new partner with a 25 percent equity interest for an
investment in the partnership of $180,000. Before admission, Sandra and Joshua will
 a. $575,000
b. $337,500
c. $528,500
d. $262,500

210. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity

account at the date of admission?

a. $142,500
b. $150,000
c. $144,000
d. The dollar amount cannot be determined from this information

211. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of bonus recognized
admission?
a. $4,500
b. $34,500
c. $6,000
d. $1,500

212. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of bonus recognized
admission?
a. $6,000
b. $1,500
c. $144,000
d. $4,500

213. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity

account at the date of admission?

a. $274,500
b. $304,500
c. $144,000
d. $271,500
214. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity

account at the date of admission?

a. $271,500
b. $301,500
c. $144,000
d. $304,500

215. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the
the date of admission?
a. $933,000
b. $450,000
c. $388,750
d. $622,000

216. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of bonus recognized in
admission?
a. $98,000
b. $61,250
c. $24,500
d. $36,750

217. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of bonus recognized in
admission?
a. $98,000
b. $61,250
c. $24,500
d. $36,750

218. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus met
the date of admission?
 a. $516,750
b. $661,750
c. $649,500
d. $504,500

219. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest

the date of admission?

a. $516,750
b. $661,750
c. $649,500
d. $504,500

220. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity

account at the date of admission?

a. $137,500
b. $120,000
c. $143,333
d. The dollar amount cannot be determined from this information

221. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of bonus recognized
admission?
a. $70,000
b. $23,333
c. $17,500
d. $52,500

222. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of the reduction to
admission?
a. $5,250
b. $12,250
c. $17,500
d. $100,333
223. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of the reduction to
unt at the date of admission?
a. $5,250
b. $12,250
c. $17,500
d. $100,333

224. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity

account at the date of admission?

a. $157,750
b. $254,750
c. $164,750
d. $247,750

225. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the
account at the date of admission?
a. $157,750
b. $254,750
c. $164,750
d. $247,750

226. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg into
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest

the date of admission?

a. $60,000
b. $78,530
c. $429,250
d. $75,750

227. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest

capital account at the date of admission?

a. $6,300
 b. $9,450
c. $54,300
d. $81,450

228. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonu
capital account at the date of admission?
a. $6,300
b. $9,450
c. $54,300
d. $81,450

229. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest

the date of admission?

a. $255,550
b. $258,700
c. $173,700
d. $170,550

230. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest

at the date of admission?

a. $255,550
b. $258,700
c. $173,700
d. $170,550

231. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, which partner(s) are contributing the goodwill?
a. Both new and existing partners are contributing goodwill
b. New partner is contributing goodwill
c. Existing partners are contributing goodwill
d. There is not enough information to answer this question

232. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
 They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jacob is admitted?
a. $130,000
b. $26,000
c. $87,500
d. $32,500

233. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Jacob immediately after he
is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000

234. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Michelle immediately after
Jacob is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000

235. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Steve immediately after
Jacob is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000

236. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
 interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
d. There is not enough information to answer this question

237. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jane is admitted?
a. $31,250
b. $125,000
c. $183,333
d. $41,667

238. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Jane immediately after she is
admitted?
a. $225,000
b. $281,250
c. $293,750
d. $183,333

239. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Susan immediately after Jane is
admitted?
a. $318,750
b. $356,250
c. $368,750
d. $306,250

240. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of David immediately after Jane is
admitted?
 a. $318,750
b. $356,250
c. $368,750
d. $306,250

241. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jason is admitted?
a. $11,250
b. $8,438
c. $186,250
d. $15,000

242. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Jason immediately after he
is admitted?
a. $190,000
b. $175,000
c. $15,000
d. $186,250

243. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Dan immediately after Jason
is admitted?
a. $285,000
b. $186,250
c. $250,000
d. $320,000

244. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Stephanie immediately after
Jason is admitted?
a. $285,000
b. $186,250
 c. $250,000
d. $320,000

245. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
d. There is not enough information to answer this question

246. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Julia is admitted?
a. $142,000
b. $150,000
c. $10,000
d. $8,000

247. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Julia immediately after she is
admitted?
a. $160,000
b. $150,000
c. $152,000
d. $158,000

248. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Juan immediately after Julia is
admitted?
a. $280,000
b. $142,000
c. $320,000
d. $240,000
249. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Felix immediately after Julia is
admitted?
a. $280,000
b. $142,000
c. $320,000
d. $240,000

250. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. Harry is withdrawing from the partnership. At the date of

amount of capital account adjustment that will be recorded?

a. $50,000
b. $70,000
c. $80,000
d. $200,000

251. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. Harry is withdrawing from the partnership. At the date of

p
capital account adjustment that will be recorded?
a. $50,000
b. $70,000
c. $80,000
d. $200,000

252. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. The partners have capital account balances of $80,000, $110,000,
and $55,000, respectively. Harry is withdrawing from the partnership. At the date of
increase of

rounded to the nearest dollar?

a. $110,000
b. $230,000
c. $282,308
d. Sus given

253. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. The partners have capital account balances of $80,000, $110,000,
and $55,000, respectively. Harry is withdrawing from the partnership. At the date of
 of total

a. $245,000
b. $445,000
c. $365,000
d. $295,000

254. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw

retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
withdrawal?
a. $40,000
b. $24,000
c. $20,000
d. $16,000

255. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw

ownership interest for $250,000. The profit and loss residual ratios
retirement are 45 percent, 30 percent, and 25 percent, respectively. What will be the
withdrawal?
a. $160,000
b. $104,000
c. $184,000
d. $136,000

256. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw

ownership interes
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will

a. $40,000
b. $24,000
c. $20,000
d. $16,000

257. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partn
ownership interest for $250,000. The profit and loss residual ratios before
 retirement are 45 percent, 30 percent, and 25 percent, respectively. What will be the
s method is applied for the withdrawal?
a. $120,000
b. $104,000
c. $184,000
d. $136,000

258. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase

much

withdrawal?
a. $36,000
b. $60,000
c. $24,000
d. $30,000

259. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase

t, 30 percent, and 28 percent, respectively. What will

withdrawal?
a. $336,000
b. $300,000
c. $264,000
d. $246,000

260. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
residual ratios before

withdrawal?
a. $36,000
b. $60,000
c. $24,000
d. $30,000

261. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
 Ra

withdrawal?
a. $336,000
b. $300,000
c. $264,000
d. $246,000

262. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partn are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners

is purchased by a new partner (Deborah) approved by Claire and Jack, what is the
tal account?
a. $150,000
b. $170,000
c. $172,500
d.
equity is not known

263. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners

is purchased by

a. $238,500
b. $307,500
c. $186,750
d. $180,000

264. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
ity
 a. $397,500
b. $294,000
c. $285,000
d. $159,000

265. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the
quity is purchased by a new

capital account?
a. $150,000
b. $170,000
c. $172,500
d.
equity is not known

266. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
thdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the

a. $175,500
b. $247,500
c. $257,250
d. $327,750

267. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
al are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the

withdrawal?
a. $175,500
 b. $247,500
c. $257,250
d. $327,750

268. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
0
percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.

a. $240,000
b. $390,000
c. $320,000
d. The amount cannot be determined because the amount Mary p
equity is not known

269. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.

withdrawal?
a. $446,000
b. $494,000
c. $424,000
d. $376,000

270. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is

percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.

a. $446,000
b. $494,000
c. $424,000
d. $376,000
271. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is

percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the

equity is purchased by a new partner (Mary) approved by Bonnie and Gwen, what is the

a. $87,500
b. $237,500
c. $350,000
d.
equity is not known

272. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is

percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the

equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is the amount of
withdrawal?
a. $441,000
b. $490,000
c. $560,000
d. $420,000

273 Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is

percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the

equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is the amount of
withdrawal?
a. $441,000
b. $490,000
c. $560,000
d. $420,000

274. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is

percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
 equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is total
partnership equity after the withdrawal?
a. $980,000
b. $780,000
c. $830,000
d. $630,000

Problems

274. (10 Points) moderate

Alan, Betty, and Carl are forming a partnership. Each will contribute cash and noncash
assets. Assume the initial capital account balances will be determined based on the value
of the assets contributed. Information regarding the initial contributions is provided
below:

Alan Betty Carl

Cash $150,000 $275,000 $125,000
Plant Assets - historical cost 280,000 350,000 540,000
Plant Assets - carrying value 215,000 225,000 300,000
Plant Assets - tax basis 200,000 190,000 230,000
Plant Assets - market value 350,000 260,000 310,000

Required:
a. accounts and the
assets assuming the carrying value is used to determine the value assigned to

assigned a value equal to the cash and noncash assets contributed by that partner.
b.
assets assuming the carrying value is used to determine the value assigned to

are equal when the journal entry is completed.

c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?

Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($215,000 + $225,000 + $300,000) 740,000
Alan, Capital ($150,000 + $215,000) 365,000
Betty, Capital ($275,000 + $225,000) 500,000
Carl, Capital ($125,000 + $300,000) 425,000
Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($215,000 + $225,000 + $300,000) 740,000
Alan, Capital ($550,000 + $740,000)/3 430,000
Betty, Capital ($550,000 + $740,000)/3 430,000
Carl, Capital ($550,000 + $740,000)/3 430,000
 Part c. Alan has significantly more capital when it is divided equally when compared to
assigning the sum of the carrying values of assets contributed. On the other hand,
Betty has significantly less capital when it is divided equally. Carl has
approximately the same amount under either assignment method. One possibility
is that Betty is giving up some capital to Alan because Alan has substantially
more expertise in running the business. Thus, Betty is paying a bonus to Alan.

275. (10 Points) moderate

Alan, Betty, and Carl are forming a partnership. Each will contribute cash and noncash
assets. Assume the initial capital account balances will be determined based on the value
of the assets contributed. Information regarding the initial contributions is provided
below:

Alan Betty Carl

Cash $150,000 $275,000 $125,000
Plant Assets - historical cost 280,000 350,000 540,000
Plant Assets - carrying value 220,000 225,000 300,000
Plant Assets - tax basis 200,000 190,000 230,000
Plant Assets - market value 350,000 260,000 310,000

Required:
a.
assets assuming the tax basis is used to determine the value assigned to noncash
pital account is assigned a
value equal to the cash and noncash assets contributed by that partner.
b.
assets assuming the tax basis is used to determine the value assigned to noncash

when the journal entry is completed.

c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?

Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($200,000 + $190,000 + $230,000) 620,000
Alan, Capital ($150,000 + $200,000) 350,000
Betty, Capital ($275,000 + $190,000) 465,000
Carl, Capital ($125,000 + $230,000) 355,000

Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($200,000 + $190,000 + $230,000) 620,000
Alan, Capital ($550,000 + $620,000)/3 390,000
Betty, Capital ($550,000 + $620,000)/3 390,000
Carl, Capital ($550,000 + $620,000)/3 390,000
 Part c. Alan and Carl each have significantly more capital when it is divided equally
when compared to assigning the sum of the carrying values of assets contributed.
On the other hand, Betty has significantly less capital when it is divided equally.
One possibility is that Betty is giving up some capital to Alan and Carl because
they have substantially more expertise in running the business. Thus, Betty is
paying a bonus to Alan and Carl.

276. (10 Points) moderate

Alan, Betty, and Carl are forming a partnership. Each will contribute cash and noncash
assets. Assume the initial capital account balances will be determined based on the value
of the assets contributed. Information regarding the initial contributions is provided
below:

Alan Betty Carl

Cash $150,000 $275,000 $125,000
Plant Assets - historical cost 280,000 350,000 540,000
Plant Assets - carrying value 220,000 225,000 300,000
Plant Assets - tax basis 200,000 190,000 230,000
Plant Assets - market value 350,000 260,000 310,000

Required:
a.
assets assuming the market value is used to determine the value assigned to
account is
assigned a value equal to the cash and noncash assets contributed by that partner.
b.
assets assuming the market value is used to determine the value assigned to

are equal when the journal entry is completed.

c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?

Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($350,000 + $260,000 + $310,000) 920,000
Alan, Capital ($150,000 + $350,000) 500,000
Betty, Capital ($275,000 + $260,000) 535,000
Carl, Capital ($125,000 + $310,000) 435,000

Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($350,000 + $260,000 + $310,000) 920,000
Alan, Capital ($550,000 + $920,000)/3 490,000
Betty, Capital ($550,000 + $920,000)/3 490,000
 Carl, Capital ($550,000 + $920,000)/3 490,000

Part c. Carl has significantly more capital when it is divided equally when compared to
assigning the sum of the carrying values of assets contributed. On the other hand,
Betty has significantly less capital when it is divided equally. Alan has
approximately the same amount under either assignment method. One possibility
is that Betty is giving up some capital to Carl because Carl has substantially more
expertise in running the business. Thus, Betty is paying a bonus to Carl.

277. (5 Points) easy

Alex, Bill, and Martha contribute the following assets to begin partnership operations:

Alex Bill Martha_

Cash $150,000 $225,000 $175,000
Inventory 57,000 89,000
Plant Assets 350,000 100,000
Accounts Payable 14,000 40,000
Notes Payable 160,000

Record

Answer:
Cash ($150,000 + $225,000 + $175,000) 550,000
Inventory ($57,000 + $89,000) 146,000
Plant Assets ($350,000 + $100,000) 450,000
Accounts Payable ($14,000 + $40,000) 54,000
Notes Payable 160,000
Alex, capital ($150,000 + $57,000 - $14,000) 193,000
Bill, capital ($225,000 + $350,000 - $160,000) 415,000
Martha, capital ($175,000 + $89,000 + 324,000
$100,000 - $40,000)

278. (10 Points) moderate

William, Casey, and Samantha are forming a partnership. Below is a table outlining the
contributions of each partner.

William Casey Samantha

Cash $ 15,000 $20,000 $ 10,000
Inventory 100,000 60,000 80,000
Plant Assets 250,000 160,000
Liabilities Assumed by Partnership 130,000 90,000

In addition, Casey brings significant experience needed to run the business. It is agreed
that partners will receive capital allocations equal to the market value of the net assets
contributed and that Casey will receive additional capital of $75,000 and the bonus
 method will be applied. Two-thirds of the bonus is to come from William and one-third
from Samantha. Record the journal entry for the creation of the partnership.

Answer:
Cash ($15,000 + $20,000 + $10,000) 45,000
Inventory ($100,000 + $60,000 + $80,000) 240,000
Plant Assets ($250,000 + $160,000) 410,000
Liabilities ($130,000 + $90,000) 220,000
Casey, Capital ($20,000 + $60,000 + $75,000) 155,000
Samantha, Capital [$10,000 + $80,000 + 135,000
$160,000 - $90,000 - ($75,000/3)]
William, Capital [$15,000 + $100,000 + 185,000
$250,000 - $130,000 - ($75,000 x 2/3)]

279. (10 Points) moderate

Bonnie, Connie, and Deborah are forming a partnership. The partners will contribute the
following identifiable assets:

Bonnie Connie Deborah

Cash $150,000 $200,000 $140,000
Inventory 160,000 190,000 180,000
Plant Assets 300,000 340,000
Liabilities Assumed by Partnership 180,000 130,000

In addition, Bonnie brings significant experience because she has run a similar type of
business. It is agreed that Bonnie will receive additional capital of $80,000 and the
bonus method will be applied. Sixty percent of the bonus is to come from Deborah and
forty percent from Connie. Record the journal entry for the creation of the partnership.

Answer:
Cash ($150,000 + $200,000 + $140,000) 490,000
Inventory ($160,000 + $190,000 + $180,000) 530,000
Plant Assets ($300,000 + $340,000) 640,000
Liabilities ($180,000 + $130,000) 310,000
Bonnie, Capital ($150,000 + $160,000 + 510,000
$300,000 - $180,000 + $80,000)
Connie, Capital [$200,000 + $190,000 - 358,000
($80,000 x .4)]
Deborah, Capital [$140,000 + $180,000 + 482,000
$340,000 - $130,000 - ($80,000 x .6)]

280. (10 Points) moderate

Able, Baker, and Charlie are forming a partnership. Charlie has significant experience in
the type of business the partners are starting. As a result, Able and Baker agree that
goodwill of $50,000 should be recognized with regard to Charlie. The partners
contribute the following tangible assets:
 Able Baker Charlie
Cash $20,000 $35,000 $55,000
Plant Assets 75,000 90,000 60,000
Liabilities 25,000 45,000 15,000

Record the journal entry to establish the partnership.

Answer:
Cash ($20,000 + $35,000 + $55,000) 110,000
Plant Assets ($75,000 + $90,000 + $60,000) 225,000
Goodwill 50,000
Liabilities ($25,000 + $45,000 + $15,000) 85,000
Able, Capital ($20,000 + $75,000 - $25,000) 70,000
Baker, Capital ($35,000 + $90,000 - $45,000) 80,000
Charlie, Capital ($55,000 + $60,000 - $15,000 + 150,000
$50,000)

281. (15 Points) moderate

Jessica, Mary, and Susan currently operate three separate businesses. They are planning
to combine and form a partnership to operate as one business. The prospective partners
agree that, in addition to the net market value of the tangible assets contributed to the
partnership, Jessica and Susan should have goodwill recognized in the amounts of
$80,000 and $40,000, respectively. The following table presents the market value of the
assets and liabilities contributed to the partnership.

Jessica Mary Susan

Cash $100,000 $250,000 $170,000
Inventory 280,000 400,000 450,000
Plant Assets 750,000 500,000 600,000
Accounts Payable 190,000 270,000 260,000
Mortgage Payable 340,000 200,000 320,000

Required:
a. Record the journal entry to establish the partnership.
b.
partnership?

Answer:
Part a.
Cash ($100,000 + $250,000 + $170,000) 520,000
Inventory ($280,000 + $400,000 + $450,000) 1,130,000
Plant Assets ($750,000 + $500,000 + $600,000) 1,850,000
Goodwill 120,000
Accounts Payable ($190,000 + $270,000 + 720,000
$260,000)
 Mortgage Payable ($340,000 + $200,000 + 860,000
$320,000)
Jessica, Capital ($100,000 + $280,000 + 680,000
$750,000 - $190,000 - $340,000 + $80,000)
Mary, Capital ($250,000 + $400,000 + 680,000
$500,000 - $270,000 - $200,000)
Susan, Capital ($170,000 + $450,000 + 680,000
$600,000 - $260,000 - $320,000 + $40,000)

Part b.
The apparent intent of the partners is to make all three partner capital accounts of equal
dollar amount when the partnership is formed.

282. (20 Points) moderate

Tom, Jon, and Sandy are partners in a thriving business. You work for the firm that
provides accounting services to the partnership. The accounting period recently ended
and you have been assigned the task of helping with the profit allocation to the partners.

Date Tom Jon Sandy

1/1 Balance $850,000 Balance $680,000 Balance $450,000
4/30 Withdraw $75,000 Withdraw $30,000
9/1 Invest $120,000 Withdraw $100,000
12/1 Invest $90,000 Invest $40,000 Withdraw $60,000

The partnership agreement stipulates that the weighted-average capital balance is the
basis for the interest on capital component of profit and loss allocation and the rate of
return on invested capital is 12 percent. What is the amount of interest on capital
allocated to each partner as a part of the profit and loss allocation?

Answer:

Capital Time Average

Date Invest/Withdraw Balance Invested Capital
January 1 $850,000 4 months $ 3,400,000
April 30 Withdraw $75,000 775,000 4 months 3,100,000
September 1 Invest $120,000 895,000 3 months 2,685,000
December 1 Invest $90,000 985,000 1 month 985,000
$10,170,000
Average capital ($10,170,000 / 12) $847,500

AVERAGE CAPITAL BALANCE

Capital Time Average
Date Invest/Withdraw Balance Invested Capital
January 1 $680,000 8 months $5,440,000
September 1 Withdraw $100,000 580,000 3 months 1,740,000
 December 1 Invest $40,000 620,000 1 month 620,000
$7,800,000
Average capital ($7,800,000 / 12) $650,000

Capital Time Average

Date Invest/Withdraw Balance Invested Capital
January 1 $450,000 4 months $1,800,000
April 30 Withdraw $30,000 420,000 7 months 2,940,000
December 1 Withdraw $60,000 360,000 1 month 360,000
$5,100,000
Average capital ($5,100,000 / 12) $425,000

Interest on capital contributions:

Tom: $847,500 x .12 = $101,700
Jon: $650,000 x .12 = $78,000
Sandy: $425,000 x .12 = $51,000

283. (20 Points) moderate

John, Roger, and Troy are partners in a local business. You are a staff accountant at a
firm that provides accounting services to the partnership. You were just assigned the task
of helping prepare the profit allocation to the partners. The following information was
records:

Date John Roger Troy

1/1 Balance $250,000 Balance $350,000 Balance $500,000
3/31 Withdraw $30,000 Invest $50,000
8/31 Invest $40,000 Withdraw $90,000
11/1 Invest $25,000 Invest $60,000 Withdraw $60,000

The partnership agreement stipulates that the weighted-average capital balance is the
basis for the interest on capital component of profit and loss allocation and the rate of
return on invested capital is 10 percent. What is the amount of interest on capital
allocated to each partner as a part of the profit and loss allocation?

Answer:

Capital Time Average

Date Invest/Withdraw Balance Invested Capital
January 1 $250,000 3 months $ 750,000
March 31 Withdraw $30,000 220,000 5 months 1,100,000
August 31 Invest $40,000 260,000 2 months 520,000
November 1 Invest $25,000 285,000 2 months 570,000
$2,940,000
Average capital ($2,940,000 / 12) $245,000
 Capital Time Average
Date Invest/Withdraw Balance Invested Capital
January 1 $350,000 8 months $2,800,000
August 31 Withdraw $90,000 260,000 2 months 520,000
November 1 Invest $60,000 320,000 2 months 640,000
$3,960,000
Average capital ($3,960,000 / 12) $330,000

Capital Time Average

Date Invest/Withdraw Balance Invested Capital
January 1 $500,000 3 months $1,500,000
March 31 Invest $50,000 550,000 7 months 3,850,000
November 1 Withdraw $60,000 490,000 2 months 980,000
$6,330,000
Average capital ($6,660,000 / 12) $527,500

Interest on capital contributions:

John: $245,000 x .10 = $24,500
Roger: $330,000 x .10 = $33,000
Troy: $527,500 x .10 = $52,750

284. (10 Points) easy

Philip is the managing partner of a local company. Part of his profit and loss allocation
is a bonus based on the store operating income. The bonus arrangement is 8 percent of
operating income in excess of
bonus this year if operating income before deducting the bonus is $350,000?

Answer:
Bonus = .08($350,000 - $200,000 - B)
1.08 Bonus = $12,000
Bonus = $11,111.11

285. (10 Points) easy

Sally is a partner, and business manager, in a local partnership. Part of the profit and loss
agreement in the articles of partnership is a bonus to be paid to the business manager.
The bonus is currently calculated at 12 percent of income in excess of $250,000 after
subtracting the bonus.

How much bonus will Sally receive if income is $400,000?

Answer:
Bonus = .12 ($400,000 - $250,000 - B)
Bonus = $16,071.43
286. (10 Points) easy
Frank, George, and Hank are partners. Partnership profits for the year are $90,000.

Required:
a. How much is allocated to each partner if the profit and loss residual ratios are
30%, 20%, and 50%, respectively?

b. How would the profit be allocated if there were no profit and loss residual ratios?

Answer:
Part a.
Frank $90,000 x .30 = $27,000
George $90,000 x .20 = $18,000
Hank $90,000 x .50 = $45,000

Part b.
Frank, George and Hank $90,000/3 = $30,000

287. (30 Points) difficult

Beverly, Brad, and Bob are partners in the 3Bs company. The partners have been in
business for a number of years. The following information exists with regard to the
allocation of profits and losses.

Beverly _ Brad Bob

Weighted-average capital balance $400,000 $650,000 $550,000
Salary 40,000 65,000 80,000
Bonus .1(Net income - $200,000)
Residual 40% 35% 25%

The interest portion of the profit and loss allocation is 8 percent of the weighted-average
capital balance. Profit allocation is determined in the order presented above. Assume the
allocation is completed regardless of the level of profit. Partnership losses, on the other
hand, are allocated by the residual ratios only.

Required:
a. Determine the profit allocation if the partnership net income is $580,000.
b. Determine the profit allocation if the partnership net income is $250,000.
c. Determine the loss allocation if the partnership net loss is ($50,000).

Solution:
Part a.
Beverly Brad Bob Total
Interest on capital
$400,000 x .08 $ 32,000
$650,000 x .08 $ 52,000
 $550,000 x .08 $ 44,000 $128,000
Salary 40,000 65,000 80,000 185,000
Bonus
.1($580,000 - $200,000) 38,000 38,000
Residual
$229,000 x .4 91,600
$229,000 x .35 80,150
$229,000 x .25 57,250 229,000
$163,600 $235,150 $181,250 $580,000

Part b.
Beverly Brad Bob Total
Interest on capital
$400,000 x .08 $32,000
$650,000 x .08 $ 52,000
$550,000 x .08 $44,000 $128,000
Salary 40,000 65,000 80,000 185,000
Bonus
.1($250,000 - $200,000) 5,000 5,000
Residual
($68,000) x .4 (27,200)
($68,000) x .35 (23,800)
($68,000) x .25 (17,000) (68,000)
$44,800 $98,200 $107,000 $250,000

Part c.
Beverly Brad Bob Total
Residual
($50,000) x .4 ($20,000)
($50,000) x .35 ($17,500)
($50,000) x .25 ($12,500) ($50,000)

288. (15 Points) difficult

Tiffany, Jason, and Shanel are partners in a marketing firm. They allocate profits and
losses based on four criteria: (1) 6 percent return on invested capital; (2) salary, based on
$40 per billable hour; (3) bonus to Jason for managing the business [.15 (net income -
$250,000 - bonus)]; and (4) residual allocation. For the year, the partners have the
following average invested capital and billable hours.

Tiffany Jason Shanel_

Average invested capital $200,000 $180,000 $160,000
Billable hours 1,500 1,700 2,200

amounts to the nearest dollar.

 Solution:
Tiffany Jason Shanel Total_
Interest on capital
$200,000 x .06 $ 12,000
$180,000 x .06 $ 10,800
$160,000 x .06 $ 9,600 $ 32,400
Salary
1,500 x $40 60,000
1,700 x $40 68,000
2,200 x $40 88,000 216,000
Bonus
.15($450,000 - $250,000 - B) 26,087 26,087
Residual
$175,513/3 58,504 58,504 58,505 175,513
$130,504 $163,391 $156,105 $450,000

289. (10 Points) moderate

Stan and Allan have been partners for several years. Their current partnership profit and
loss ratios are being changed from 75/25 to 60/40. As part of the change, they have
created a list of assets that have market and book value differences. One of the assets is
vacant land with a $200,000 market value and a $110,000 book value. One year after
changing the profit and loss ratios, the building is sold for $280,000. Record (1) the sale
of the land and (2) the distribution of the gain on sale to the partners.

Solution:
Cash 280,000
Land 110,000
Gain on Sale of Land 170,000

Gain on Sale of Land 170,000

Stan, capital ($200,000 - $110,000)(.75) + 115,500
($280,000 - $200,000)(.60)
Allan, capital ($200,000 - $110,000)(.25) + 54,500
($280,000 - $200,000)(.40)

290. (10 Points) moderate

Susan and Mary have been partners for several years. Their current partnership profit
and loss ratios are being changed from 65/35 to 55/45. As part of the change, they have
created a list of assets that have market and book value differences. One of the assets is a
building with a $370,000 market value and a $150,000 book value. One year after
changing the profit and loss ratios, the building is sold for $500,000. Record (1) the sale
of the building and (2) the distribution of the gain on sale to the partners.

Solution:
Cash 500,000
 Building 150,000
Gain on Sale of Building 350,000

Gain on Sale of Land 350,000

Susan, capital ($370,000 - $150,000)(.65) + 214,500
($500,000 - $370,000)(.55)
Mary, capital ($370,000 - $150,000)(.35) + 135,500
($500,000 - $370,000)(.45)

291. (10 Points) easy

Janice and Richard are partners who are changing their profit and loss ratios from 40/60
to 55/45. At the date of the change, the partners chooses to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$250,000 and a market value of $420,000. Two years after the profit and loss ratio is
changed, the land is sold for $600,000. Record (1) the revaluation of the land, (2) the
sale of the land, and (3) the distribution of the gain on sale of land to the partners.

Solution:
Land ($420,000 - $250,000) 170,000
Janice, capital ($170,000 x .40) 68,000
Richard, capital ($170,000 x .60) 102,000

Cash 600,000
Land 420,000
Gain on Sale of Land ($600,000 - $420,000) 180,000

Gain on Sale of Land 180,000

Janice, capital ($180,000 x .55) 99,000
Richard, capital ($180,000 x .45) 81,000

292. (10 Points) moderate

John and Renee are partners who are changing their profit and loss ratios from 70/30 to
60/40. At the date of the change, the partners chooses to revalue assets with market
value different from book value. One asset revalued is a building with a net book value
of $100,000 and a market value of $340,000. One year after the profit and loss ratio is
changed, the building is sold for $270,000. Record (1) the revaluation of the building,
(2) the sale of the building, and (3) the distribution of the loss on sale of the building to
the partners.

Solution:
Building ($340,000 - $100,000) 240,000
John, capital ($240,000 x .70)
168,000
Renee, capital ($240,000 x .30) 72,000

Cash 270,000
 Loss on Sale of Building ($270,000 - $340,000) 70,000
Building 340,000

John, capital ($70,000 x .60) 42,000

Renee, capital ($70,000 x .40) 28,000
Loss on Sale of Building 70,000

293. (10 Points) moderate

Tom and Darris are partners. Their current profit and loss ratios (80/20) are being
changed to (70/30). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, land has a market value of
$350,000 and a book value of $140,000. Record the adjustment to the capital accounts at
the date of the change in the profit and loss ratios.

Solution:
Darris, capital [($340,000 - $150,000)(.20-.30)] 21,000
Tom, capital [($340,000 - $150,000)(.80 - .70)] 21,000

294. (10 Points) moderate

Tim and Donna are partners. Their current profit and loss ratios (60/40) are being
changed to (45/55). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, a building has a book
value of $400,000 and a market value of $650,000. Record the adjustment to the capital
accounts at the date of the change in the profit and loss ratios.

Solution:
Donna, capital [($650,000 - $400,000)(.40-.55)] 37,500
Tim, capital [($650,000 - $400,000)(.60 - .45)] 37,500

295. (5 Points) easy

Wesley, Slyvia, and Mel are partners. They have capital accounts of $60,000, $95,000,
and $105,000, respectively. Heather is talking to Mel about joining the partnership and
acquiring 1/3 of his equity. Wesley and Slyvia know Heather and they have approved

Solution:
Mel, capital ($105,000/3) 35,000
Heather, capital 35,000

296. (10 Points) moderate

John, Linda, and Bill are partners with capital accounts of $78,000, $59,000, and
$183,000, respectively. In addition, they share profits and losses 30%, 25%, and 45%,
respectively. Bill is planning to partially retire and has asked John and Linda if they
 would approve Mitch as a new partner. John and Linda respond that Mitch is acceptable

the admission, the net assets are written up $250,000. Mitch pays Bill $200,000 for 60
percent of his equity. Record the revaluation of the assets and the admission of Mitch
into the partnership.

Solution:
Assets 250,000
John, capital ($250,000 x .30)
75,000
Linda, capital ($250,000 x .25) 62,500
Bill, capital ($250,000 x .45) 112,500

Bill, capital ($183,000 + $112,500)(.60) 177,300

Mitch, capital 177,300

297. (20 Points) moderate

Susan and Tom are partners with capital accounts of $280,000 and $182,500,
respectively. The partners share profits and losses 60/40. They are considering
admitting Scott into the partnership as a 25% equity ownership for an investment into the

revalued up $100,000. Record the revaluation of the assets and the admission of Scott
into the partnership.

Solution:
Assets 100,000
Susan, capital ($100,000 x .60) 60,000
Tom, capital ($100,000 x .40)
40,000

Book value of capital before the investment $562,500

($280,000 + $182,500 + $100,000)
187,500
Total book value of capital after the investment $750,000
percentage ownership 0.25
percentage capital $187,500

Cash 187,500
Scott, capital 187,500

298. (20 Points) moderate

Wayne and Dennis are partners with capital accounts of $250,000 and $300,000,
respectively. The partners share profits and losses 30/70. They are considering
admitting Dorothy into the partnership with a 20% equity ownership for an investment
 will be revalued up $225,000. Record the revaluation of the assets and the admission of
Dorothy into the partnership.

Answer:
Assets 225,000
Wayne, capital ($225,000 x .30) 67,500
Dennis, capital ($225,000 x .70) 157,500

Book value of capital before the investment $775,000

($250,000 + $300,000 + $225,000)
193,750
Total book value of capital after the investment $968,750
0.20
$193,750

Cash 193,750
Dorothy, capital 193,750

299. (10 Points) easy

Louise and Jane are considering admitting Mary into their partnership. Louise and Jane
share profits at losses 70/30 and their capital account balances are $260,000 and
$190,000, respectively. The partnership agreement indicates that the bonus method will
be applied when new partners are admitted to the company. Louise and Jane want to
know what the journal entry would look like if Mary is admitted with a 20 percent equity
interest in the partnership for an investment of $140,000. Prepare the journal entry at the
date of admission.

Answer:
Cash 140,000
Jane, capital ($140,000 - $118,000)(.30) 6,600
Louise, capital ($140,000 - $118,000)(.70) 15,400
Mary, capital ($260,000 + $190,000 + $140,000)(.20) 118,000

300. (10 Points) easy

Steve and Ray are partners with capital accounts of $300,000 and $460,000, respectively.
They share profits and losses 60/40. Their business is growing and they need to admit a
new partner. Sheila has indicated that she would like to be part of the business.
Negotiations occur and Sheila is admitted with a 25 percent equity interest for $325,000.
Record the admission of Sheila if the bonus method is applied.

Answer:
Cash 325,000
Sheila, capital ($300,000 + $460,000 + 271,250
$325,000)(.25)
Ray, capital ($325,000 - $271,250)(.40) 21,500
Steve, capital ($325,000 - $271,250)(.60) 32,250
301. (20 Points) moderate
Deborah and Randy are partners who share profits and losses 55/45. They have capital
account balances of $450,000 and $380,000, respectively. The partners have been
negotiating with Marsha about her joining the partnership. The parties agree that the
partnership will revalue assets to their market value ($150,000 above book value) and
that Marsha will invest $250,000 for a 15 percent equity interest. Record the revaluation
and the admission of Marsha into the partnership assuming the bonus method is applied.

Answer:
Assets 150,000
Deborah, capital ($150,000 x .55) 82,500
Randy, capital ($150,000 x .45) 67,500

Cash 250,000
Deborah, capital ($250,000 - $184,500)(.55) 36,025
Marsha, capital ($450,000 + $380,000 + 184,500
$150,000 + $250,000)(.15)
Randy, capital ($250,000 - $184,500)(.45) 29,475

302. (10 Points) easy

Jennifer and Juan are partners with capital accounts of $100,000 and $160,000,
respectively. They share profits and losses 45/55. The business is expanding and they
need to admit a new partner. Kathryn has indicated that she would like to join the
partnership. Negotiations occur and Kathryn is admitted with a 25 percent equity interest
for $75,000. Record the admission of Kathryn assuming the bonus method is applied.

Answer:
Cash 80,000
Jennifer, capital ($85,000 - $80,000)(.45) 2,250
Juan, capital ($85,000 - $80,000)(.55) 2,750
Kathryn, capital ($100,000 + $160,000 + 85,000
$80,000)(.25)

303. (10 Points) easy

Fred and Laurie are considering admitting John into their partnership. Fred and Laurie
share profits at losses 60/40 and their capital account balances are $160,000 and
$290,000, respectively. The partnership agreement indicates that the bonus method will
be applied when new partners are admitted to the company. Fred and Laurie have asked
you to prepare the journal entry to admit John with a 25 percent equity interest in the
partnership for an investment of $125,000.

Answer:
Cash 125,000
Fred, capital ($143,750 - $125,000)(.60) 11,250
Laurie, capital ($143,750 - $125,000)(.40) 7,500
 John, capital ($160,000 + $290,000 + 143,750
$125,000)(.25)

304. (20 Points) moderate

Jo Ann and Robert are partners who share profits and losses 30/70. They have capital
account balances of $150,000 and $280,000, respectively. The partners have been
negotiating with Bill about him joining the partnership. The parties agree that the
partnership will revalue assets to their market value ($80,000 above book value) and that
Bill will invest $100,000 for a 20 percent equity interest. Record the revaluation and the
admission of Bill into the partnership assuming the bonus method is applied.

Answer:
Assets 80,000
Jo Ann, capital ($80,000 x .30) 24,000
Robert, capital ($80,000 x .70) 56,000

Cash 100,000
Jo Ann, capital ($122,000 - $100,000)(.30) 6,600
Robert, capital ($122,000 - $100,000)(.70) 15,400
Bill, capital ($280,000 + $150,000 + 122,000
$80,000 + $100,000)(.20)

305. (20 Points) moderate

Robert and Steven are partners in a local company. They have capital accounts in the
amounts of $250,000 and $320,000, respectively, when they agree to admit a new
partner, Don, to the company. Don has agreed to contribute $225,000 for a 25 percent

partnership, Robert and Steven share profits and losses 80 percent and 20 percent,
respectively. Record the admission of Don assuming the goodwill method is applied.

Answer:
Book value of capital before the investment $570,000
225,000
Total book value of capital after the investment $795,000
0.25
$198,750

Goodwill to existing partners

$225,000 = (.25)($795,000 + Goodwill)

$225,000 = $198,750 + .25 (Goodwill)
$26,250 = .25 (Goodwill)
Goodwill = $105,000

Cash 225,000
Goodwill 105,000
 Don, capital 225,000
Robert, capital ($105,000 x .80) 84,000
Steve, capital ($105,000 x .20) 21,000

306. (20 Points) moderate

Ann and Sarah are partners in a local company. They have capital accounts in the
amounts of $150,000 and $220,000, respectively, when they agree to admit a new
partner, John, to the company. John has agreed to contribute $175,000 for a 25 percent

partnership, Ann and Sarah share profits and losses 40 percent and 60 percent,
respectively. Record the admission of John assuming the goodwill method is applied.

Answer:
Book value of capital before the investment $370,000
175,000
Total book value of capital after the investment 545,000
0.25
136,250

Goodwill to existing partners

$175,000 = (.25)($495,000 + Goodwill)

$175,000 = $136,250 + .25 (Goodwill)
$38,750 = .25 (Goodwill)
Goodwill = $155,000

Cash 175,000
Goodwill 155,000
Ann, capital ($155,000 x .40) 62,000
John, capital 175,000
Sarah, capital ($155,000 x .60) 93,000

307. (30 Points) difficult

Bob and Norman are partners and they share profits and losses 70/30. They have capital
accounts balances of $350,000 and $480,000, respectively, when they agree to admit
Richard to the company. All parties have agreed that the partnership will first revalue
tangible assets to their market value ($150,000 above book value) and then Richard will

revaluation and the admission of Richard into the partnership assuming the goodwill
method is applied.

Answer:
Assets 150,000
Bob, capital ($150,000 x .70) 105,000
Norman, capital ($150,000 x .30) 45,000
 Book value of capital before the investment $ 980,000
($350,000 + $480,000 + $150,000)
300,000
Total book value of capital after the investment $1,280,000
0.20
$ 256,000

Goodwill to existing partners

$300,000 = (.20)($1,280,000 + Goodwill)

$300,000 = $256,000 + .20 (Goodwill)
$44,000 = .20 (Goodwill)
Goodwill = $220,000

Cash 300,000
Goodwill 220,000
Bob, capital ($220,000 x .70) 154,000
Norman, capital ($220,000 x .30) 66,000
John, capital 300,000

308. (10 Points) moderate

Skip and Amy are partners in a struggling company. An investor, James, has offered to
join the partnership and provide the needed expertise. Skip and Amy have capital
account balances in the amount of $120,000 and $160,000, respectively, at the date
James is admitted to the partnership and their respective profit and loss ratios are 60
percent and 40 percent. James agrees to invest $60,000 for a 20 percent interest in the
partnership capital. Assuming the goodwill method is applied, record the admission of
James.

Answer:
Book value of capital before the investment $280,000
($120,000 + $160,000)
60,000
Total book value of capital after the investment $340,000
0.20
percentage capital $ 68,000

Goodwill to new partner

$60,000 + goodwill = (.20)($340,000 + Goodwill)

$60,000 + goodwill = $68,000 + .20 (Goodwill)
.80 goodwill = $8,000
Goodwill = $10,000

Cash 60,000
Goodwill 10,000
 James, capital 70,000

309. (10 Points) moderate

Rich and Barbara are partners who share profits and losses 70/30. They have been
looking for a new partner to help with the expanding business. Frank has expressed an
interest and discussions are underway. Frank is willing to join the partnership by
investing $270,000 for a 25 percent equity interest. At the date Frank joins the
partnership, Rich and Barbara have capital account balances of $370,000 and $500,000,
respectively. Assuming the goodwill method is applied, record Fran
partnership.

Answer:
Book value of capital before the investment $ 870,000
($370,000 + $500,000)
270,000
Total book value of capital after the investment 1,140,000
0.25
Book $ 285,000

Goodwill to new partner

$270,000 + goodwill = (.25)($1,140,000 + Goodwill)

$270,000 + goodwill = $285,000 + .25 (Goodwill)
.75 goodwill = $15,000
Goodwill = $20,000

Cash 270,000
Goodwill 20,000
Frank, capital 290,000

310. (30 Points) difficult

Clark and Nick are partners and they share profits and losses 75/25. They have capital
accounts balances of $250,000 and $380,000, respectively, when they agree to admit Ron
to the company. All parties have agreed that the partnership will first revalue tangible
assets to their market value ($200,000 above book value) and then Ron will invest

applied.

Answer:
Assets 200,000
Clark, capital ($200,000 x .75) 150,000
Nick, capital ($200,000 x .25) 50,000

Book value of capital before the investment $ 830,000

($250,000 + $380,000 + $200,000)
 $ 170,000
Total book value of capital after the investment $1,000,000
0.20
$ 200,000

Goodwill to new partner

$170,000 + goodwill = (.20)($1,000,000 + Goodwill)

$170,000 + goodwill = $200,000 + .20 (Goodwill)
.80 goodwill = $30,000
Goodwill = $37,500

Cash 170,000
Goodwill 37,500
Ron, capital 207,500

311. (10 Points) easy

Sarah, Tanya, and Theresa are partners who share profits and losses 25 percent, 35
percent, and 40 percent, respectively. Theresa has decided to leave the partnership. The
fixed assets of the partnership are undervalued by $50,000. The capital accounts of

$156,000, respectively. The articles of partnership state that the withdr

share of any differences between market value and carrying value should be recognized
when a partner leaves the partnership. Record the journal entry for the revaluation of the

equity.

Answer:
Assets ($50,000 x .40) 20,000
Theresa, capital ($50,000 x .40) 20,000

Theresa, capital ($156,000 + $20,000) 176,000

Marsha, capital 176,000

312. (10 Points) easy

Sarah, Tanya, and Theresa are partners who share profits and losses 25 percent, 35
percent, and 40 percent, respectively. Theresa has decided to leave the partnership. The
fixed assets of the partnership are undervalued by $50,000. The capital accounts of
,000, $130,000, and
$156,000, respectively. The articles of partnership state that the full market value of all
assets and liabilities should be recognized when a partner leaves the partnership. Record
the journal entry for the revaluation of the assets. R

Answer:
Assets 50,000
 Sarah, capital ($50,000 x .25) 12,500
Tanya, capital ($50,000 x .35) 17,500
Theresa, capital ($50,000 x .40) 20,000

Theresa, capital ($156,000 + $20,000) 176,000

Marsha, capital 176,000

313. (10 Points) moderate

Sam, Tim, and Tyrone are partners who share profits and losses 15 percent, 40 percent,
and 45 percent, respectively. Tyrone has decided to leave the partnership. The fixed

balances before the withdrawal are $70,000, $190,000, and $250,000, respectively. The

between market value and carrying value should be recognized when a partner leaves the
partnership. Record the journal entry for the revaluation of the assets. Record the
withdrawal assuming that Sam purchases 30 percent and Tim purchase 70 percent of

Answer:
Assets ($80,000 x .45) 36,000
Tyrone, capital 36,000

Tyrone, capital ($250,000 + $36,000) 286,000

Sam, capital ($286,000 x .30) 85,800
Tim, capital ($286,000 x .70) 200,200

314. (10 Points) moderate

Sam, Tim, and Tyrone are partners who share profits and losses 15 percent, 40 percent,
and 45 percent, respectively. Tyrone has decided to leave the partnership. The fixed

balances before the withdrawal are $70,000, $190,000, and $250,000, respectively. The
articles of partnership state that the full market value of all assets and liabilities should be
recognized when a partner leaves the partnership. Record the journal entry for the
revaluation of the assets. Record the withdrawal assuming that Sam purchases 30 percent
equity.

Answer:
Assets 80,000
Sam, capital ($80,000 x .15) 12,000
Tim, capital ($80,000 x .40) 32,000
Tyrone, capital ($80,000 x .45) 36,000

Tyrone, capital ($250,000 + $36,000) 286,000

Sam, capital ($286,000 x .30) 85,800
Tim, capital ($286,000 x .70) 200,200
315. (10 Points) easy
Don, Mark, and James are partners who share profits and losses 25 percent, 20 percent,
and 55 percent, respectively. Mark has decided to leave the partnership. The articles of

value and carrying value should be recognized when a partner leaves the partnership.

account balances before the withdrawal are $90,000, $110,000, and $240,000,
respectively. Record the journal entry for the revaluation of the assets. Record the

Answer:
Assets ($75,000 x .20) 15,000
Mark, capital 15,000

Mark, capital ($110,000 + $15,000) 125,000

Cash 125,000

316. (10 Points) easy

Don, Mark, and James are partners who share profits and losses 25 percent, 20 percent,
and 55 percent, respectively. Mark has decided to leave the partnership. The articles of
partnership state that the full market value of all assets and liabilities should be
recognized when a partner leaves the partnership. The fixed assets of the partnership are

are $90,000, $110,000, and $240,000, respectively. Record the journal entry for the
revaluation of the assets. Record the withdrawal assuming that the partnership acquires

Answer:
Assets 75,000
Don, capital ($75,000 x .25) 18,750
Mark, capital ($75,000 x .20) 15,000
James, capital ($75,000 x .55) 41,250

Mark, capital ($110,000 + $15,000) 125,000

Cash 125,000

317. (30 Points) difficult

Berry, Carl, and Phil have been partners for many years. Carl has indicated that he plans
to withdraw from the partnership. To prepare for his departure, the following
information is gathered:

Book Market
Value Value_
Current Assets 210,000 210,000
Fixed Assets 850,000 980,000
Total Assets 1,060,000
 Current Liabilities 110,000 110,000
Long-term Debt 220,000 180,000
Berry, Capital (45%) 380,000
Carl, Capital (25%) 180,000
Phil, Capital (30%) 170,000
Total Liabilities and Partnership Equity 1,060,000

in value of any assets and liabilities should be recognized at the date of withdrawal. The

ownership equity. The assets are to be financed by borrowing the money on long-term
notes payable. Record these events assuming that the bonus method is used to recognize
the withdrawal.

Answer:
Fixed Assets ($980,000 - $850,000)(.25) 32,500
Long-term Debt ($220,000 - $180,000)(.25) 10,000
Carl, capital 42,500

Cash 300,000
Long-term Debt 300,000

Carl, capital ($180,000 + $42,500) 222,500

Berry, capital ($300,000 - $222,500)(45/75) 46,500
Phil, capital ($300,000 - $222,500)(30/75) 31,000
Cash 300,000

318. (10 Points) moderate

Barbara, Mitch, and Susan are partners with capital accounts of $280,000, $350,000, and
$420,000, respectively. Barbara has informed Mitch and Susan that she is withdrawing
from the partnership. The partners have agreed that the partnership will purchase

Bar

Answer
Barbara, capital 280,000
Mitch, capital ($340,000 - $280,000)(28/70) 24,000
Susan, capital ($340,000 - $280,000)(42/70) 36,000
Cash 340,000

319. (10 Points) easy

Fred, Greg, and Sam are partners with capital accounts of $175,000, $225,000, and
$150,000, respectively. Sam informs Fred and Greg that is withdrawing from the
partnership. The
 the bonus method is applied.

Answer:
Sam, capital 150,000
Fred, capital ($200,000 - $150,000)(45/80) 28,125
Greg, capital ($200,000 - $150,000)(35/80) 21,875
Cash 200,000

320. (10 Points) moderate

Jack, Ken, and Laura are partners in a local company. Ken has announced his
withdrawal from the company. The articles of partnership indicate that the withdrawing

share profits in a 30 percent, 25 percent, and 45 percent ratio, respectively, and their
respective capital accounts just prior to the withdrawal are $225,000, $260,000, and

is $80,000. Prepare the journal entry (entries) necessary to reflect the withdrawal of Ken
assuming that Martin has been approved to become the new partner. Martin pays Ken
$380,000 for 100 percent of his partnership equity.

Answer:
Goodwill 80,000
Ken, capital 80,000

Ken, capital ($260,000 + $80,000) 340,000

Martin, capital 340,000

321. (10 Points) moderate

Doris, Elmer, and Fran are partners in a local company. Doris has announced her
withdrawal from the company. The articles of partnership indicate that the withdrawing
date of withdrawal. Doris, Elmer, and Fran
share profits in a 20 percent, 35 percent, and 45 percent ratio, respectively, and their
respective capital accounts just prior to the withdrawal are $120,000, $180,000, and
$275,000, respectively. Estimated good
is $50,000. Prepare the journal entry (entries) necessary to reflect the withdrawal of
Doris assuming that Greg has been approved to become the new partner. Greg pays
Doris $190,000 for 100 percent of her partnership equity.

Answer:
Goodwill 50,000
Doris, capital 50,000

Doris, capital ($120,000 + $50,000) 170,000

Greg, capital 170,000

322. (10 Points) moderate

 Shawn, Teresa, and Mark are partners who share profits and losses 25 percent, 35
percent, and 40 percent, respectively. Mark announced his withdrawal from the

respectively.

ownership percentage is $75,000. Prepare the journal entry (entries) necessary to reflect

equity.

Answer:
Goodwill 75,000
Mark, capital 75,000

Mark, capital ($210,000 + $75,000) 285,000

Shawn, capital ($285,000 x .60) 171,000
Theresa, capital ($280,000 x .40) 114,000

323. (10 Points) moderate

David, Eric, and Glenn are partners who share profits and losses 35 percent, 40 percent,
and 25 percent, respectively. Eric announced his withdrawal from the company when the
he

ownership percentage is $90,000. Prepare the journal entry (entries) necessary to reflect
pays

equity.

Answer:
Goodwill 90,000
Eric, capital 90,000

Eric, capital ($200,000 + $90,000) 290,000

David, capital ($290,000 x .30) 87,000
Glenn, capital ($290,000 x .70) 203,000

324. (10 Points) easy

Rich, Sam, and Clarence are partners who share profits and losses 15 percent, 45 percent,
and 40 percent, respectively. Sam announced his withdrawal from the company when
he

ownership percentage is $60,000. Prepare the journal entry (entries) necessary to reflect
Sa equity.
 Answer:
Goodwill 60,000
Sam, capital 60,000

Sam, capital ($210,000 + $60,000) 270,000

Cash 270,000

325. (10 Points) easy

Hal, Norris, and Eddie are partners who share profits and losses 25 percent, 15 percent,
and 60 percent, respectively. Hal announced his withdrawal from the company when the
e

percentage is $30,000. Prepare the journal entry (entries) necessary to reflect Hal
equity.

Answer:
Goodwill 30,000
Hal, capital 30,000

Hal, capital ($120,000 + $30,000) 150,000

Cash 150,000

326. (10 Points) moderate

James, Kris, and Lance are partners in a local company. Kris has announced her
withdrawal from the company. The articles of partnership indicate that the entire

Lance share profits in a 30 percent, 25 percent, and 45 percent ratio, respectively, and
their respective capital accounts just prior to the withdrawal are $160,000, $120,000, and
$225,000, respectively. Estimated goodwill is $180,000. Prepare the journal entry
(entries) necessary to reflect the withdrawal of Kris assuming that Felix has been
approved to become the new partner. Felix pays Kris $175,000 for 100 percent of her
partnership equity.

Answer:
Goodwill 180,000
James, capital ($180,000 x .30) 54,000
Kris, capital ($180,000 x .25) 45,000
Lance, capital ($180,000 x .45) 81,000

Kris, capital ($120,000 + $45,000) 165,000

Felix, capital 165,000

327. (10 Points) moderate

Nicole, Melvin, and Joshua are partners in a local company. Melvin has announced his
withdrawal from the company. The articles of partnership indicate that the entire
 Joshua share profits in a 40 percent, 25 percent, and 35 percent ratio, respectively, and
their respective capital accounts just prior to the withdrawal are $200,000, $150,000, and
$190,000, respectively. Estimated goodwill is $120,000. Prepare the journal entry
(entries) necessary to reflect the withdrawal of Melvin assuming that Hans has been
approved to become the new partner. Hans pays Melvin $160,000 for 100 percent of his
partnership equity.

Answer:
Goodwill 120,000
Nicole, capital ($120,000 x .40) 48,000
Melvin, capital ($120,000 x .25) 30,000
Joshua, capital ($120,000 x .35) 42,000

Melvin, capital ($150,000 + $30,000) 180,000

Hans, capital 180,000

328. (10 Points) moderate

Kim, Jennifer, and David are partners who share profits and losses 40 percent, 25
percent, and 35 percent, respectively. Kim announced her withdrawal from the company
ere $250,000, $180,000, and $210,000,

to be recognized at the date of withdrawal. Estimated goodwill is $95,000. Prepare the

journal entry (entries) necessary to r

equity.

Answer:
Goodwill 95,000
Kim, capital ($95,000 x .40) 38,000
Jennifer, capital ($95,000 x .25) 23,750
David, capital ($95,000 x .35) 33,250

Kim, capital ($250,000 + $38,000) 288,000

Jennifer, capital ($288,000 x .60) 172,800
David, capital ($288,000 x .40) 115,200

329. (10 Points) moderate

Natalie, Oscar, and Paul are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Paul announced his withdrawal from the company when
. The

at the date of withdrawal. Estimated goodwill is $110,000. Prepare the journal entry
d Oscar acquire
pays
 Answer:
Goodwill 110,000
Natalie, capital ($110,000 x .30) 33,000
Oscar, capital ($110,000 x .25) 27,500
Paul, capital ($110,000 x .45) 49,500

Paul, capital ($320,000 + $49,500) 369,500

Natalie, capital ($369,500 x .30) 110,850
Oscar, capital ($369,500 x .70) 258,650

330. (10 Points) easy

Cindy, Tony, and Ben are partners who share profits and losses 25 percent, 55 percent,
and 20 percent, respectively. Ben announced his withdrawal from the company when the

at the date of withdrawal. Estimated goodwill is $40,000. Prepare the journal entry
quires
equity.

Answer:
Goodwill 40,000
Cindy, capital ($40,000 x .25) 10,000
Tony, capital ($40,000 x .55) 22,000
Ben, capital ($40,000 x .20) 8,000

Ben, capital ($100,000 + $8,000) 108,000

Cash 108,000

331. (10 Points) easy

Mary, Nick, and Shawn are partners who share profits and losses 15 percent, 25 percent,
and 60 percent, respectively. Mary announced her withdrawal from the company when

at the date of withdrawal. Estimated goodwill is $50,000. Prepare the journal entry
acquires

Answer:
Goodwill 50,000
Mary, capital ($50,000 x .15) 7,500
Nick, capital ($50,000 x .25) 12,500
Shawn, capital ($50,000 x .60) 30,000

Mary, capital ($80,000 + $7,500) 87,500

Cash 87,500
 Short Answer Questions

332. Helen and Richard are considering forming a partnership. They have worked out many
of the issues but they are unsure about how the accounting records have to be maintained.
They come to you for information pertaining to the application of GAAP for partnership
records.

Answer: Partnerships are not required to comply with generally accepted accounting
principles (GAAP) unless the entity has publicly traded debt securities or the entity is
required to comply with GAAP by a creditor.

333. What are the similarities and differences among proprietorships, partnerships, and
corporations with regard income tax filing.

Answer: Partnerships and proprietorships are viewed as an extension of the owners.

Neither entity is separately taxed on income. The taxable income or loss is allocated to

individual tax return. The partnership is required to file an informational tax return
(Form 1065) to disclose how the taxable income has been allocated to the partners. The
corporation, on the other hand, is a taxable entity and income tax is paid on the
income.

334. Three individuals are considering forming a business together. One of their concerns is
the liability exposure from the business. Prepare a short note to these individuals
explaining the extent of liability each has when forming a partnership and a corporation.

Answer: A partner may bind the partnership by contract when conducting business in the
name of the partnership. This results in each partner being liable for the partnership
business dealings of the other partners. In addition, partners have unlimited liability with
regard to partnership debts. On the other hand, stockholders of a corporation do not
share such legal liability. The corporation is a legal entity separate from the owners and
management can commit the corporation to legal contracts in the name of the
corporation, but not the stockholders. Thus, management of the corporation can sue in
the name of the corporation and the corporation can be sued. As a result, the
stockholders are generally not liable for the debts of the corporation beyond the amount
invested.

335. Alex is the owner of a small local business. He has operated as a proprietorship for many
years but his health is starting to fail. As a result, Alex is going to reduce the number of
hours worked in the business. He has asked you to explain how changing his business to
a partnership would affect him (legally). Prepare a brief memo outlining the similarity
and differences between a proprietorship and a partnership with regard to legal issues.
 Answer: Similarities to be discussed include (1) ease of formation and (2) unlimited

336. Compare and contrast the proprietary theory of equity and the entity theory of equity
with regard to partnerships.

Answer: The proprietary theory is based on the notion that the business entity is an
extension of the owners. The entity theory is based on the notion that the business entity
is distinct and separate from the owners. Partnerships contain elements of both the
proprietary and entity theories. Support for the proprietary theory can be found in the
following:
Individual partners are liable for all debts of the partnership
Salaries of partners are viewed as distributions of income, not components of net
income
The admission of a new partner or withdrawal of an existing partner results in the
dissolution of the partnership
Assets contributed to the partnership retain the existing tax basis to the partner
contributing
net income, and
the partnership does not pay income taxes

Support for the entity theory can be found in the following:

Assets contributed to the partnership become property of the partnership
A partnership can enter into contracts
Partners do not have claims to specific assets
Partnership creditors have priority claim to partnership assets and the creditors of

Continuity of the partnership when admission or withdrawal of partners occurs

337. Partnership accounting applies elements of both the proprietary and entity theories.
Explain the underlying theoretical basis for the proprietary theory and the entity theory.

Answer: The proprietary theory is based on the notion that the business entity is an
extension of the owners. The entity theory is based on the notion that the business entity
is distinct and separate from the owners.

338. Hans and Felix are attempting to work out the final issues for forming a partnership.
They are currently debating the values to assign to noncash assets contributed to the
partnership by each partner. Hans believe that the market value has to be assigned to
these assets while Felix believes there may be other alternatives. Prepare a short note to
the two potential partners clarifying this issue.

Answer: The three most likely valuations that can be assigned to noncash assets are the

of the asset. The amount to be assigned to the noncash assets can be determined by
agreement among the partners or by appraisal (if market values are used).

339. Berry and Charlie plan to start a partnership. One partner is contributing an old building
while the other partner is contributing several delivery trucks. Both partners are also
contributing cash. A difference of opinion exists regarding the amount at which the

the carrying values should be recorded. Charlie objects because it would give Berry too

be used. Berry objects to the tax basis for the same reason Charlie objects to the book
basis. The partners ask for your opinion. How do you respond?

Answer
assigned to each individual capital account. The amount recorded for the assets will help
determine total capital, not how total capital is divided between the partners.

340. Explain how the assumption of a liability by the partnership on an asset contributed by a
asset.

Answer: Generally the value assigned to the asset (e.g., carrying value, tax basis, market
value) is explicitly reduced by the amount of the liability assumed to determine the

agree to create capital accounts in equal amounts through such techniques as the
recognition of goodwill for other partners. The tax basis of a contributing partner is only
reduced by the part of the liability assumed by the partnership because the IRS interprets
this event as all partners sharing the obligation so the contributing partner is still
obligated for part of the liability.

341. Clark, Mitchell, and Thomas are forming a partnership. Each partner is contributing cash
and other tangible assets. In addition, Clark has a significant amount of experience in
operating the type of business being created. The partners do not like the idea of
 recording goodwill but they are not sure how to otherwise recognize the additional
contribution Clark is making. Prepare a brief memo explaining a different way to

Answer
contribution. Mitchell and Thomas would give up an agreed amount of capital to be
assigned to Clark. This approach is called the bonus method. Mitchell and Thomas are
giving a bonus to Clark because of the additional contribution that cannot be measured in
a traditional manner.

342. James and Rachel are forming a partnership. They agree on the values to assign to all of
the assets and liabilities. The partners also want to recognize that Rachel has many
contacts that will be of value to the business. A mutual friend who owns a business has
told them the bank will be unhappy with their balance sheet if they record goodwill for
contacts?

Answer: The bonus method can be used instead of the goodwill method. The bonus
method reallocates capital from James to Rachel to recognize the contribution made by
Rachel in excess of the identifiable assets. As a result, James will have a reduced capital
account balance and Rachel will have a greater balance.

343. Barry, George, and Felix are forming a partnership. Each partner is contributing cash
and other tangible assets. George and Felix are contributing greater amounts of cash and
other tangible assets but Barry has a significant amount of experience in operating the
type of business being created. A mutual friend has suggested that the three make their
initial capital accounts equal in value. George and Felix do not like the idea of recording
their capital accounts at an amount less than the market value of what they are
contributing but they are not sure how to otherwise recognize the additional contribution

contribution.

Answer: The additional contribution being made by Barry could be recorded as goodwill.
This intangible asset would be created at an amount agreed by the partners. Goodwill

344. Explain how partners may determine the dollar amount of goodwill recognized at the
date a partnership is formed.

Answer: The value assigned to goodwill can be determined in any legal manner
agreeable to the partners. One possibility is to have an independent appraisal of the
intangible asset contributed. Another possibility is for the partners to agree on an
assigned value of the intangible asset.

345. Explain how a drawing account used by a partnership is similar in concept to a dividend
account used by a corporation.
 Answer: Both accounts contain information pertaining to distributions to owners. These
distributions can take any form such as cash, inventory, and other assets. Both accounts

closed at the end of the accounting period to permanent equity accounts (partnership
capital accounts for drawing accounts and retained earnings for dividends).

346. Vicky, Robert, and Ray are forming a partnership. They have asked for some
information regarding the allocation of profits and losses among the partners. While they
believe that each partner will contribute significantly to the partnership, this contribution
will take different forms. They are unsure how to recognize these different types of
contributions. Prepare a short note explaining the different components that might be
considered when allocating partnership profits to individual partners.

Answer: Partnership profits and losses can be allocated in any manner but there are four
common components: interest on capital balance, salary, bonus, and residual percentages.
These different components reward partners for contributions of economic resources,
labor and expertise, taking on special responsibilities, and agreed allocation of any
residual profit or loss remaining after the other components have been considered.

347. Susan is joining an already existing partnership. She is reading the profit and loss
sharing part of the partnership agreement. She calls you with a question regarding a term
she does not understand, weighted average capital balance. Prepare a short note
explaining what is meant by this term.

Answer: The weighted average capital balance is the calculated average dollar amount in
the capital account after considering the length of time that balance existed. This method
of computing the average is less subject to manipulation that the simple average, which is
beginning amount plus ending amount divided by two.

348. Ben is a new partner in a local company. When he became a partner, he received a copy
of the partnership agreement including the profit and loss sharing agreement. Ben is
concerned about the interest on capital balance portion of the profit and loss sharing
agreement because his capital account is very small. Prepare a short note explaining the
reason this component of profit and loss allocation exists.

Answer: The interest on capital balance is meant to reward partners for contributions of
economic resources. As a new partner, a small capital account will likely exist and
therefore this component of the profit allocation will be small. As the capital account
grows through additional investment and profit accumulation, this component of the
profit and loss allocation will also grow.

349. Michelle is a new partner is considering becoming a partner in a small company. She
obtained a copy of the most recent income statement and is surprised when she does not
find salaries on the income statement. She asks you if it is unusual for partners to not
receive a salary from their work in the partnership.
 Answer: The lack of salary expense on the income statement does not mean that the
partners do not receive a salary. Partner salaries are not on the income statement, they
are part of the profit allocation.

350. Are there any differences between bonuses offered to partners and bonuses offered to
managers in corporations?

Answer: Bonuses offered to partners and bonuses offered to managers in corporations

are the same. Both are forms of compensations designed to encourage performance.
Furthermore, both should be based on criteria within the control of the person who will
receive the bonus.

351. Ben and Natalie are forming a partnership. They have worked out many of the details
but they are confused about how to divide profits and losses. They have spoken with
several associates who are in different partnership and there seems to be some
inconsistencies. Some partnerships have residual profit and loss ratios while others do
not. Prepare a note to Ben and Natalie informing them of the reason for this
inconsistency.

Answer: Residual profit and loss ratios are not needed if the ratios are to be equal. The
default profit and loss ratio, if not stated, is that all partners will share the residual profit
and loss equally. If the desire is to share the residual amount of profit or loss in some
other proportion, the allocation must be disclosed.

352. Do partnership residual profit ratios have to be the same as partnership residual loss
ratios? Why or why not.

Answer: Residual profit and loss ratios are part of a contractual agreement among the
partners. As a result, the partnership can apply any ratios agreed by the partners. The
ratios are typically the same for profits and losses but they can differ.

353. Alex, Shawn, and Tammy are partners in a local company. They have been conducting
business for a number of years and Shawn recently told the partners that he is going to
reduce his activities in the partnership. As a result, the partners have agreed that the
profit and loss sharing arrangement should be modified. They have agreed to adjust the
salaries and the profit and loss residuals. They come to you with a concern regarding the
assets that are currently owned by the partnership. The partners know that the assets are
worth more than the amount recorded on the financial records but they do not know how
this should be considered when the profit and loss ratios are changed. Prepare a short
note to the partners outlining the their options.

Answer: The difference between the market and book values of assets that exist when the
profit and loss ratios change can be addressed in several ways. One way is to make a list
of these assets and their market value at the date of the change. When the assets are sold,
the amount of the gain that existed when the profit and loss ratios were changed would be
 allocated based on the previous profit and loss ratios and any change in market value that
occurs after the ratios are changed would be allocated based on the new ratios. Another
approach is to revalue the assets at the date the profit and loss ratios are changed. The
gain would be allocated based on the previous ratios. A third approach is to determine
the impact of the unrealized gains on the capital accounts due to the change in the ratios
and directly adjust the capital accounts. The gain on the assets at the date of sale would
then be allocated based on the new ratios. All three approaches give the same end result,
the choice is a matter of preference by the partners.

354. Partners sometimes change the profit and loss ratios used to determine the allocation of
profits and losses. When this occurs, why would the partners choose to prepare a list of
assets with market values different from book values when they could have chosen to
revalue the assets to market value at the date the profit and loss ratios were changed?

Answer: Some partners and possibly their creditors may not want to have the assets
revalued to market value. The revaluation is a significant departure from GAAP and the
records
maintained in accord with GAAP.

355. Sarah, a friend who knows you are a CPA comes to you with a concern. She has been
asked by a colleague to consider becoming a partner in a small company. She will be the
fourth partner in the company. Sarah has had two meetings with the current partners.
She is concerned that one of the current partners who does not know her has been asking
a variety of questions pertaining to her business practices beliefs and her personal ethics.
Sarah asks if you have any idea why this partner would ask such questions. How do you
respond?

Answer: The current partner may be concerned because the existing partners will have
unlimited liability for the actions of the new partner. Given that this partner does not
know Sarah, he/she is gathering information so a choice can be made about accepting
such risk.

356. Don and Jerry are partners in a publishing company. Don is interested in reducing his
involvement in the company and they have been searching for a new partner to take on
some of the work. They learn that Ted is interested in joining the partnership and they
enter into negotiations. Don is willing to support Ted joining the partnership if Ted will
pay Don $250,000. Don will not transfer any of his equity to Ted but will allocate 30

unwillingness to allocate any equity to him even though a significant investment is

required. How do you respond?

Answer: There is no requirement for a partner to give up equity to a new partner

of the partnership. His capital account would start at $0 an increase as the partnership
has income.
357. Sally, Robert, and Stuart are partners in a manufacturing company. They are considering
allowing Dick to acquire an ownership interest in the partnership by purchasing part of

comes to you with a question just before a negotiating session with the current partners.

profit allocation or if that is a separate issue. How do you respond?

Answer
and losses. These two items have to be negotiated simultaneously but they are
independent. Dick has to be comfortable with the outcome on both issues if he is going
to acquire a part ownership in the partnership.

358. Fred is negotiating an investment to join a partnership. The existing partners are asking

Fred is encouraged by this proposal but then he learns that the partners plan to revalue
the
revaluations. Prepare a note to Fred explaining why the existing partners want to revalue
the assets before he is admitted.

Answer: The partners believe that the difference between market value and book value of
existing assets belong to them because they have been the partners during the time period
when the assets value increased. As a result, they intend to have the unrealized increase
in value added to their capital accounts so that it will not be shared with the new partner.
Any changes in value after Fred becomes a member of the partnership will be allocated
to all of the partners, including Fred.

359. Why are some people opposed to the revaluation of partnership assets when a new
partner is admitted to the partnership?

Answer: These individuals contend that the partnership is still in operation and there
should be no change in the values assigned to assets and liabilities while the partnership
is in operation. There has not been a change in ownership so there is no transaction to
justify the revaluation.

360. You are a staff accountant for a local company. The partners of a client are discussing
the admission of a new partner. Some
should be revalued before admission of the new partner while other partners are opposed
to the revaluation. Prepare a short note explaining why it may be appropriate to revalue
time.

Answer: The change in value of the assets has occurred over time and the partners during
that time should share in the increase in value. The new partner should have no claim to
addition, when the
new partner joins the company, there is a new legal entity so recording the assets at the
market value at that date is not inappropriate.
361. Sam and Mark are discussing bringing Susan into the partnership. Susan understands
that
understand why she should invest more in the partnership than her share of the market
at
it may require a greater investment to become a member of this partnership.

Answer

balance sheet but goodwill still exists. The amount that Susan is investing in excess of
the capital account created represents her investment in the goodwill that already exists in
the company. She is paying a bonus to the existing partners for allowing her to share in
the goodwill of the partnership.

362. Steve is negotiating with the partners in a local business. He would like to become a new
partner in the business but there are several issues he does not understand. One of the
primary issues pertains to the amount of his capital account at the date of investment.
The partners told Steve that he would have to invest $100,000 to join the business but his
capital account would be created for $85,000. Prepare a short note to Steve explaining
why his capital account would be recognized at an amount less than his investment.

Answer: The partnership has an unidentified asset (goodwill) that has value to the

sheet but goodwill still exists. The amount that Steve is investing in excess of the capital
account created represents his investment in the goodwill that already exists in the
company. He is paying a bonus to the existing partners for allowing him to share in the
goodwill of the partnership.

363. Jim and Fred have decided to admit Richard into their partnership. Jim and Fred know
that they are going to apply something called the bonus method to record the admission
of Richard into the partnership but they do not understand the technical accounting part

be created at an amount greater than the amount of his investment in the partnership.
Prepare a short note
is created for this amount.

Answer: The parties have agreed that Richard is going to receive a certain percentage of
o agreed on the
amount that Richard will invest. When the investment takes place, the bonus method

capital after the investment. This amount may be less than, equal to, or more than the
amount invested. If it is less than or more than the amount of the investment, the capital
accounts of the existing partners is adjusted to make up for the difference.

364. John and Joel are negotiating with a potential partner to join their local business. They
would like Laura to become a new partner in the business but there are several issues
they do not understand. One of the primary issues pertains to the amount of his capital
 account at the date of investment. The partners agreed that Laura would have to invest
$75,000 to join the business and they agree that he is going to have a 30% equity interest
in the partnership. What they did not realize is that their capital accounts were going to
decrease when Laura joined the partnership. Prepare a short note to John and Joel
explaining why their capital accounts would be reduced when Laura joins the company.

Answer: The partners have agreed that Laura is contributing something to the partnership
in addition to the tangible assets. They have also agreed on the value of this contribution

capital plus the investment) is allocated to the new and existing partners in the agreed
manner. If the new partner is receiving an equity interest more or less than the amount

capital account of the new partner is greater than the amount invested so the existing

365. Shawn is currently in discussion with Ted and Mark regarding his joining their
partnership. Initial discussions resulted in an agreement that Shawn would contribute
$50,000 for a 20 percent equity interest in the partnership. The last discussion was about

were greater in the pro forma balance

sheet and that goodwill had been added to the balance sheet. Shawn asks for an
explanation of this change. You are the accountant attending the meetings, how do you
respond?

Answer: The partnership agreement indicates that the goodwill method is to be applied
when new partners join the company. In this instance, Shawn is contributing more than
his share of the book value of the company. This implies that there exists goodwill in the
company. The goodwill is recorded and allocated to Ted and Mark because they were

recorded.

366. You are conducting training for new loan officers of a bank. The topic of the day is
partnerships and their changes in ownership. The bank often receives loan requests when
partnerships are expanding. At the same time, the partnership may also be adding a new
partner to increase the c
bank. You hand out several partnership balance sheets before and after a new partner has
joined. One loan officer asks about the reason for a change in existing partner capital
accounts and the addition of goodwill to the balance sheet. How do you respond?

Answer: Partnerships are permitted to record goodwill when a new partner joins the

equity, goodwill is said to exist in the current partners. As a result, this goodwill is
recorded and allocated to the current partners.
367. Three investors have asked for your assistance in planning the formation of a partnership.
After about two hours of discussion the group arrives at the topic of how to admit
additional partners in the future or retire existing partners. You explain that there are two
methods that can be used to account for these events: the bonus method and the goodwill
method. One of the partners listens to the explanation of the two methods and then asks
for you to summarize the criteria that may be used to determine which method this
request.

Answer: The difference that exists when comparing the bonus method and the goodwill
method is whether the partners wish to recognize goodwill on the balance sheet. The
goodwill method will result in greater total assets than the bonus method but the
relationship that exists among the partners will be the same regardless of the method
applied.

368. Why would partners in an existing partnership agree to allocate an equity interest to a
new partner that is greater than the value of the identifiable net assets contributed by the
new partner?

Answer: The existing partners would be willing to allocate a capital account to a new
partner greater than the value of the identifiable new assets contributed because the new
partner is contributing unidentifiable assets to the partnership. These other assets may
include business expertise, a good reputation, or existing customers. The additional
assets contributed to the partnership result in the new partner having goodwill.

369. You are an analyst for a local bank. A question just arrived in your email from a new
loan officer. The loan officer is reviewing information from a small partnership
requesting a loan. The partnership indicates that one of the partners is withdrawing from
the partnership. The remaining partners send a current balance sheet and a pro forma
balance sheet after the withdrawal. The loan officer is confused because the withdrawing

reduced?

Answer ould be
reduced. First, the partnership may have revalued assets to their market value. If the
market value were less than book value, the capital accounts would be reduced. The
second, and more likely, reason is that the remaining partners are going to pay a bonus to

will be reduced by his/her proportion of the bonus paid.

370. Jennifer is confused with regard to the recognition of the withdrawal of a partner from
the company. The partnership agreement indicates that they will apply the bonus method
to recognize the withdrawal and that any bonus will be shared by the remaining partners
based on their profit and loss ratio. Jennifer was surprised when she is assigned 40
percent of the bonus paid even though she only has a 35 percent ownership interest in the
partnership. How do you respond?
Answer: The remaining partners, based on their profit and loss residual ratios, absorb the
bonus paid to the withdrawing partner
became 40 percent of the remaining equity after the existing partner was removed from
consideration.
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Self Test Chapter 3

Multiple Choice Theories
1. If existing partners acquire the equity of a withdrawing partner, in what manner do they divide the
equity?
a. In any manner they choose
b. Equally
c. Proportionate to their residual pro@t and loss ratios
d. Existing partners are not permitted to acquire the equity of a withdrawing partner
2. Which of the following must exist to create the potential for a retiring partner to have a bonus
recognized at the date of withdrawal?
a. The retiring partner must be paid more than the book value of his equity
b. The existing partners must decide to not admit a new partner to the partnership
c. The retiring partner’s equity must be acquired by the partnership
d. All of the above are necessary for a bonus to be recognized
3. In what manner do the remaining partners share in the bonus paid to a withdrawing partner?
a. In proportion to their residual pro@t and loss ratios
b. Equally
c. In proportion to their capital account balances
d. The partner with the greatest capital account is assigned the bonus
4. Which of the following statements is true with regard to a withdrawing partner?
a. A bonus must be paid to the retiring partner
b. A bonus may be paid to the retiring partner
c. A bonus must be paid to the retiring partner or to the remaining partners
d. Recognizing a bonus is not appropriate when a partner retires
5. What change occurs to continuing partners’ capital accounts when a withdrawing partner is
assigned goodwill at the date of withdrawal?
a. Continuing partners’ capital accounts decease by their pro@t and loss ratio proportion of the
goodwill assigned to the withdrawing partner
b. Continuing partners’ capital accounts increase
c. Continuing partners’ capital accounts do not change
d. Goodwill cannot be recognized with regard to withdrawing partners
6. What amount of goodwill can be recognized at the date a partner withdraws from a partnership?
a. The withdrawing partner’s portion of goodwill
b. The continuing partners’ portion of goodwill
c. Goodwill may not be recognized at the date a partner withdraws
d. Either the withdrawing partner’s portion of goodwill or the goodwill attributable to the entire
partnership
7. What portion of the partnership’s assets must be revalued when a partner withdraws from the
partnership?
a. The withdrawing partner’s share must be revalued
b. All of the partnership’s assets must be revalued
c. Any or all of the partnership’s assets may be revalued but none have to be revalued
d. Partnership assets may not be revalued when a partner withdraws
8. If existing partners acquire the equity of a withdrawing partner, in what manner do they divide the
equity?
a. In any manner they choose
b. Equally
c. Proportionate to their residual pro@t and loss ratios
d. Existing partners are not permitted to acquire the equity of a withdrawing partner
9. Which of the following must exist to create the potential for a retiring partner to have a bonus
recognized at the date of withdrawal?
a. The retiring partner must be paid more than the book value of his equity
b. The existing partners must decide to not admit a new partner to the partnership
c. The retiring partner’s equity must be acquired by the partnership
d. All of the above are necessary for a bonus to be recognized
Problems
1. Kern and Pate are partners with capital balances of P60,000 and P20,000, respectively.
Pro@ts and losses are divided in the ratio of 60:40. Kern and Pate decide to admit Grant,
who invested land valued at P15,000 for a 20% capital interest in the partnership.
Grant’s capital account should be credited for:

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2. At December 31, RR and SH are partners with capital balances of P40,000 and P20,000,
and they share pro@ts and losses in the ratio of 2:1, respectively. On this date, PP invests
P17,000 in cash for a one-@fth interest in the capital and pro@t of the new partnership.
Assuming that the bonus method is used, how much should be credited to PP’s capital
account on December 31?
3. The capital balance for Messalina is P210,000 and for Romulus is P140,000. These two
partners share pro@ts and losses 60 percent (Messalina) and 40 percent (Romulus).
Claudius invests P100,000 in cash in the partnership for a 20 percent ownership. The
bonus method will be used. What are the capital balances for Messalina, Romulus, and
Claudius after this investment is recorded?
4. Jesse, Joseph, and Leslie are partners with capital accounts of P70,000, P120,000, and
P90,000, respectively. The partnership share pro@ts and losses 45%, 30%, and 25%,
respectively. They are considering allowing Hans to join the partnership by investing
directly into the partnership. The partners intend to revalue the assets before Hans’
admission. Neither bonus nor goodwill are required. If the asset’s market value exceeds
book value P150,000, how much will Hans invest to acquire a 20% equity interest in the
partnership?
5. Sandra and Joshua are partners. They have capital account balances of P250,000 and
P200,000, respectively, and they share pro@ts and losses 70/30. The partners are
considering admitting Judy as a new partner with a 25 percent equity interest for an
investment in the partnership of P180,000. Before admission, Sandra and Joshua will
revalue the partnership’s assets. If the net increase in the partnership’s assets is
P125,000, what will be the balance in Sandra’s capital account immediately before Judy’s
admission?
6. Kris and Mark are partners who share pro@ts and losses 70/30. They have capital
account balances of P170,000 and P260,000, respectively at the date they admit Frank
into the partnership. Frank invests P120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the peso amount of the reduction to
Kris’ capital account at the date of admission?
7. The following balance sheet information is for the partnership of Abel, Boule, and
Cayman:
Cash P 210,000 Liabilities P 510,000
Other assets 1,500,000 Abele, Capital (40%) 300,000
Boule, Capital (40%) 480,000
Cayman, Capital (20%) 420,000
P1,710,000 P1,710,000
Figures shown parenthetically reeect agreed pro@t and loss sharing percentages. If
assets on the initial balance sheet are fairly valued, Abele and Boule consent and Dann
pays Cayman P225,000 for his interest; the revised capital balances of the partners
would be:
8. Pink desires to purchase a one-fourth capital and pro@t and loss interest in the
partnership of Brown, Greene, and Red. The three partners agree to sell Pink one-fourth
of their respective capital and pro@t and loss interests in exchange for a total payment of
P100,000. The payment is made directly to the individual partners. The capital accounts
and the respective percentage interests in pro@ts and losses immediately before the sale
to Pink follow
Capital % Interests in
Accounts Pro@ts and Losses
Brown P168,000 50%
Greene 104,000 35
Red 48,000 15
Total P320,000
All other assets and liabilities are fairly valued and implied goodwill is to be recorded
prior to the acquisition by Pink. Immediately after Pink’s acquisition, what should be the
capital balances of Brown, Greene, and Red, respectively?

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9. Donkey desires to purchase a one-fourth capital and pro@t and loss interest in the
partnership of Shrek, Fiona, and Mugn. The three partners agree to sell Donkey one-
fourth of their respective capital and pro@t and loss interests in exchange for a total
payment of P125,000. The payment is made directly to the individual partners. The
capital accounts and the respective percentage interests in pro@ts and losses
immediately before the sale to Donkey follow
Capital % Interests in
Accounts Pro@ts and Losses
Shrek P210,000 60%
Fiona 130,000 25
Mugn 60,000 15
Total P400,000
All other assets and liabilities are fairly valued by Donkey. Immediately after Donkey’s
acquisition, what should be the capital balances of Shrek, Fiona, and Mugn,
respectively?
10. The partnership of Gilligan, Skipper, and Ginger had total capital of P570,000 on
December 31, 20x4 as follows:
Gilligan, Capital (30%) P180,000
Skipper, Capital (45%) 255,000
Ginger, Capital (25%) 135,000
Total P570,000
Pro@t and loss sharing percentages are shown in parentheses. The partnership has no
liabilities. If Mary Ann purchases a 25 percent interest from each of the old partners for a
total payment of P270,000 directly to the old partners:
a. total partnership net assets can logically be revalued to P1,080,000 on the basis of
the price paid by Mary Ann.
b. the payment of Mary Ann does not constitute a basis for revaluation of partnership
net assets because the capital and income interests of the old partnership were not
aligned.
c. total capital of the new partnership should be P760,000.
d. total capital of the new partnership will be P840,000 assuming no revaluation.
11. Assume the same data in No. 10, except that Mary Ann became a partner by investing
P150,000 in the Gilligan, Skipper, and Ginger partnership for a 25 percent interest in
capital and pro@ts and that partnership net assets are not revalued. Mary Ann’s capital
credit using the bonus method should be
12. Assume the same data in No. 10, except that Professor became a partner by investing
P190,000 in the Gilligan, Skipper, and Ginger partnership for a 25 percent interest in the
capital and pro@ts, and the partnership assets are revalued. Under this assumption
a. Professor’s capital credit will be P150,000.
b. Gilligan’s capital will be increased to P147,000.
c. total partnership capital after Professor’s admission to the partnership will be
P600,000.
d. net assets of the partnership will increase by P190,000, including Professor’s interest.
13. The balance sheet for the partnership of Nina, Pinta, and Santa Maria at January 1, 20x4
follows. The partners share pro@ts and losses in the ratio of 3:2:5, respectively.
Assets at cost P480,000
Liabilities P135,000
Nina, capital 75,000
Pinta, capital 120,000
Santa Maria, capital 150,000
P480,000

Nina is retiring from the partnership. By mutual agreement, the assets are to be adjusted
to their fair value of P540,000 at January 1, 20x4. Pinta and Santa Maria agree that the
partnership will pay Nina P135,000 cash for hers her partnership interest. There is no

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goodwill is to be recorded. What is the balance of Pinta’s capital account after Nina’s
retirement?
14. Alf and Ben, partners in Alf & Ben Partnership who share net income and losses equally,
had capital account balances of P40,000 and P60,000, respectively, on September 25,
20x4, on which date the following journal entry was prepared for the partnership:
Cash 62,000
Goodwill [(P62,000 x 3)  (P100,000 + P62,000)] 24,000
Alf, Capital (P24,000 x 0.50) 12,000
Ben, Capital (P24,000 x 0.50) 12,000
Cam, Capital 62,000
To record investment by Cam for a one-third interest in capital,
with goodwill of P24,000 divided equally between Alf and Ben.
The foregoing journal entry:
a. Is acceptable
b. Should be replaced by an entry allocating an P8,000 bonus equally to Alf and to Ben
c. Should be replaced by an entry allocating a P24,000 bonus equally to Alf and to Ben
d. Should not reeect either a bonus or goodwill
15. Michelle and Steve are partners in a local business. They currently share pro@ts and
losses 60/40 and have capital account balances of P150,000 and P200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a P120,000 investment. Assuming that goodwill is
to be recognized, which partner(s) are contributing the goodwill?
a. Both new and existing partners are contributing goodwill
b. New partner is contributing goodwill
c. Existing partners are contributing goodwill
d. There is not enough information to answer this question
16. Assuming the same data in No. 15, what amount of goodwill would be disclosed on the
partnership balance sheet immediately after Jacob is admitted?
17. Susan and David are partners in a local business. They currently share pro@ts and
losses 45/55 and have capital account balances of P250,000 and P300,000, respectively.
They are considering admitting Jane to the partnership. She will receive a 25 percent
equity interest in the partnership for a P225,000 investment. Assuming that goodwill
(revaluation) is to be recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
d. There is not enough information to answer this question
18. Assuming the same information in No. 17, what amount of goodwill would be disclosed
on the partnership balance sheet immediately after Jane is admitted?
19 At year-end, the Cisco partnership has the following capital balances:
. Montana, P 130,000
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rice, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,000
..
Craig, 80,000
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taylor, 70,000
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Pro@ts and losses are split on a 3:3:2:2 basis, respectively. Craig decides to leave the
partnership and is paid P90,000 from the business based on the original contractual
agreement. If the goodwill (revaluation) method is to be applied, what is the balance of
Montana’s capital account after Craig withdraws?

20. When Elsa Martin withdrew from Lewis, Martin, Noll & Ordway Partnership on January

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31, 20x4, she was paid P80,000, although her capital account balance was only P60,000.
The four partners shared net income and losses equally. The journal entry of the
partnership to record Martin's withdrawal on January 31, 20x4, preferably should include
a debit of:
a. P6,667 to Lewis, Capital c. P80,000 to Goodwill
b. P20,000 to Goodwill d. P80,000 to Martin, Drawing
21. Harry, Susan, and Walter are partners who share pro@ts and losses 35, 40, and 25
percent, respectively. The partners have capital account balances of P80,000, P110,000,
and P55,000, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing all of the partnership’s assets, an increase of
P200,000. If Susan and Walter acquire Harry’s equity, what will be the amount of
Susan’s capital on the partnership’s balance sheet immediately after Harry’s withdrawal,
rounded to the nearest peso?
22. Assuming the same information in No. 21, what will be the amount of total capital on the
partnership’s balance sheet immediately after Harry’s withdrawal?
23. Frank, George, and Scott are partners with capital accounts of P160,000, P120,000, and
P210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Scott’s ownership interest for P250,000. The pro@t and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
Frank’s capital account be reduced if the bonus method is applied for the withdrawal?
24. Assuming the same information in No. 23, what will be the balance in Frank’s capital
account if the bonus method is applied for the withdrawal?
25. Bob, Claire, and Jack are partners who share pro@ts and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
P150,000, P135,000, and P225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is P22,500. Assuming that Bob’s equity
is purchased by a new partner (Deborah) approved by Claire and Jack, what is the
amount of Deborah’s initial capital account?
26. Using the same information in No. 25, except that Bob’s equity is purchased by Claire
(60 percent) and Jack (40 percent), what is the amount of Claire’s capital account at the
date of Bob’s withdrawal?
Use the following information for questions 27 to 29:
Donald, Anne and Todd have the following capital balances; P40,000, P50,000 and P30,000
respectively. The partners share pro@ts and losses 20%, 40% and 40% respectively.
27. Anne retires and is paid P80,000 based on the terms of the original partnership
agreement. If the goodwill (revaluation of asset) method is used, what is the capital of
the remaining partners?
28. Anne retires and is paid P80,000 based on the terms of the original partnership
agreement. If the bonus method is used, what is the capital of the remaining partners?
29. What is the total partnership capital after Anne retires receiving P80,000 and using the
bonus method?
30. XX and YY are partners who have capital of P600,000 and P480,000 sharing pro@ts in
the ratio of 3:2. ZZ is admitted as a partner upon investing P500,000 for 25% interests in
the @rm, pro@ts are to be allocated equally. Given the choice between goodwill and
bonus method, ZZ will prefer bonus or goodwill with a gain amounting to or be
indiqerent.
31. XX and YY are partners who have capital of P600,000 and P480,000 sharing pro@ts in
the ratio of 3:2. ZZ is admitted as a partner upon investing P500,000 for 25% interests in
the @rm, while the other partners continue to participate pro@ts and losses in their

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original ratio. Given the choice between goodwill and bonus method, ZZ will prefer
bonus or goodwill with a gain amounting to or be indiqerent. :
32. Neal, Palmer, and Ruppe are partners in a real estate company. Their respective capital
balances and pro@t-sharing ratios are as follows:
Partners Capital Balance Pro@t-sharing ratio
Neal . . . . . . . . . . . . . . . . . . . . . . . . . P 250,000 4
.
Palmer . . . . . . . . . . . . . . . . . . . . . . . 150,000 3
.
Ruppe . . . . . . . . . . . . . . . . . . . . . . . 100,000 3
.
Neal wishes to withdraw from the partnership on January 1, 2009, Palmer and Ruppe
have agreed to pay Neal P300,000 from the partnership assets for his 50% capital
interest. This settlement price was based on such factors as capital investments, sales
performance, and earning capacity. Palmer and Ruppe must decide whether to use the
bonus method or the goodwill method (recognize total goodwill implied by the payment)
to record the withdrawal, and they wish to compare the results of using the two
methods. The new pro@t and loss ratio is in the same relative ratio as that existing before
Neal’s withdrawal. Given the choice between goodwill and bonus method or indiqerent,
Palmer will choose:
33. Using the same information in No. 32, except that the pro@t and loss ratio is changed to
3:2. Palmer is particularly interested in these results, because he feels that his present
contribution of time and capital is better reeected by this new pro@t and loss ratio. Given
the choice between goodwill and bonus method or indiqerent, Palmer will choose:
34. JJ & KK partnership’s balance sheet at December 31, 20x4, reported the following:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 100,000
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
JJ, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
KK, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
On January 2, 20x4, JJ and KK dissolved their partnership and transferred all assets and
liabilities to a newly-formed corporation. At the date of incorporation, the fair value of the
new assets was P12,000 more than the carrying amount on the partnership’s book, of
which P7,000 was assigned to intangible assets and P5,000 was assigned to goodwill. JJ
and KK were each issued P5,000 shares of the corporation’s P1 par value common stock.
Immediately following incorporation, additional paid-in capital in excess of par should be
credited for:
35.The balance sheet of Sade & Tipp LLP on April 30, 2006, was as follows:

Cash P 8,700Notes payable P10,000

Trade accounts receivable 13,250Trade accounts payable 9,800
Inventories 21,760Sade, Capital 25,110
Equipment 32,400Tipp, Capital 20,000
Less: Accumulated
depreciation (11,200)
______
Total P 64,910Total P64,910

The partnership was converted to S & T Corporation, with new accounting records. Sade
and Tipp received a total of 10,000 shares of P1 par common stock in exchange for the
net assets of the partnership. The accounting records of the partnership had been
maintained in accordance with generally accepted accounting principles, except that an
allowance for doubtful accounts of P800 had not been provided. The current fair values
of the inventories and equipment were P28,000 and P35,000, respectively. Sade and Tipp
shared net income and losses in a 3:2 ratio, respectively.

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Immediately following incorporation, additional paid-in capital in excess of par should be

credited for:

Solu%ons
Mul%ple Choice Theories
1. a
2. d
3. a
4. b
5. c
6. d
7. c
8. a
9. d

Problems
1. P19,000
2.
PP invests P17,000; no goodwill/revaluation recorded:
Investment in partnership P 17,000
New partner's proportionate book value
[(P60,000 + P17,000) x 1/5] (15,400)
Diqerence (investment > book value) P 1,600

Method: Bonus to prior/old partners

PP's capital credit = P77,000 x 1/5
= P15,400

3. Messalina, P216,000; Romulus, P144,000 and Claudius, P90,000

Total capital is P450,000 (P210,000 + P140,000 + P100,000) after the new investment.
As Claudius's portion is to be 20 percent, the new capital balance would be P90,000
(P450,000 × 20%). Since P100,000 was paid, a bonus of P10,000 is being given to the
two original partners based on their pro@t and loss ratio: Messalina – P6,000 (60%) and
Romulus – P4,000 (40%). The increase raises Messalina's capital balance from P210,000
to P216,000 and Romulus's capital balance from P140,000 to P144,000.

4. P107,500 = [(P70,000 + P120,000 + P90,000 + P150,000)/.80](.20)

5. P337,500 = P250,000 + (P125,000 x .70)
6. P121,250 = [P120,000 - (P170,000 + P260,000 + P120,000)(.25)](.70)

7. Abele, P300,000; Boule, P480,000; Dann, P420,000

8. Brown, P156,000; Green, P99,000; Red, P45,000

9. Shrek, P195,000; Fiona, P123,750; Mugn, P56,250

10. Total partnership net assets can logically be revalued to P1,080,000 on the basis of the
price paid by Mary Ann.

11. P180,000

12. Net assets of the partnership will increase by P190,000, including Professor’s interest.

13. P120,000

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14. b
15. c - (P150,000 + P200,000 + P120,000)(.20) = P94,000

16. P130,000
(P150,000 + P200,000 + P120,000)(.20) = P94,000, goodwill to existing partners
P120,000 + P0 = .2(P150,000 + $200,000 + P120,000 + goodwill)
P120,000 = P94,000 + .2 goodwill
P26,000 = .2 goodwill
Goodwill = P130,000

17. b
(P250,000 + P300,000 + P225,000)(.25) = P193,750

18. P125,000
(P250,000 + P300,000 + P225,000)(.25) = P193,750, goodwill to existing partners
P225,000 + P0 = .25 (P250,000 + P300,000 + P225,000 + goodwill)
P225,000 = P193,750 + .25 goodwill
P31,250 = .25 goodwill
Goodwill = P125,000

19. P145,000
Craig receives an additional P10,000. Since Craig is assigned 20 percent of all pro@ts
and losses, this allocation indicates total goodwill of P50,000.

20% of Goodwill = P10,000

.20 G = P10,000
G = P10,000/.20
G = P50,000

Montana is assigned 30% of all pro@ts and losses and would, therefore, record P15,000 of
this goodwill, an entry that raises this partner's capital balance from P130,000 to
P145,000.

20. a – [(P80,000  P60,000)  3 + P6,667]

21. Susan’s capital account balance cannot be determined from the information given
22. P445,000 = P80,000 + P110,000 + P55,000 + P200,000
23. P24,000 = (P250,000 - P210,000)(45/75)
24. P136,000 = P160,000 - (P250,000 - 210,000)(45/75)
25. P172,500 = P150,000 + (P75,000 x .3)
26. P257,250 = P135,000 + (P75,000 x .25) + [P150,000 + (P75,000 x .30)](.60)

27. Donald, P55,000; Todd, P60,000

Anne receives an additional P30,000 above her capital balance. Since she is assigned
40 percent of all pro@ts and losses, this extra allocation indicates total goodwill of
P75,000, which must be split among all partners. 40% of Goodwill = P30,000

Amount paid P 80,000

Less: Book value of Anne (40%) 50,000
Partial goodwill/revaluation adjustment P 30,000
Capitalized at 40%
Goodwill/revaluation P 75,000

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 lOMoARcPSD|12864551

Goodwill/assets 75,000
Donald (20%) 15,000
Anne (40%) 30,000
Todd (40%) 30,000

Anne (P50,000 + P30,000) 80,000

Cash 80,000

Donald: P40,000 + P15,000 = P55,000

Todd: PP30,000 + P30,000 = P60,000

28. Donald, P30,000; Todd, P10,000

The P30,000 bonus is deducted from the remaining partners according to their relative
pro@t and loss ratio. Donald = 20% and Todd = 40% which is a 1/3, 2/3 split.

Anne 50,000
Donald (P30,000 x 2/6) 10,000
Todd (P30,000 x 4/6) 20,000
Cash 80,000

Therefore: Donald: P40,000 – P10,000 = P30,000; Todd: P30,000 – P20,000 = P10,000

29. P40,000 - refer to No. 28 (P30,000 + P10,000 = P40,000)

30. Prefer bonus method due to ZZ’s gain of P35,000
Goodwill method: Using the capital of new partner as a basis for computing total agreed
capital.

Total agreed capital (P500,000 ÷ 25%) P2,000,000

Less: Total contributed capital (P600,000 + P480,000 + P500,000) 1,580,000
Goodwill to old partners P 420,000

Therefore, the capital balances after admission of ZZ:

XX: [P600,000 + (P420,000 x 3/5)] P852,000
YY: [P480,000 + (P420,000 x 2/5)] 648,000
ZZ: 500,000
Total agreed capital P2,000,000

Bonus Method:
Total agreed capital (P600,000 + P480,000)( P500,000) P 1,580,000
Multiplied by; ZZ’s capital interest 25%
Agreed capital to be credited to ZZ P 395,000
Contributed / invested capital of ZZ 500,000
Bonus to XX and YY (old partners) P 105,000

The bonus would be added to XX and YY:

XX: [P600,000 + (P105,000 x 3/5)] P 663,000
YY: [P480,000 + (P105,000 x 2/5)] 522,000
ZZ 395,000
Total agreed capital P 1,580,000

For the purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: if goodwill is found to exist:

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 lOMoARcPSD|12864551

XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Bonus Method is used P 663,000 P 522,000 P 395,000
Add: Goodwill (allocated equally) 140,000 140,000 140,000
P803,000 P 662,000 P 535,000
(Gain) Loss – Bonus method P 49,000 P (140,000) P 35,000

Alternative 2: If goodwill is not realized and written-oq as a loss:

XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Less: Write-oq of goodwill 140,000 140,000 140,000
(equally)
P 712,000 P 508,000 P 360,000
Bonus Method is used 663,000 522,000 395,000
(Gain) Loss – Bonus method P 49,000 P (140,000) P 35,000

Note: The bonus method adheres to the historical cost concept and it is often used in
accounting practice. It is objective that is establishes total capital of the new partnership at
an amount based on actual consideration received from the new partner. The bonus method
indirectly acknowledges the existence of goodwill by giving a bonus to either old or new
partners.

The goodwill method results in the recognition of an asset implied by a transaction rather
than recognizing an asset actually purchased. Historically, goodwill has been recognized
only when purchased so that a more objective measure of its value is established. Therefore,
opponents of the goodwill method contend that goodwill is not determined objectively and
other factors may have ineuenced the amount of investment required from the new
partners.

Although either method can be used in achieving the required interest for the new partner,
the two methods oqer the same ultimate results only:
1. When the incoming partner’s percentage share of pro@t and loss and percentage
interest in assets upon admission are equal, and
2. When the former partners continue to share pro@ts and losses between themselves in
the original ratio.

If these conditions are not fully met, however, results will be diqerent.

31. Be indiqerent for the goodwill (revaluation) or bonus methods are the same.
Goodwill method: Using the capital of new partner as a basis for computing total agreed
capital.
Total agreed capital (P500,000 ÷ 25%) P2,000,000
Less: Total contributed capital (P600,000 + P480,000 + P500,000) 1,580,000
Goodwill to old partners P 420,000

Therefore, the capital balances after admission of ZZ:

XX: [P600,000 + (P420,000 x 3/5)] P852,000
YY: [P480,000 + (P420,000 x 2/5)] 648,000
ZZ: 500,000
Total agreed capital P2,000,000

Bonus Method:
Total agreed capital (P600,000 + P480,000)( P500,000) P 1,580,000
Multiplied by; ZZ’s capital interest 25%

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 lOMoARcPSD|12864551

Agreed capital to be credited to ZZ P 395,000

Contributed / invested capital of ZZ 500,000
Bonus to XX and YY (old partners) P 105,000
The bonus would be added to XX and YY:
XX: [P600,000 + (P105,000 x 3/5)] P 663,000
YY: [P480,000 + (P105,000 x 2/5)] 522,000
ZZ 395,000
Total agreed capital P 1,580,000

For the purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: if goodwill is found to exist:
XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Bonus Method is used P 663,000 P 522,000 P 395,000
Add: Goodwill* (45%: 30%:25%) 189,000 126,000 105,000
P852,000 P 648,000 P 500,000
(Gain) Loss – Bonus method P 0 P 0 P 0

*XX: 75% x 3/5 = 45%; YY: 75% x 2/5 = 30%

Alternative 2: If goodwill is not realized and written-oq as a loss:

XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Less: Write-oq of goodwill* 189,000 126,000 105,000
P 633,000 P 522,000 P 395,000
Bonus Method is used 663,000 522,000 395,000
(Gain) Loss – Bonus method P 0 P 0 P 0

32. Be indiqerent for the goodwill (revaluation) or bonus methods are the same.
*Goodwill (revaluation) method:
Amount paid P300,000
Less: Book value of interest – Neal (40%)) 250,000
Partial goodwill/revaluation adjustment P 50,000
Capitalized at 40%
Goodwill/revaluation P125,000

Neal Palmer Ruppe

Capital balances before withdrawal 250,000 150,000 100,000
Allocate goodwill* 50,000 37,500 37,500
300,000 187,500 137,500
Withdrawal of Neal (300,000) _______ _______
187,500 137,500
Write-oq Impaired Goodwill (125,000  0.50) _______ (62,500) (62,500)
0 125,000 75,000
Capital balances using the bonus method** 125,000 75,000

33. Prefer bonus method due to Palmer’s gain of P12,500

Neal Palmer Ruppe
Capital balances before withdrawal 250,000 150,000 100,000
Allocation of goodwill* 50,000 37,500 37,500
300,000 187,500 137,500
Withdrawal of Neal (300,000) _______ _______
-0- 187,500 137,500
Write-oq Impaired Goodwill

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 lOMoARcPSD|12864551

125,000  0.60 (75,000)

125,000  0.40 ________ _______ (50,000)
-0- 112,500 87,500
Capital balances using the bonus method** 125,000 75,000
(Gain) Loss – Bonus method 0 12,500 12,500

**The excess paid to Neal of P50,000 would have been divided equally between Palmer
and Ruppe as follows:
Palmer Ruppe

Capital balance before withdraw 150,000 100,000

Allocation of excess paid to Neal (25,000) (25,000)
Capital balance using bonus method 125,000 75,000

34. P82,000
Carrying value of net assets (P100,000 – P20,000)………………………P 80,000
Add: Adjustments to reeect fair value…………………………………… 12,000
Fair value of net assets………………………………………………………. P 92,000
Less: Common stock, P1 par (5,000 shares x 2 x P1……………………... 10,000
Additional paid-in capital…………………………………………………… P82,000

35. P54,350
Carrying value of net assets (P25,110 + P20,000))……………………… P 45,110
Add: Adjustments to reeect fair value
(P28,000 – P21,760) – P800 + [(P35,000 – (P32,400 – P11,200)]… 19,240
Fair value of net assets………………………………………………………. P 64,350
Less: Common stock, P1 par (10,000 shares x P1)……………………... 10,000
Additional paid-in capital…………………………………………………… P 54,350
Note: Refer to Problem XII for journal entries for further analysis

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 1. SLM Manufacturing Corp. consigned ten refrigerators to JAL Co. These refrigerators had a cost of
P9,000 each. Freight on the shipment was paid by SLM in the amount of P6,000. JAL submitted an
account sales stating that it had sold six refrigerators and remitted the P68,250 balance due to SLM
after deducting 15% commission, P4,500 marketing expenses, P3,000 delivery and installation of items
sold, and P750 cartage cost paid upon receipt of consignment.

● The consignee sold the six refrigerators for a total of _______.

90000

● The commission earned on the sale of the six refrigerators by JAL amounted to _______.
13500

● The consignor’s net profit from the sale of the consigned goods was _______.
10950

2. Data pertaining to the consigned goods by QQQ, Inc. appear below:

Jan. 3 Shipped 12 sets 8,400

Freight on consigned goods 720

Jan. 31 Sales, 9 sets 10,800

Charges by the consignee:

Delivery expense 450

Commission (20%) 2,160

Advertising 500

● The amount of the consignee remittance was _______.

7690

● The net income realized by QQQ, Inc. on the consignment during the month was _______.
850

● The inventory of the consigned goods was _______.

2280

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 1. The MMM Corp. delivered 150 bath water heaters to OOO Company on consignment. These water
heaters cost P900 each and are advertised to sell at P1,500 each. The consignee is to be allowed a
commission of 15% of the selling price. The agreement for the consignment stated that MMM Corp.
would draw a sight draft on the consignee for the 60% of the cost of the water heaters and advance
shall be recovered periodically by monthly deductions (in proportions to units sold) from the remittances
which accompany the account sales. All expenses of the consignee are to be deducted monthly as
incurred.

The consignee rendered an account sales at the end of the first month showing among others the
following information: advertising, P2,250; delivery expense, P1,125; and commission, P3,375.

● The consignment profit (loss) of MMM Corp. is _______.

2250

● The number of units sold by OOO Company during the first month is _______.
15

● The amount remitted by OOO Company to MMM Corp. for the first month is _______.
7650

2. The ELM Co. consigned ten sala sets to a furniture dealer. Manufacturing cost is P4,000 per set. At the
end of one month, the dealer reported the sale of four sets at P7,000 each and remitted the net sales
proceeds after deducting the following: 20% commission on sets sold and P1,600 freight paid upon
receipt of the ten sets.

● The balance of the consignor’s inventory relative to the consigned goods is _______.
24960

● Cash remitted to the consignor was _______.

20800

● Net profit on consignment sales was _______.

5760

● The entry on the books of ELM to record the shipment assuming consignment profits are
calculated separately includes
A credit to merchandise shipment on consignment of 40,000

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 FORMATIVE ASSESSMENT
1. On November 30, Northup Co. consigned 90 freezers to Watsons Co. for sale at P1,600 each and paid
P1,200 for transportation costs. A report of sales was received on December 30 from Watsons Co.
reporting the sale of 20 freezers, together with a remittance of P27,200 balance due. The remittance
was net of the agreed 15% commission.

● The consignment sales revenue recognized by Northup Co. in December is 32000

● The consignment sales revenue recognized by Northup Co. in November is 0

2. On May 1, 2020, TV Inc. consigned 80 DVD players to ED Inc. The DVD player costs P270. Freight on
the shipment paid by ED Inc. was P600. On July 10, TV Inc. received an account sales and P12,900
from ED Inc. Thirty DVD players had been sold and the following expenses were deducted:

Freight 600

Commission (20% of the sales price) ?

Advertising 390

Delivery 210

● The inventory on consignment to be reported by the consignor Inc. is 13875

● The total sales price of the DVDs sold by ED Inc. is a 17625

3. On October 5, 2020, the PPG Co. consigned 30 computer units costing P8,000 each to Pampanga Co.
The units were sold to be on either cash or credit basis at a commission of 15% of net sales. The
consignor paid freight of P1,800 on the shipment. On November 11, the consignee received the goods.
Sales were made as follows:

October 15: 10 units for cash at P13,000 each

October 28: 12 units on account as P14,000 each

On October 31, 2020, collections on account amounted to P95,000, and an allowance of P2,000 was
given to a charge customer for a defective unit. On November 15, 2020, a receivable balance of P7,000
was determined to be uncollectible. On December 21, 2020, the consignee made the proper
remittance.

● The amount due from Pampanga Co. is 244600

● The cost of inventory on consignment is 64480
● The consignment profit is 67280
 FORMATIVE ASSESSMENT
1. On May 1, RR Co. ships 5 of its appliances to SS Co. on consignment. The cost of the appliance is
P155 per unit. The consignor paid shipping costs totaling P50. Each unit is to be sold at P250 payable
P50 in the month of purchase and P10 per month thereafter. The consignee is entitled to 20% of all
amount collected on consignment sales.

SS Co. was able to sell 3 appliances in May and 1 in June. Regular monthly collections by the
consignee and appropriate cash remittances have been made to the consignor at the end of each
month.

● The total amount remitted to the consignor as of June is 184

● The profit on consignment is 140
● The cost of inventory on consignment is 165

2. AL Co. consigned 5 calculators, with cost of P800 each, to OO Co. which was to sell these goods for a
commission of 15% of selling price. The AL Co. paid shipping costs of P200 on the shipment.
Correspondingly, OO Co. paid P320 on the freight of the shipment.

On the last day of the year, OO Co. reported that it had sold 3 of the calculators, 2 for cash at P1,500
each and 1 on credit at P1,800, of which 25% was collected as down payment. OO Co. remitted all the
cash due.

● The amount of inventory on consignment of AL Co. is 1808

● The amount of cash remitted by OO Co. is 2410
● The consignment profit or loss on consignment is 1368

3. NN Co. consigns technical pens to retailers, debiting AR for the retail sales price and crediting Sales.
All costs related to the consigned pens are debited to expenses of the current accounting period. Net
remittances of the consignees are credited to AR. In December, 800 technical pens costing P60 each
and retailing for P100 a unit were consigned to SS Store. Freight cost of P800 was debited to freight
Expense by the consignor. On December 31, SS Store remitted P35,505 to NN Co. in full settlement of
the balance due. AR was credited for this amount. The consignee deducted to a commission of P10 on
each technical pen and P45 for each delivery expense.

● The number of technical pens sold by SS Store is 395

 ENABLING ASSESSMENT
1. CCB Industries sells merchandise on a consignment basis to dealers. Shipping costs are chargeable to
CCB, although in some cases the dealer pays them. The selling price of the merchandise averages
25% above cost of the merchandise exclusive of freight. The dealer is paid a 10% commission on the
sales price for all sales made. All dealer sales are made on a cash basis. The following consignment
sales activities occurred during 2020:

Manufacturing cost of goods shipped on consignment 500,000

Freight cost incurred:
Paid by CCB 30,000
Paid by dealer 10,000
Set price of merchandise sold by dealer 420,000
Payment made by dealers after deducting commission
And freight costs 278,000

● The consignment profit is

15120

● The amount of cost of goods sold is

362880

● The cost of inventory on consignment that should appear in the statement of financial position of
CCB at the end of accounting period is
177120

● The amount of consignee receivable at the end of the year is

90000

2. Grid Works Co. consigned 5 dozens of stainless chairs to Contemporary Furniture CO. on April 1 of the
current year. Each chair costs 120 and the consignor paid 600 for the shipment to the consignee. On
August 15, 36 chairs were already sold and Contemporary rendered an account sales and remitted the
balance due to the consignor in the amount of 5,580 after deducting the following expenses:

Commission (15% on sales)

Selling expenses 360
Delivery expenses 180
Freight of 12 defective chairs returned 255

● The total sales price is (NOTE: TWO CASES)

7500

● The cost of inventory on consignment is (NOTE: TWO CASES)

1560

● The profit on consignment is (NOTE: TWO CASES)

780
 ENABLING ASSESSMENT
1. Grid Works Co. consigned 5 dozens of stainless chairs to Contemporary Furniture CO. on April 1 of the
current year. Each chair costs 120 and the consignor paid 600 for the shipment to the consignee. On
August 15, 36 chairs were already sold and Contemporary rendered an account sales and remitted the
balance due to the consignor in the amount of 5,580 after deducting the following expenses:

Commission (15% on sales)

Selling expenses 360
Delivery expenses 180
(Walang freight on defective chairs)

● The profit on consignment is (NOTE: TWO CASES)

900

● The cost of inventory on consignment is (NOTE: TWO CASES)

3120

● The total sales price is (NOTE: TWO CASES)

7200

2. On October 1, 2021, the Big Heart Company consigned one hundred wall clocks to Double S Retailers,
Inc. Each wall clock had a cost of P150. Freight on the shipment was paid by Big Heart Company for
P200. On December 1, 2021, Double S submitted an account sales stating that it had sold sixty pieces
and it was remitting the P12,840 balance due. The remittance was net of the following deductions from
the sales price of the wall clocks sold:

Commission (20% of sales price) ?

Advertising 500
Delivery and installation charges 100

● The consignment profit is

3720

● The total sales price of the wall clocks sold by Double S Retailers, Inc. is
16800

● The cost of inventory on consignment is

6080
 ENABLING ASSESSMENT
1. CASE 1: WITHOUT DEFECTIVE UNITS

Cavite Town Center consigned 12 washing machines to Laguna Emporium. Each washing machine
costs 6,000 and the consignor paid 720 for the freight. The consignee rendered an account sales for
five units sold at 7,700 each and deducted the following items from the selling price.

Commission based on sales net of commission 10%

Marketing expense (based on commission) 10%
Delivery and installation per unit sold P30

● The net profit of the consignor is (NOTE: TWO CASES)

4200

CASE 2: WITH DEFECTIVE UNITS

Cavite Town Center consigned 12 washing machines to Laguna Emporium. Each washing machine
costs P6,000 and the consignor paid P720 for the freight. Subsequently, the consignee returned
one defective unit and rendered an account sales for five units sold at P7,700 each and deducted the
following items from the selling price:

Commission based on sales net of commission 10%

Marketing expense (based on commission) 10%
Delivery and installation per unit sold P30

● The net profit of the consignor is _______ (NOTE: TWO CASES)

4140

● The remittance of the consignee on the five washing machines sold is ____
34500

2. The CCM Corporation ships out Laser Discs and television sets to consignees, who are allowed
commission of 15% of the selling price on both types of merchandise. Consignees are also to be
reimbursed for expenses incurred in connection with the consignment shipments. On December 31, the
following information pertain to the consigned goods:

Cost of goods shipped to consignees:

Laser disc sets @ P12,000 180,000
TV sets @P90,000 216,000

Freight, handling and related expenses of shipment

Laser disc sets 5,400
TV sets 10,800

Return freight on TV sets due to defects, “collect” 1,080

Consignee’s remittances:
On total laser disc sets sold (net of commission,
P32,400 and cartage in, P1,800) 181,800
On 15 TV sets sold (net of commissions and
Installation costs of P2,700) 173,250

Cost of TV sets returned by consignee:

Because of defects 27,000
The account sales rendered by the consignees were accompanied by checks for correct amounts.

● The total inventoriable costs related to the goods still in the possession of consignee is
56700

● The profit or loss as of December 31, on the TV consignment is

29070

● The profit of loss as of December 31, on the laser discs consignment is

(3600)
 ENABLING ASSESSMENT
1. On December 1, 2020, CCN Corporation consigned 500 video players costing 600 per unit and retailing
for 1,000 per unit to CCO store. Freight cost of 5,500 were paid by the consignor. On December 20,
CCN Corp. sent a mechanic to CCO store to install safety devices on 200 players which have not been
sold. The costs of this alteration were parts from inventories 6,000, cash expenditure for labor 4,000.
CCN Corp thereafter increased the unit retail price to 1,100 for the remaining 200 players. On
December 31, the CCO store remitted 364,500 to CCN corp in full settlement to date after deducting a
commission of 10% of selling price on each player sold and 4,500 for delivering the players sold.

● The number of units sold is

400

● The value of the inventory on consignment to be reported on the statement of financial position
of the consignor is
66100

● The consignment profit is

115100

2. Assume the following information:

❖ Super Sale Inc sent 10 units of computer on consignment to We can Sell It Company. The unit
cost is P25,000 and the unit selling price is P40,000.
❖ Super Sale paid shipping costs of P2,500.
❖ We Can Sell It paid a reimbursable advertising cost of P10,000.
❖ Five computers were sold for P200,000.
❖ Commission of 10% of sales was given to We Can Sell It.
❖ We Can Sell It remitted amount due to Super Sale, Inc.

● Consignment profit is
43750

● The cost of inventory on consignment is

126250

3. On May 1, 2021, Subic Co. paid 5,000 for the insurance of consigned goods shipped to a consignee
and paid 7,000 for the freight. Additionally, Subic advanced 5,000 as part of the commission that will be
due when the consignee sells the goods. The consigned goods costs Subic 50,000 and will be sold at
60% above cost. . All goods were sold by the consignee at the end of the month. Remittance was made
net of 10% commission on sales.

● The total amount of inventory that Subic should report for the consigned goods on May 1, 2021
is
62000

● The consignment profit amounted to

10000

● The remittance amounted to

72000
 ENABLING ASSESSMENT
1. The Printex Manufacturing Company delivered 10 printers to Primeprint Company on consignment.
These printers cost 3,000 each and to be sold at 5,000 each. The Printex Manufacturing Company paid
shipment cost of 2,500. Primeprint company submitted an account sales stating that it had returned one
unit and was remitting 21,900. This amount represents the total amount due to printex manufacturing
company after deducting the following from the selling price of the printers sold:

Commission 20% of selling price

Advertising 1,000
Delivery and installation 600
Cartage on consigned goods 500

● The consignment profit is

2300

● The cost of inventory on consignment is

9900

2. On January 1, 2021, Best Electrical Shop received from Marion Trading 300 pieces of bread toasters,
Best was to sell this on consignment at 50% above cost price and will receive a 15% commission. Best
paid 2,000 for cartage. Marion Trading consequently increased the selling price of the remaining units
to 330 after Best sold 200 units. On January 31, Best remitted 64,980 after deducting the commission,
850 delivery expense and 2,000 cartage. The consigned goods cost Marion 200 per unit and 1,150 was
paid in shipping the goods to Best. Consignment expenses are reimbursable.

● The consignment profit on the sold units is

12250

● The value of inventory on consignment is

8420

● The number of units sold is

260
 ENABLING ASSESSMENT
1. The following information relate to the consigned goods of Papi Co. to Mami Co.

Merchandise shipped (10 units) P10,000

Shipping cost on the transfer of goods 400

from Papi to Mami

Sales (6 units) 12,000

Returns (2 units) 2,000

Charges to Consignee:

Freight in 500

20% commission 2,400

Advertising 1,000

Freight for returns 200

● The cost of inventory on consigned goods is

2180

● The profit realized by the consignor on the consignment is

1680

● The amount of remittance by the consignee is

7900

2. Agbayani Co. consigned to Olano Marketing thee following merchandise:

Costs Freight

10 units of Samsung TV 30,000 1,000

5 units of LG DVD Player 27,500 500

One month after, the consignee rendered an account sales as follows:

TV Sets DVD Player

Number of units sold 7 3

Sales 28,,000 21,000

Less: Commission 2,800 2,100

Cartage In 350 150

Remittance 25,850 18,750

● The profit or loss on consignment on the Samsung TV sets is ______
3255

● The cost of inventory in the hands of the consignee is _______

20665
 ENABLING ASSESSMENT
1. In accounting for sales on consignment, sales revenue and the related cost of goods sold should be
recognized by the consignee when the goods are shipped to the third party
False

2. Transportation costs of consigned goods from the consignor to the consignee form part of the cost of
inventory of the consignee
False

3. The consignor recognizes revenue from a consignment sale when the consignee sells the goods to the
end customer.
True

4. Transportation costs of consigned goods from the consignee to end customers may be treated as
freight out by the consignor.
True

5. Prime Co enters into an agreement with Smile Co. whereby Prime undertakes to manufacture a product
for Smile Co. Prime shall be held liable for the quality of the manufactured product and its conformance
with the customer’s specified design. However, Prime does not have the expertise in manufacturing the
product so it enters into a contract with Sully Co. Sully Co. shall do the manufacturing in accordance
with the specifications of the customer.

If the entire manufacturing process is outsourced from Sully Co., Prime is acting as a
consignor.
False

6. In consignment sales, the consignee records a liability for the merchandise held on consignment.
False

7. Revenue is recognized by the consignor when it receives an account sales from the consignee.
True

8. Prime Co enters into an agreement with Smile Co. whereby Prime undertakes to manufacture a product
for Smile Co. Prime shall be held liable for the quality of the manufactured product and its conformance
with the customer’s specified design. However, Prime does not have the expertise in manufacturing the
product so it enters into a contract with Sully Co. Sully Co. shall do the manufacturing in accordance
with the specifications of the customer.

If only a portion of the manufacturing process is outsourced from Sully Co., Prime is acting not
as a consignor but as an agent.
False

9. Ted Suavillo is an artist who sells his work under consignment. Recently, he transferred a painting on
consignment to a local shop. Suavillo most likely should recognize revenue when the local shop sells
the painting.
True (NOTE: SEVERAL TED SUAVILLO CASES)

10. If another party is primarily responsible for fulfilling a contract with a customer, this may indicate that the
arrangement is a consignment contract.
True

11. Under a consignment arrangement, the consignor recognizes revenue equal to the gross amount of the
consideration in the contract.
 True

12. In a consignment arrangement, the consignor bears the inventory risk and credit risk.
True

13. Revenue from consignment arrangements is normally recognized by the consignor when the consigned
goods are delivered to the consignee.
False

14. Goods out on consignment are properly included in the consignee’s inventory.
False

15. Ted Suavillo is an artist who sells his work under consignment. Recently, he transferred a painting on
consignment to a local shop. After Suavillo transferred the painting to the local shop, the painting
should be counted in the local shop’s inventory because the painting is in its possession.
False (NOTE: SEVERAL TED SUAVILLO CASES)

16. The gross amount of sales price represents consignor’s revenue while commission represents
consignee’s revenue.
True
 ENABLING ASSESSMENT
1. On August 31, 2021, CTC Company consigned to Lovely Company ten ladies handbags which cost
CTC P300 each. CTC paid freight charge of P150 on the shipment.

On September 30, 2021, Lovely Company submitted an account sales reporting that is sold for cash
seven handbags for which it remitted P3,165 representing the net proceeds after deductions as follows:

Commission 20% of the selling price

Advertising placed upon receipt of shipment P120
Delivery of units sold 75

● The total sales price of the seven handbags sold is

4200

● The inventory of the unsold handbags at September 30, 2021 is valued at

945

● The consignor realized a net income on the consignment amounting to

960

2. The following items were included in Elma’s inventory account at December 31,2021:

Merchandise out on consignment at sales price (mark-up of 40% on sales price) P40000
Goods purchased, in transit, shipped FOB shipping point 36000
Goods held on consignment by Elma 27000

● Elma’s inventory account at December 31, 2021 be reduced by

43000

3. On December 31, 2021, Alps received 505 sweatshirts on consignment from Teds. Cost of each
sweatshirt was P80 each and was priced to sell at P100. Alps is entitled to a 10% commission. On
December 31, 5 sweatshirts remained on hand while 5 were returned for being defective.

● In its December 31,2021 balance sheet, Alps should report as payable for consigned goods in
the amount of
44550

4. In a consignment arrangement, revenue is recognized at the point in time when the consignment
arrangement is made
False

5. Consignment arrangement is a specialized marketing method whereby the consignee takes possession
of merchandise but little remains with the consignor
True

6. A consignment arrangement is implied when an entity has discretion in establishing prices for the other
party’s goods or service.
False

7. Goods on consignment should be included in the inventory of both the consignor and the consignee.
False
 FORMATIVE ASSESSMENT
1. On October 1, 2020, the NN Co. consigned 100 wall clocks to OO Co. Each wall clock had a cost of
P150. Freight on the shipment was paid by NN Company for P200. On December 1, 2020, OO Co.
submitted an account sales stating that it had sold 60 pieces and it was remitting the P12,840 balance
due. The remittance was net of the following deductions from the sales price of the wall clocks sold:

Commission (20% Sales Price) ?

Advertising 500

Delivery and Installation Charges 100

● The total sales price of the wall clocks sold by OO Co is 16800

● The cost of inventory on consignment is 6080

2. On August 5, 2020, Famous Furniture shipped 20 dining sets on consignment to Furniture Outlet Inc.
The cost of each dining was P350. The cost of shipping the dining sets amounted to P1,800 and was
paid for by Famous Furniture. On December 30, 2020, the consignee reported the sale of 15 dining
sets at P850 each. The consignee remitted payment for the amount due after deducting a 6%
commission, advertising expense of P300 and installation and set up costs of P390.

● The amount of cash received by Famous Furniture is 11295

● The total profit on units sold for the consignor is 4695

3. TS Trading consigned 100 beds costing P600 each to PP Co. The advertised selling price is P1,000
each bed. The consignment agreement provides that the consignee is to be allowed a commission of
15% of the selling price.

Furthermore, PP Company has to draw a sight draft for 60% of the cost of the beds: the advance is to
be recovered periodically by monthly deductions (in proportion to units sold) from the remittance which
accompany the account sales. All expenses of the consignee are to be deducted monthly as incurred.

At the end of the first month, the consignee rendered an account sales showing among others the
following charges: Commission, P2,250; Advertising, P1,500; and Delivery expense, P750.

● The number of unit sold by PP Co is 15

● The consignment profit of TS Trading is 1500
● The amount remitted to TS Trading for the month is 5100
 FORMATIVE ASSESSMENT
1. The CC Manufacturing Co. delivered 10 DVD players to DD Co. on consignment. Each DVD player
costs P3,000 each and is to be sold at P5,000 each. The CC Manufacturing Co. paid shipment costs of
P2,500. DD Co. submitted an account sales stating that it had returned one unit and was remitting
P21,900. This amount represents the total amount due to CC Manufacturing Co. after deducting the
following from the selling price of the DVD player sold:

Commission 20% of selling price

Advertising 1,000

Delivery and Installation 600

Cartage on consigned goods 500

● The profit or loss on consignment realized by CC Manufacturing Co. is 2300

● The number of units sold by DD Co. is 6
● The cost of inventory in the hands of DD Co. is 9900

2. On June 1, DD Co. shipped 25 DVD to BB View Store on consignment. The DVD is to be sold at an
advertised price of P200 per item. The cost of each DVD to the consignor is P100. The consignor paid
P75 to ship the merchandise. Commission is to be 25% of sales price. During the month, 2 DVD were
returned. On June 30, BB View Store remitted the amount due to consignor after deducting commission
of P400.

● The cost of inventory on consignment amounted to is 1545

● The amount remitted by BB View Store is 1200
● The consignment profit is 370

3. On May 15, 2020, AA Co. received a shipment of merchandise with a selling price of P15,000 from PC
Co. The consigned goods cost PC Co. P10,000 and freight charges of P120 had been paid to ship the
goods to AA Co.

The consignment arrangement provided for a sale of merchandise on credit with terms of 2/10, n/30.
The 15% commission is to be based on accounts receivable collected by the consignee. Cash
discounts taken by the customers, expenses applicable to goods on consignment and any cash
advanced to the company are deductible from the remittance by the consignee.

AA Co. advanced P6,000 to PC Company upon receipt of the shipment. An expense of P800 was paid
by AA. By June 20x4, 70% of the shipment had been sold, and 80% of the resulting accounts
receivable had been collected, all within the discount period. Remittance of the amount due was made
on June 30, 2020.

● The cost of unsold goods in the hands of AA is 3036

● The profit on consignment is 873
● The cash remitted by AA Co. is 172
 FORMATIVE ASSESSMENT
1. On October 1, 2020, the NN Co. consigned 100 wall clocks to OO Co. Each wall clock had a cost of
P150. Freight on the shipment was paid by NN Company for P200. On December 1, 2020, OO Co.
submitted an account sales stating that it had sold 60 pieces and it was remitting the P12,840 balance
due. The remittance was net of the following deductions from the sales price of the wall clocks sold:

Commission (20% Sales Price) ?

Advertising 500

Delivery and Installation Charges 100

● The total sales price of the wall clocks sold by OO Co is 16800

● The cost of inventory on consignment is 6080

2. On August 5, 2020, Famous Furniture shipped 20 dining sets on consignment to Furniture Outlet Inc.
The cost of each dining was P350. The cost of shipping the dining sets amounted to P1,800 and was
paid for by Famous Furniture. On December 30, 2020, the consignee reported the sale of 15 dining
sets at P850 each. The consignee remitted payment for the amount due after deducting a 6%
commission, advertising expense of P300 and installation and set up costs of P390.

● The amount of cash received by Famous Furniture is 11295

● The total profit on units sold for the consignor is 4695

3. TS Trading consigned 100 beds costing P600 each to PP Co. The advertised selling price is P1,000
each bed. The consignment agreement provides that the consignee is to be allowed a commission of
15% of the selling price.

Furthermore, PP Company has to draw a sight draft for 60% of the cost of the beds: the advance is to
be recovered periodically by monthly deductions (in proportion to units sold) from the remittance which
accompany the account sales. All expenses of the consignee are to be deducted monthly as incurred.

At the end of the first month, the consignee rendered an account sales showing among others the
following charges: Commission, P2,250; Advertising, P1,500; and Delivery expense, P750.

● The number of unit sold by PP Co is 15

● The consignment profit of TS Trading is 1500
● The amount remitted to TS Trading for the month is 5100

4. The CC Manufacturing Co. delivered 10 DVD players to DD Co. on consignment. Each DVD player
costs P3,000 each and is to be sold at P5,000 each. The CC Manufacturing Co. paid shipment costs of
P2,500. DD Co. submitted an account sales stating that it had returned one unit and was remitting
P21,900. This amount represents the total amount due to CC Manufacturing Co. after deducting the
following from the selling price of the DVD player sold:

Commission 20% of selling price

Advertising 1,000

Delivery and Installation 600

Cartage on consigned goods 500

● The profit or loss on consignment realized by CC Manufacturing Co. is 2300

 ● The number of units sold by DD Co. is 6
● The cost of inventory in the hands of DD Co. is 9900

5. On June 1, DD Co. shipped 25 DVD to BB View Store on consignment. The DVD is to be sold at an
advertised price of P200 per item. The cost of each DVD to the consignor is P100. The consignor paid
P75 to ship the merchandise. Commission is to be 25% of sales price. During the month, 2 DVD were
returned. On June 30, BB View Store remitted the amount due to consignor after deducting commission
of P400.

● The cost of inventory on consignment amounted to is 1545

● The amount remitted by BB View Store is 1200
● The consignment profit is 370

6. On May 15, 2020, AA Co. received a shipment of merchandise with a selling price of P15,000 from PC
Co. The consigned goods cost PC Co. P10,000 and freight charges of P120 had been paid to ship the
goods to AA Co.

The consignment arrangement provided for a sale of merchandise on credit with terms of 2/10, n/30.
The 15% commission is to be based on accounts receivable collected by the consignee. Cash
discounts taken by the customers, expenses applicable to goods on consignment and any cash
advanced to the company are deductible from the remittance by the consignee.

AA Co. advanced P6,000 to PC Company upon receipt of the shipment. An expense of P800 was paid
by AA. By June 20x4, 70% of the shipment had been sold, and 80% of the resulting accounts
receivable had been collected, all within the discount period. Remittance of the amount due was made
on June 30, 2020.

● The cost of unsold goods in the hands of AA is 3036

● The profit on consignment is 873
● The cash remitted by AA Co. is 172

7. On November 30, Northup Co. consigned 90 freezers to Watsons Co. for sale at P1,600 each and paid
P1,200 for transportation costs. A report of sales was received on December 30 from Watsons Co.
reporting the sale of 20 freezers, together with a remittance of P27,200 balance due. The remittance
was net of the agreed 15% commission.

● The consignment sales revenue recognized by Northup Co. in December is 32000

● The consignment sales revenue recognized by Northup Co. in November is 0

8. On May 1, 2020, TV Inc. consigned 80 DVD players to ED Inc. The DVD player costs P270. Freight on
the shipment paid by ED Inc. was P600. On July 10, TV Inc. received an account sales and P12,900
from ED Inc. Thirty DVD players had been sold and the following expenses were deducted:

Freight 600

Commission (20% of the sales price) ?

Advertising 390

Delivery 210

● The inventory on consignment to be reported by the consignor Inc. is 13875

● The total sales price of the DVDs sold by ED Inc. is a 17625

9. On October 5, 2020, the PPG Co. consigned 30 computer units costing P8,000 each to Pampanga Co.
The units were sold to be on either cash or credit basis at a commission of 15% of net sales. The
 consignor paid freight of P1,800 on the shipment. On November 11, the consignee received the goods.
Sales were made as follows:

October 15: 10 units for cash at P13,000 each

October 28: 12 units on account as P14,000 each

On October 31, 2020, collections on account amounted to P95,000, and an allowance of P2,000 was
given to a charge customer for a defective unit. On November 15, 2020, a receivable balance of P7,000
was determined to be uncollectible. On December 21, 2020, the consignee made the proper
remittance.

● The amount due from Pampanga Co. is 244600

● The cost of inventory on consignment is 64480
● The consignment profit is 67280

10. On May 1, RR Co. ships 5 of its appliances to SS Co. on consignment. The cost of the appliance is
P155 per unit. The consignor paid shipping costs totaling P50. Each unit is to be sold at P250 payable
P50 in the month of purchase and P10 per month thereafter. The consignee is entitled to 20% of all
amount collected on consignment sales.

SS Co. was able to sell 3 appliances in May and 1 in June. Regular monthly collections by the
consignee and appropriate cash remittances have been made to the consignor at the end of each
month.

● The total amount remitted to the consignor as of June is 184

● The profit on consignment is 140
● The cost of inventory on consignment is 165

11. AL Co. consigned 5 calculators, with cost of P800 each, to OO Co. which was to sell these goods for a
commission of 15% of selling price. The AL Co. paid shipping costs of P200 on the shipment.
Correspondingly, OO Co. paid P320 on the freight of the shipment.

On the last day of the year, OO Co. reported that it had sold 3 of the calculators, 2 for cash at P1,500
each and 1 on credit at P1,800, of which 25% was collected as down payment. OO Co. remitted all the
cash due.

● The amount of inventory on consignment of AL Co. is 1808

● The amount of cash remitted by OO Co. is 2410
● The consignment profit or loss on consignment is 1368

12. NN Co. consigns technical pens to retailers, debiting AR for the retail sales price and crediting Sales.
All costs related to the consigned pens are debited to expenses of the current accounting period. Net
remittances of the consignees are credited to AR. In December, 800 technical pens costing P60 each
and retailing for P100 a unit were consigned to SS Store. Freight cost of P800 was debited to freight
Expense by the consignor. On December 31, SS Store remitted P35,505 to NN Co. in full settlement of
the balance due. AR was credited for this amount. The consignee deducted to a commission of P10 on
each technical pen and P45 for each delivery expense.

● The number of technical pens sold by SS Store is 395

 FORMATIVE ASSESSMENT
1. When is a “Statement of Affairs” used?
In both liquidations and reorganizations

2. Typically, the estimated amount available for short-term prepayments in a statement of affairs, is:
Zero

3. What is defined as a condition in which a company is unable to meet debts as the debt matures?
Insolvency

4. Which of the following is first-ranked of the unsecured liabilities with priority in bankruptcy liquidation?
Administrative cost

5. Statement 1: Unsecured creditors whose claims are to be paid in full from the assets of a debtor in
bankruptcy liquidation before any cash is paid to other unsecured creditors are classified as unsecured
creditors having preference.
Statement 2: Creditors having priority under the Bankruptcy Law include creditors having security
interests collateralized by specific assets of the debtor.
Both statements are false.

6. In reporting a company that is to be liquidated, assets are shown at

Net realizable value

7. How are the liabilities classified in the Statement of Affairs?

Secured and unsecured

8. The document used by a trustee to report periodically on the status of fiduciary activities is called a/an
Statement of Realization and Liquidation

9. Statement 1: Creditors having security interests collateralized by specific assets of a debtor in

bankruptcy liquidation are entitled to obtain satisfaction of their claims from the free assets of the
debtor’s estate.
Statement 2: Creditors having security interest collateralized by specific assets of a debtor in
bankruptcy liquidation always have a 100% recovery rate.
Both statements are false.

10. The document used to estimate amounts available to each class of claims is called a/an
Accounting Statement Affairs

11. Goodbye Na Corp. has been undergoing liquidation since January 1. As of March 31, its condensed
statement of realization and liquidation is presented below:

12. On June 1, 2020, the books of Dreamer Corp. show assets with book values and realizable values as
follows:

13. On June 1, 2020, the books of Dreamer Corp. show assets with book values and realizable values as
follows:
 14. Target Corp. was forced into bankruptcy and is in the process of liquidating assets and paying claims.
Unsecured claims will be paid at the rate of thirty cents on the peso. Arrow holds a note receivable from
Target for P90,000 collateralized by an asset with a book value of P60,000 and a liquidation value of
P30,000. The amount to be realized by Arrow on this note is
P48,000

15. Sparkman Co. filed a bankruptcy petition and liquidated its noncash assets. Sparkman was paying forty
cents on the peso for unsecured claims. Bailey Co. held a mortgage of P150,000 on the land that was
sold for P110,000. The total amount of payment that Bailey should have received is calculated to be
P126,000

Account Book value Realizable value

Cash

Accounts receivable (net)

 ENABLING ASSESSMENT
1. Pag-asa Corporation is undergoing liquidation. The statement of affairs shows the following information:

ASSETS Carrying Amount Realizable Value

Assets pledged with fully secured creditors 160,000 190,000

Assets pledged with partially secured creditors 90,000 6,0000

Free Assets 200,000 140,000

450,000 390,000

LIABILITIES

Liabilities with priority 20,000 20,000

Fully secured creditors 130,000 130,000

Partially secured creditors 100,000 100,000

Unsecured creditors 260,000 260,000

510,000 510,000

● If all the assets were sold at their realizable values and all the liabilities were settled at their
expected settlement amount, the amount that partially secured creditors will receive is ___.
84000

● If all the assets were sold at their realizable values and all the liabilities were settled at their
expected settlement amount, the amount that unsecured creditors will receive is ___.
156000

2. Stopna Corporation filed a voluntary bankruptcy during the year. Relevant information follows:

ASSETS Carrying Amount Realizable Value

Assets pledged with fully secured creditors 300,000 370,000

Assets pledged with partially secured creditors 180,000 120,000

Free assets 420,000 320,000

900,000 810,000

LIABILITIES

Liabilities with priority 70,000

Fully secured creditors 260,000

Partially secured creditors 200,000

Unsecured creditors 540,000

 1,070,000

The assets are converted to cash at the estimated realizable values and the business is liquidated.

● The amount of cash available to pay unsecured non-priority claims is ___.

360000

● The estimated recovery percentage of unsecured creditors without priority is ___.

58.06%

● The total amount paid to the partially secured creditors is ___.

166448

● The total amount paid to the unsecured creditors is ___.

313524

● The total amount paid to the fully secured creditors is ___.

260000

● The total amount paid to the unsecured creditors with priority is ___.
70000

3. Moveon Corporation is undergoing liquidation. Relevant information follows:

Carrying Amount Realizable Value

Assets pledged with partially 80,000 50,000

secured creditors

Free assets 220,000 160,000

Expected settlement amount Amount unsecured

Liabilities with priority 16,000 -

Partially secured creditors 75,000 25,000

Unsecured creditors 155,000 155,000

● The estimated amount of liquidating dividend per peso claim is ___.

0.80

● The total amount available for payment of claims of unsecured creditors is ___.
144000

● The amount of deficiency to creditors is ___.

36000
4. A trustee has been appointed by SEC for ELM Inc., which is being liquidated. The following
transactions occurred after the assets were transferred to the trustee:
a. Sales on account by the trustee were P75,000. Cost of goods sold were P60,000, consisting of
all the inventory transferred from ELM.
b. The trustee sold P12,000 worth of marketable securities for P10,500.
c. Receivables collected by the trustee:

Old P21,000 of the P38,000 transferred

New P47,000

d. Recorded P16,000 depreciation on the plant assets of P96,000 transferred from ELM.
e. Disbursements by the trustee:

Old current payable P22,000 of the P48,000 transferred

Trustee’s expenses P4,300

● In the statement of realization and liquidation of ELM Inc., the total assets to be realized is ___.
206000

● The total assets realized is ___.

153500

● The net gain (loss) is ___.

(6800)

5. Items displayed in the June 30, 2020, statement of affairs for Liquidating Company, which is
undergoing bankruptcy liquidation, included the following:

Assets pledged for fully secured liabilities 190,000

Assets pledged for partially secured liabilities 46,600

Free assets 146,330

Fully secured liabilities 183,600

Partially secured liabilities 54,600

Unsecured liabilities with priority 30,810

Unsecured liabilities without priority 182,500

● The expected percentage expected to be recovered by unsecured liabilities without priority

is ___.
64.0%

● The expected percentage expected to be recovered by fully secured liabilities is ___.

100.0%
 ● The expected percentage expected to be recovered by partially secured liabilities is ___.
94.7%

● The expected percentage expected to be recovered by unsecured liabilities with priority is

___.
100.0%

6. Hikahos Corporation is undergoing liquidation. Relevant information as of January 1, 2021 is shown

below:

ASSETS Carrying Amount Net Realizable Value

Cash 200,000 200,000

Accounts Receivable 500,000 450,000

Equipment-net 600,000 150,000

Land 1,000,000 1,300,000

Total Assets 2,300,000 2,100,000

LIABILITIES

Accounts Payable 700,000 700,000

Salaries Payable 800,000 800,000

Notes Payable 500,000 500,000

Loan Payable 750,000 750,000

Total Liabilities 2,750,000 2,750,000

EQUITY

Share Capital 1,000,000

Deficit (1,450,000)

Capital Deficiency (450,000)

Total Liabilities and Equity 2,300,000

Additional information:

❏ Administrative expenses expected to be incurred during the liquidation process is P180,000.

❏ The equipment is pledged as collateral security for the notes payable.
❏ The land is pledged as collateral security for the loan payable.

● The estimated recovery percentage is ___.

20.95%
 ● Assuming all the assets were sold, and all the liabilities were settled, Ms. E, an unsecured and
non-priority creditor would expect to receive from her P500,000 claim from Hikahos Corporation
an amount equal to ___.
104762

● The net free assets amount to ___.

220000

● The estimated deficiency is ___.

830000

7. Olive Company recently petitioned for bankruptcy andis now in the process of preparing a statement of
affairs. The carrying values and estimated fair values of the assets of Olive Company are as follows:

Carrying Value Fair Value

Cash 20,000 20,000

Accounts receivable 45,000 30,000

Inventory 60,000 35,000

Land 75,000 70,000

Building (net) 180,000 100,000

Equipment 170,000 80,000

Total 550,000 335,000

Debts of Olive are as follows:

Accounts payable 60,000

Wages payable (all have priority) 10,000

Taxes payable 10,000

Notes payable (secured by receivable and inventory) 120,000

Interest on notes payable 6,000

Bonds payable (secured by land and building) 150,000

Interest on Bonds payable 7,000

Total 363,000

● The total amount of unsecured claims is ___.

121000

● The estimated amount available for general unsecured creditors upon liquidation is ___.
93000
 ● The estimated dividend percentage is ___.
77%

8. On June 1, 2020, the books of Coco Corporation show assets with book values and realizable values
as follows:

Book Value Realizable Value

Cash 10,000 10,000

Receivables (net) 100,000 50,000

Inventory 140,000 100,000

Land and building (net) 600,000 650,000

Equipment (net) 400,000 100,000

Total 1,250,000 910,000

Coco’s books show the following liabilities:

Book value

Accounts payable 260,000

Wages payable (eligible for priority) 10,000

Taxes payable 20,000

Accrued interest on notes payable 30,000

Accrued interest on mortgage payable 20,000

Notes payable (secured by receivables and inventory) 500,000

Mortgage payable (secured by land and building) 300,000

Total 1,140,000

● The amount available to unsecured claims is ___.

410000

● The amount the note holders are likely to receive is ___.

393580

● The dividend (% expected to be recovered) of the unsecured claims is ___.

64.1%

● The estimated dividend percentage is ___.

64.1%
9. Buhay Corp. is undergoing liquidation. Relevant information follows:

Carrying amount

Accounts receivable 300,000

Inventories 110,000

Land 150,000

Building 400,000

❏ The accounts receivable has a realizable value of P320,000. The accounts receivable has been
pledged to secure notes payable with an expected settlement amount of P280,000.
❏ The inventories have a total realizable value of P70,000. Included in the inventories are
inventories with carrying amount of P50,000 and realizable value of P60,000 which have been
pledged to secure an account payable with an estimated settlement amount of P40,000.
❏ The land and building have a total realizable value of P450,000. Both assets have been used as
collateral security for a bank loan of P250,000.

● The total amount of net free assets is ___.

270000

● The estimated amount available for preferred claims and unsecured creditors out of assets
pledged with fully secured creditors is ___.
240000

10. A company going through a bankruptcy has the following account balances:

Cash 30,000

Receivable (30% collectible) 50,000

Inventory (worth P39,000) 90,000

Land (worth P120,000, secures note payable) 100,000

Buildings (worth P180,000, secures bond payable) 200,000

Salaries payable 10,000

Account payable 90,000

Notes payable (secured by land) 110,000

Bonds payable (secured by building) 300,000

Common stock 100,000

Retained earnings 140,000

● The amount paid to Note Payable is ___.

110000
 ● The amount paid to Accounts Payable is ___.
36000

● The amount paid to Salaries Payable is ___.

10000

● The amount paid to Bonds Payable is ___.

228000

11. Owners’ equity amounts are not displayed in a statement of affairs.

True

12. A statement of affairs is the initial report prepared at the start of the liquidation process.
True

13. In the accountability technique of accounting used by a trustee for a debtor in bankruptcy liquidation,
there is no ledger account for owner’s equity.
True

14. Liabilities in the statement of affairs are classified into short-term and long-term liabilities.
False

15. Voluntary insolvency occurs when three or more creditors of the insolvent corporation file a petition to a
court of law for the adjudication of the corporation as insolvent.
False

16. Creditors having priority under the Bankruptcy Law include creditors having security interests
collateralized by specific assets of the debtor.
False

17. A debtor in bankruptcy liquidation will not be discharged within six years of a previous bankruptcy
discharge.
True

18. Unsecured creditors whose claims are to be paid in full from the assets of a debtor in bankruptcy
liquidation before any cash is paid to other unsecured creditors are classified as unsecured creditors
having preference.
False

19. All stockholders of a corporation undergoing bankruptcy reorganization must approve the plan or
reorganization before it is confirmed by the bankruptcy court.
False

20. Assets in a statement of affairs are assigned to one of three categories:assets pledged for fully secured
liabilities, assets pledged for partially secured liabilities, and priority assets.
False
21. The bankruptcy court has the option of appointing either a trustee or an examiner in bankruptcy
reorganization.
False

22. Insolvency in the bankruptcy sense is a financial status in which the aggregate current fair value of the
assets of a business enterprise is not sufficient to pay the enterprise’s liabilities.
True

23. Assets in the statement of affairs are classified into current and non-current assets.
False

24. Assets pledged to fully secured creditors have realizable values equal to or greater than the realizable
values of the related liabilities for which these assets have been pledged as security.
True

25. The filing of a debtor’s petition in bankruptcy does not operate as an order for relief by the bankruptcy
court.
False

26. Creditors having security interests collateralized by specific assets of a debtor in bankruptcy liquidation
are entitled to obtain satisfaction of their claims from the free assets of the debtor’s estate.
False

27. Free assets include the excess of realizable values of assets pledged to fully secured creditors over the
realizable values of the related liabilities for which these assets have been pledged.
True

28. A railroad corporation may not file a debtor’s petition for bankruptcy.
True

29. Entities undergoing liquidation measure their assets and liabilities in the statement of affairs at fair
value.
False

30. The measurement bases under the Conceptual Framework and the PFRS are not applicable to
liquidating entities.
True

31. Assets pledged to partially secured creditors have realizable values less than the realizable values of
the related liabilities for which these assets have been pledged as security.
True
1. Tom and Jerry formed a management consulting partnership on January 1, 2021. The fair value of net
assets invested by each partner follows:

Tom Jerry

Cash 13,000 12,000

Accounts receivable 8,000 6,000

Office 2,000 800

Office equipment 30,000

Land 30,000

Accounts payable 2,000 5,000

Mortgage payable 18,800

During the year, Tom withdrew P15,000 and Jerry withdrew P12,000 in anticipation of operating
profits.Net profit for 2021 was P50,000 which is to be allocated based on the original net capital
investment.

● The capital balance of Tom on December 31, 2021 is

69,553

● The capital balance of Jerry on December 31, 2021 is

29,447

2. Robert, Mico and Aaron formed a partnership on March 1, 2019 with original capital contributions of
P300,000, P100,000, and P400,000, respectively. On April 30, 2019, agreed to invest additional capital
of P100,000 each. On August 1, all partners agreed to have the same level of contributed capital of
P500,000.

● How much is the average capital balance of Mico for the 10-month period ending December 31,
2019?
330,000

● How much is the average capital balance of Robert for the 10-month period ending December
31, 2019?
430,000

● How much is the average capital balance of Mico for the 10-month period ending December 31,
2019?
Robert of P100,000. Mico of P300,000 and nothing from Aaron

3. Dino, Doods, and Dong have the following accounts and their normal balances on January 31, 2021,
the date the partners agreed to liquidate their 3D Partnership:

Cash P20,000 Accounts Payable P10,000

 Accounts Receivable 25,000 Notes Payable 27,000

Allowance for Bad Debts 5,000 Loans due to Dino 5,000

Merchandise Inventory 60,000 Loans due to Doods 7,000

Furniture & Equipment 50,000 Dino, Capital 20,000

Accumulated Depreciation 5,000 Doods, Capital 40,000

Dong, Capital 36,000

The partners divide profit and losses 4:1:5, respectively. Sales proceed follows:
Accounts Receivable P10,000
Merchandise Inventory 30,000
Furniture & Equipment 20,000

● Assuming that Dino is a limited partner, the cash paid to Dong is?
0

● If Dino is a limited partner, the cash paid to Doods is

32500

● Assuming that Dino is a limited partner, how much additional investment should Dong give?
1500

● How much is the non-cash assets?

125000

● Assuming that any deficiency will be immediately paid, the cash paid to Doods
40500

● Assuming that any deficiency is uncollectible, the cash paid to Dong?

2667

● The sale of non-cash assets resulted in a total loss of

65000

● How much is the cash available for distribution to the partners?

43000

● The sale resulted in a capital deficiency for

Dino

4. Felicity and Gregory are partners with capital balances of P700,000 and P500,000, respectively. They
agree to accept Randell who will contribute land costs him P500,000, but with a market value of
P600,000.

Randell will be given 30% interest in the partnership and bonus is to be recognized.
 ● The revised capital of Felicity after the admission of Randell is
P735,000

● Who gives the bonus?

Randell

Randell will be given 40% interest in the partnership.

● Assuming bonus is to be recognized, how much is the bonus?

120,000

● Assuming bonus is to be recognized, who gets the bonus?

Randell

5. Felicity and Gregory are partners with capital balances of P700,000 and P500,000, respectively. They
agree to accept Randell who will contribute land costs him P500,000 but with a market value of
P600,000. Randell will be given 30% interest in the partnership but assets should first be revalued
using Randell’s investment and interest as basis.

● How much is the total agreed capital?

P2,000,000

● How much is the total asset revaluation?

200,000

6. Felicity and Gregory are partners with capital balances of P700,000 and P500,000, respectively. They
agree to accept Randell who will contribute land costs him P500,000 but with a market value of
P600,000. Randell will be given 40% interest in the partnership but assets should first be revalued
using Randell’s investment and interest as basis.

● Total asset revaluation amounts to

P(300,000)

7. Ara, Bea, and Cai agreed to admit a new partner on January 1, 2021 when their capital balances were
250,000, 150,000, and 200,000, respectively. Profit and loss ratio is 2:1:2, respectively. A new partner,
Dell was admitted for cash investment that will give her 25% interest in the partnership.

How much should Dell invest?

200,000

8. Ara, Bea, and Cai agreed to admit a new partner on January 1, 2021 when their capital balances were
250,000, 150,000, and 200,000, respectively. Profit and loss ratio is 2:1:2, respectively.

Ara retired and the partnership paid her P240,000 after the assets were revalued.

● Bea’s capital after Ara’s retirement is

P145,000

Ara retired and the partnership paid her P280,000 after the assets were revalued.
 ● Total capital after Ara’s retirement is
P395,000

9. Ara, Bea, and Cai agreed to admit a new partner on January 1, 2021 when their capital balances were
250,000, 150,000, and 200,000, respectively. Profit and loss ratio is 2:1:2, respectively. A new partner,
Dell was admitted for cash investment of 100,000 for a 20% interest in an agreed capitalization of
700,000. The accountant recognized
Bonus to new partner

10. Ali and Bebe formed a partnership. The partnership agreement stipulates the following:
a. Ali shall contribute non-cash assets with a carrying amount of P60,000 and fair value of
P100,000.
b. Bebe shall contribute cash of P200,000
c. Ali and Bebe have an interest of 80% and 20%, respectively, on both initial and subsequent
partnership profits and losses
d. No outside cash settlement shall be made between the partners. *

● The entry to record the contribution of Bebe includes a credit to Ali’s capital in the amount of
140000

● The total partnership capital after the formation is ________.

300000

● The adjusted capital account of Bebe after the formation is ________.

60000

11. The partners in the ABC partnership have the capital balances as follows:
A - 70 000 ; B - 70, 000 ; C - 105 000
Profits and losses are shared 30%, 20%, 50%, respectively. On this date, C withdraws and the partners
agree to pay him P140,000 out of partnership cash. *

● Using the total revelation of asset method, the revised capital of B after the withdrawal of C is
84000

● Using partial revaluation of asset method, the revised capital of A after the withdrawal of C is
70000

● Using bonus method, the revised capital of A after the withdrawal of C is

91000 49000

12. Jack holds an ownership interest of 63% and Teresa holds an ownership interest of 37% in the J and T
partnership. This year, in order to fully develop the business, Jack contributes an additional P6800 and
Teresa contributes an additional P3200 to the partnership. Which of the following is TRUE of this
scenario
Individual contributions of P6800 by Jack and P3200 by Teresa will be recorded.

13. Assume that after operations and partners’ withdrawals during 20x2 and 20x3, DE partnership has a
book value of P120,000 and profit and loss (P&L) percentage on January 1, 20x4 as follows:
 a. Capital balances of P72,000 and P48,000 for D and E, respectively.
b. P/L ratio of 7:3 to D and E, respectively.

On this date, G is admitted to the partnership. G purchased one-fourth of D’s interest for P21,600 and
one-fourth of E’s interest for P14,400 making direct payment to D and E. The new partner will have a
one-fourth share in the profits and losses. The old partners continue to use their profit and loss ratios.

● The capital of E after the admission of G is _______.

36000

● The revised profit or loss percentage of D is _______.

52.5%

On this date, G is admitted to the partnership. G paid P28,000 directly in exchange for a one-third
interest of D.

● The capital account credit to G is _______.

24,000

14. Rica is a sole proprietor who invested her grocery when she invited Belle to form a new partnership
business. The following are the assets and liabilities of the grocery:

Cash 50,000

Merchandise 30,000 Book Value

P20,000 Market Value

Fixed Asset (100k less Acc. Depn 10K) 90,000 Book Value

70% of cost Market Value

Accounts Payable 20,000

Accrued Expenses 7,000

Belle invested the following:

Cash P60,000

Land (mortgage balance of 200,000 Book Value

P500k plus accrued interest
for 6 mos at 18%)

500,000 Market Value

Store furniture (costing 30,000

P40k less acc depn of 10k)

The total liabilities of the newly formed partnership would be

81,500
15. A statement of financial position of the partnership of X, Y, Z contains the following account balances:

Cash P240,000 Accounts Payable P300,000

Accounts Receivable 280,000 Notes Payable 200,000

Loans to Z 40,000 Loans from Y 20,000

Inventories 400,000 X, Capital 340,000

Property, Plant, and 440,000 Y, Capital 340,000

Equipment

Z, Capital 200,000

In January 2021, the loan to Z, was offset against his capital balance, P200,000 of accounts receivable
were collected and inventories with carrying value of P160,000 were sold for P200,000. Available cash
was distributed. **

X, Y, and Z share profits and losses in the ratio of 5:3:2, respectively.

● After the first distribution of cash, the equity of Y is ________.

220000

● If Z received P30,000 during the first cash distribution, the amount that should have been
received by X is ________.
15000

● If P40,000 cash was withheld for possible liquidation expenses, the amount of cash received by
Y in the first cash distribution is ________.
100000

● If X received a total of P240,000 in full settlement of his interest in the partnership, the total loss
incurred on the liquidation of the partnership is ________.
200000

● The amount of cash available for distribution to partners is ________.

140000

16. Brian Snow and Wendy Waite formed a partnership on July 1, 20x2. Brian invested P20,000 cash,
inventory valued at P15,000, and equipment valued at P67,000. Wendy invested P50,000 cash and
land valued P120,000. The partnership assumed the P40,000 mortgage on the land.

On June 30, 20x3, the partnership reported a net loss of P24,000. The partnership contract specified
that income and losses were to be allocated by allowing 10% interest on the original capital investment,
salaries of P15,000 to Brian and P20,000 to Wendy, and the remainder to be divided in the ratio of
40:60.
 On July 1, 20x3, Alan Young was admitted into the partnership with a P70,000 cash investment. Alan
was given 30% interest in the partnership because of his special skills. The partners elect to use the
bonus method to record the admission. Any bonus should be divided in the old ratio of 40:60.*

On June 30, 20x4, the partnership reported a net income of P150,000. The new partnership contract
stipulated that income and losses were to be divided a fixed ratio of 20:50:30

On July 2, 20x4, Brian withdrew from the partnership for personal reasons. Brian was given P40,000
cash and a P60,000 note for his capital interest.

● The share of Snow in the net loss for the first year is ________.
(16,320) 7680

● The share of Snow in the net income for the second year is ________.
30000

● The decrease in the capital of Waite upon the admission of Alan is ________.
8040

● Upon formation the amount credited to the capital account of Waite is ________.
130 000

● The entry to record the withdrawal of Snow includes a credit to Waite, Capital in the amount of
11850

17. A 1:3:2 ratio is the same as

⅙:½:⅓

18. Mickey, Donald, and Minnie are partners sharing profit and loss in the ratio of 2:1:1, respectively. Their
capital balances are P400,000 for Mickey, P200,000 for Donald and P100,000 for Minnie. Claims of
suppliers amounted to 500,000 including the loan extended by Minnie, P50,000. The cash balance
amounted to P300,000 and it increased to P1,050,000 as a result of the sale of the non-cash assets.

● How much cash was received by Donald in the final settlement?

162,500

● How much cash was received by Mickey in the final settlement?

325,000

● How much was the non-cash assets of the partnership?

900,000

● How much was the loss from sale of non-cash assets?

150,000

● How much was the cash proceeds from sale of non-cash assets?
750,000

● How much cash will Minnie receive?

 112,500

19. Partnership JB has two partners, Jim and Bill. Jim own 60% of the partnership and Bill owns 40%. In
which of the following transactions will the partnership be held responsible for an individual partners'
actions
Bill signs a contract to buy furniture for official use in the partnership.

20. Carlin and Marley have a partnership agreement which includes the following provisions regarding
sharing net income or net loss.
* A salary allowance of P120,000 to Carlin and P100,000 to Marley.
* An interest allowance of 10% on capital balances at the beginning of the year.
* A bonus of 20% to Carlin,
* The remainder is to be divided 40% to Carlin and 60% to Marley.

The capital balances on January 1, 2018 for Carlin and Marley was P90,000 and P120,000,
respectively. During 2018, the Carlin and Marley partnership had sales of P2,000,000, cost of goods
sold of P1,100,000, and operating expenses of P400,000. Income Tax rate is 30%.

● If bonus is computed based on net income before bonus, salary allowances, and interest on
capital, the total share of C in the partnership is ________.
214600

● If bonus is computed based on net income after bonus, salary allowances, and interest on
capital, the total share of C in the partnership is ________.
183500

21. On January 1, 2021, Am and Boy agreed to form a partnership. The partners’ contribution are as
follows:

Am Boy

Cash 50,000 120,000

AR 360,000 1,080,000

Inventories 216,000 360,000

Land 1,080,000

Building 900,000

Equipment 90,000 90,000

AP 336,000 450,000

Capital 1,460,000 2,100,000

The partners agreed to the following:

A. The recoverable amounts of the partners’ accounts receivable are P300,000 and P760,000 for
and Boy , respectively
B. The inventory contributed by Boy includes obsolete items with a recorded cost of P200,000
 C. The land contributed by Am has an attached mortgage of P180,000. The partnership shall
assume the mortgage
D. The equipment contributed by Boy has a fair value of P130,000
E. Has an unrecorded accounts payable of P100,000. The partnership assumes the obligation of
settling the account *

● The total assets of Amboy Partnership is

3986000

● The adjusted capital balance of Am is

1120000

● The adjusted capital balance of Boy is

1800000

22. Assume that AA and BB partners of AB Partnership (who share net income and loss in 80%:20%)
organize A & B Corporation to take over the net assets of the partnership. The balance sheet of the
partnership on June 20, 20x4, the date of incorporation, is as follows: **

Assets:

Cash 14,400

Trade AR 33,720

Allowance for doubtful accounts (720)

Inventories 30,600

Equipment 72,000

A/D (31,200)

Total Assets 118,800

Liabilities and Partners Capital

Trade AP 42,000

AA, Capital 57,588

BB, Capital 19,212

Total Liabilities and Partners Capital 118,800

After an appraisal of the equipment and an audit of the partnership’s financial statements, the partners
agree that the following adjustments are required to restate the net assets of the partnership to current
fair value:
A. Increase the allowance for doubtful accounts to P1,200
B. Increase the inventories to current replacement cost of P36,000
 C. Increase the equipment to its reproduction cost new, P84,000, less accumulated depreciation on
this basis, P36,600; that is to current fair value , P47,400
D. Recognize accrued liabilities of P1,320
E. Recognize goodwill of P12,000

A & B Corporation is authorized to issue 12,000 shares of P10 par common stock. It issues 9,000
shares of common stock valued at P11 a share to the partnership in exchange for the net assets of the
partnership

● In the books of the corporation, the amount credited to Paid in Capital in Excess of Par is
9000

● The adjusted capital of AA is

75348

● The adjusted capital of BB is

23652

● The total net adjustment is

22200

23. An advantage of the partnership as a form of business

A partnership is created by a mere agreement of the partners

24. Luz, Vi and Minda are partners when the partnership earned a profit of P30,000. Their agreement
provides the following regarding the allocation of profit and losses:
a. 8% interest in partner’s ending capital in excess of P75,000
b. Salaries of P20,000 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 P60,000, P80,000 and P100,000 for partners Luz, Vi and Minda,
respectively. What is the amount of profit allocated for Minda, if each provision of the profit and loss
agreement is satisfied to whatever extent possible using the priority order shown above?
P2,000

25. Partners AA and BB have profit and loss agreement with the following provisions: salaries of P30,000
and P45,000 for AA and BB, respectively; a bonus to AA of 10% of net income after salaries and bonus,
and interest of 10% on average capital balances of P20,000 and P35,000 for AA and BB, respectively.
One-third of any remaining profits will be allocated to AA and the balance to BB.

● If the partnership has net income of P102,500, how much should be allocated to Partner AA?
P41,000

● If the partnership has net income of P102,500, how much should be allocated to Partner BB?
P61,500

● If the partnership had net income of P22,000, how much should be allocated to partner AA,
assuming that the provision of the profit and loss agreement are ranked by order of priority
starting with salaries?
 P8,800

26. Hope & Faith Co. reports net income after 30% tax of P235,000 by the end of 2018. The partnership
agreement provides for division of profit or loss on the ratio of the partners’ capital balances. At the end
of 2017, each partner had a capital balance of P220,000. During 2018, Hope made additional
investment of P50,000 on April 1 and withdrew P70,000 of her capital on September 30. Faith, on the
other hand, made additional investment of P80,000 on October 1.

● The share of Hope in the net profit using the ratio of weighted average capital is ____
P117,500

27. The partnership agreement of Rossi and Olson provides for salary allowances of P45,000 to Rossi and
P35,000 to Olson, with the remaining income or loss to be divided equally. During the year, Rossi and
Olson each withdraw cash equal to 80% of their salary allowances. If partnership net income is
P100,000, Rossi’s equity in the partnership would
Increase more than Olson’s

28. Nancy and Betty enter into a partnership agreement where they decide to share profits according to the
following rules.
● Nancy and Berry will receive salaries of P1700 and P14500 respectively as the from allocation.
● The next allocation is based on 20% of each partner’s capital balances.
● Any remaining profit or loss is to be allocated completely to betty

The partnership net income for the first year is P50,000. Nancy’s capital balance is P83,000 and Betty's
capital is P11,000 at the end of the year. Calculate the share of profit/loss to be allocated to Betty.
P31,700

29. The most appropriate basis for dividing partnership net income when the partners do not plan to take
an active role in daily operation is
On a ratio based average capital balances

30. XYZ Partnership provided for the following in the distribution of profits and losses:
First: X is to receive 10% of net income up to P100,000 and 20% of the amount in excess thereof.
Then: Y and Z are each to receive a 5% of the remaining income in excess of P150,000 after X’s share.
Lastly: The balance is to be distributed equally to the three partners.

● If the partnership income is P250,000, what is the total share of X?

P108,000

31. Tamayo, Banson and Vidal, a partnership formed on january 1, 2018, had the following initial
investments.

Tamayo 100,000

Banson 150,000

Vidal 225,000
 The partnership agreement profits and losses are to be shared equally by the partners after
consideration is made for the following:
a. Salaries allowed to partners: P60,000 for Tamayo; P48,000 for Banson and P36,000 for Vidal.
b. Average partner’s capital balances during the year shall be allowed 10% interest.

Additional information:
A. On June 30,2018, Tamayo invested an additional P60,000.
B. Vidal withrew P70,000 from the partnership on September 30, 2018.
C. Share on the remaining profit was P3,000 for each partner.

● The average capital of Vidal is ________.

207500

● The partnership net profit for 2018 before salaries, interest and partner’s share on the
remainder is _______.
201750

● The average capital of Tamayo is ________.

130000

● Interest on average capital balances of the partners totals

48750

● Total Partnership Capital

666750

32. Mariano and Lucas entered into partnership on March 1, 2018, investing P125,000 and P75,000
respectively. It was agreed that Mariano, the managing partner, was to receive a salary of P12,000 per
year and also 10% bonus on the profit after adjustment for the salary, the balance of the profit was to
be divided in the ratio of the original capital. On December 31, 2018, account balances are as follows:

Cash 70,000 Accounts payable 60,000

Accounts receivable 67,000 Sales 233,000

Furniture and Fixtures 45,000 Mariano, Capital 125,000

Purchases 196,000 Lucas Capital 75,000

Sales returns & allowances 5,000 Mariano Drawing (20,000)

Operating expenses 60,000 Lucas Drawing (30,000)

Inventories on December 31, 2018 were merchandise, P73,000; Supplies P2,500. Prepaid insurance
was P950 and accrued liabilities totaled P1,550. Depreciation on Furniture & Fixtures is to be computed
at 20% per year. Income tax rate is 35%.

● The distribution of net profit to Mariano is _______.

20342
 ● The distribution of net profit to Lucas is _______.
5268

● After closing the net profit and drawing accounts, the capital of Lucas is _______.
50268

● After closing the net profit and drawing accounts, the capital of Mariano is _______.
125342

33. Sison, Torres and Velasco are partners in an accounting firm. Their capital account balances at year-
end were: Sison, P50,000; Torres, P110,000; Velasco, P50,000. They share profits and losses in a
4:4:2 ratio, after the following terms;
a. Partners Velasco is to receive a bonus of 10% of net profit after bonus.
b. Interest of 10% shall be paid on the portion of a partner’s capital in excess of P100,000.
c. Salaries of P10,000 and P12,000 shall be paid to partners Sison and Velasco, respectively.

● Assuming a net profit of P22,000 for the year, the profit share of Sison was ________.
8800

● Assuming a net profit of P22,000 for the year, the profit share of Torres was ________.
(200)

● Assuming a net profit of P22,000 for the year, the profit share of Velasco was ________.
13400

● Assuming a net profit of P44,000 for the year, the profit share of Sison was ________.
16800

● Assuming a net profit of P44,000 for the year, the profit share of Torres was ________.
7800

● Assuming a net profit of P44,000 for the year, the profit share of Velasco was ________.
19400

34. Carlin and Maley have a partnership agreement which includes the following provisions regarding
sharing net income or net loss:
❖ A salary allowance of P120,000 to Carlin and P100,000 to Maley.
❖ An investment allowance of 10% on capital balances at the beginning of the year.
❖ A bonus of 20% Carlin
❖ The remainder to be divided 40% to Carlin and 60% to Maley.

The capital balance on January 1, 2018 for Carlin and Maley was P90,000 and P120,000, respectively.
During 2018, the Carlin and Maley partnership had sales of P2,000,000 cost of goods sold of
P1,100,000 and operating expenses of P400,000. Income tax rate is 30%.

● If bonus is computed based on net income before bonus, salary allowances, and interest on
capital, the total share of C in the partnership is __________.
P214,600
 ● If bonus is computed based on net income after bonus, salary allowances, and interest on
capital, the total share of C in the partnership is __________.
P183,500

35. Which one of the following would not be considered an expense of a partnership in determining income
for the period?
Salary allowance to partners

36. A partners share of net income is recognized in the accounts through

Closing entries

37. Jaime, Madrid and Soriano are partners sharing profits on a 5:3:2 ratio. On January 1, 2018, Matias
was admitted into the partnership with a 20% share in the profits. The old partners continue to
participate in profits proportionate to their original ratios. For the year 2018, the partnership books
showed a net profit of P250,000. It was disclose however, that the errors shown below were made:

● Assuming that income tax rate is 35%, the share of Jaime in the corrected net profit is
________.
96100

● Assuming that income tax rate is 35%, the share of Madrid in the corrected net profit is
________.
57660

● Assuming that income tax rate is 35%, the share of Soriano in the corrected net profit is
________.
38440

● Assuming that income tax rate is 35%, the share of Matias in the corrected net profit is
________.
48050

● The new profit and loss ratio of Jaime is ________.

40%

● The new profit and loss ratio of Madrid is ________.

24%

● The new profit and loss ratio of Soriano is _______.

16%

38. The net income of the Rice and Wynn partnership is P120,000. The partnership agreement specifies
that Rice and Wynn have a salary allowance of P32,000 and P48,000 respectively. The partnership
agreement also specifies an interest allowance of 10% on capital balances at the beginning of the year.
Each partner had a beginning capital balance of P80,000. Any remaining net income or net loss is
shared equally.

● What is Rice’s share of the P120,000 net income?

P52,000
 ● What is the balance of Wynn’s Capital account at the end of the year after net income has been
distributed?
P148,000

39. The BLUE Company, a partnership, was formed on January 1, 2018 with four partners, Belen, Lorna,
and Edna. Capital contributions were as follows:

Belen 100,000

Lorna 50,000

Ursula 50,000

Edna 40,000

The partnership agreement provides that each partner shall receive 5% interest on the amount
of his/her capital contribution. In addition, Belen is to receive a salary of P10,000 and Lorna a salary
of P6,000 per annum which are to be charged as expenses of the business. The agreement further
provides that Ursula shall receive a minimum of P5,000 per annum from the partnership and Edna a
minimum of P12,000 per annum, both including the profits is to be distributed in the following
proportion: Belen 30% Lorna 30% Ursula 20% Edna 20%.

● The amount that must be earned by the partnership during 2018, before any change for interest
on capital or partners salaries in order that Belen may receive an aggregate of P25,000
including interest, salary and share of profits would be _________. (Disregard income tax.
Round your final answer to the nearest peso. Do not use peso sign, comma, and decimal.)
64667

● Using the amount that must be earned by the partnership during 2018, before any change for
interest in capital or partners salaries in order that Belen may receive an aggregate of P25,000,
including interest, salary and share of profits, the total earnings of Ursula would be
_________. (Disregard income tax. Round your final answer to the nearest peso. Do not use
peso sign, comma, and decimal.)
9167

● Using the amount that must be earned by the partnership during 2018, before any change for
interest in capital or partners salaries in order that Belen may receive an aggregate of P25,000,
including interest, salary and share of profits, the total earnings of Lorna would be _________.
(Disregard income tax. Round your final answer to the nearest peso. Do not use peso sign,
comma, and decimal.)
18500

40. On October 31, 2018, Zita and Jones formed a partnership by investing cash of P300,000 and
P200,000, respectively, The partners agreed to receive and annual salary allowance of P360,000 and
to give Zita a bonus 20% of the net income after partner’s salaries, the bonus being treated as an
expense.
 If the profits after salaries and bonuses are to be divided equally, and the profits on December 31,
2018 after partner’s salaries but before bonus of Zita are P360,000, how much is the share of Zita in
the profits?
P270,000

41. RK is trying to decide whether to accept a salary of P40,000 or a salary of P25,000 plus a bonus of
10% of net income after salaries and bonus as a means of allocating profit among partners. Salaries
traceable to the other partners are estimated to be P100,000. What amount of income would be
necessary so that RK would consider choices to be equal?
P290,000

42. A, B, and C are capitalist partners while D is an industrial partner. The partnership reported a net loss of
P100,000. How much is the share of D in the reported net loss?
P-0-

43. A partner’s share of net income is recognized in the accounts through

Closing entries

44. If the partnership agreement does not specify how income is to be allocated, profits and losses should
be allocated
In accordance with their capital contribution

45. Lori and Mike enter into a partnership and decide to share profits and losses as follows:
● The first allocation is a salary allowance with Lori receiving P12,000 and Mike receiving
P25,000.
● The second allocation is 20% of the partners’ capital balances at year end. On December 31,
2019, the capital balances for Lori and Mike are P86,000 and P344,000, respectively.
● Any remaining profit or loss is allocated equally.

For the year ending December 31, 2019, the partnership reported a net loss of P122,000. The journal
entry to record the loss allocation will _______.
Debit Lori, Capital for P93,300

46. The Smith and Jones partnership agreement stipulates that profits and losses will be shared equally
after salary allowances of P120,000 for Smith and P60,000 for Jones. At the beginning of the year,
Smith’s Capital account had a balance of P240,000, while Jones’ Capital account had a balance of
P210,000. Net income for the year was P150,000 The balance of Jones’ Capital account at the end of
the year after closing is
P255,000

47. David, Chris, and John formed a partnership on July 31, 2019. They decided to share profits equally,
but inserted a clause in the partnership agreement where any losses would be allocated in the ratio of
5:2:3, respectively. For the year ended December 31, 2019, the firm earned a net income of P50,000.
However, for the year ended December 31, 2020, the firm incurred a loss of P60,000. Assuming that
John had an initial capital contribution of P43,000 and made no withdrawals, what is the balance of
John’s capital account as of december 30, 2020? (Assume that none of the partners made any further
contributions to their capital accounts. Do not round any percentage calculations. Round all monetary
calculations to the nearest peso)
P41,667
48. DOER partnership was organized on March 1, 2021. On formation date, Dory invested P150,000 and
Erwin invested land and building with fair value of P80,000 and P100,000. Erwin also invested P60,000
cash in the partnership on November 1, 2021 to meet the additional liquidity requirements of the
business. The Article of Co-partnership stipulates the following:
A. Annual salary of P18,000 o Dory and P24,000 to Erwin
B. 10% annual interest on average capital account balance, and the
C. Remainder to be shared 6:4 to Dory and Erwin, respectively.

The annual salary was to be withdrawn by each partner in twelve monthly installments, During the fiscal
year ended, February 28, 2022, DOER had net sales of P500,000, cost of sales of P280,000, and total
operating expenses of P100,000 (excluding salaries and interest on average capital balance of
partners). Each partners made monthly cash drawings in accordance with the agreement.

Assume that the annual salary is to be recognized as operating expenses and the total operating
expenses of P100,000 includes the partners’ salaries but excluding interest on partners’ average capital
account balances.

● The capital balance of Dory at the end of the fiscal year is

216000

● The capital balance of Erwin at the end of the fiscal year is

294000

● The share of Dory in the net income is

66000

● The share of Erwin in the net income is

54000

DOER partnership was organized on March 1, 2021. On formation date, Dory invested P150,000 and
Erwin invested land and building with fair value of P80,000 and P100,000. Erwin also invested P60,000
cash in the partnership on November 1, 2021 to meet the additional liquidity requirements of the
business. The Article of Co-partnership stipulates the following:
D. Annual salary of P18,000 o Dory and P24,000 to Erwin
E. 10% annual interest on average capital account balance, and the
F. Remainder to be shared 6:4 to Dory and Erwin, respectively.

The annual salary was to be withdrawn by each partner in twelve monthly installments, During the fiscal
year ended, February 28, 2022, DOER had net sales of P500,000, cost of sales of P280,000, and total
operating expenses of P100,000 (excluding salaries and interest on average capital balance of
partners). Each partners made monthly cash drawings in accordance with the agreement.

Walang assume that annual salary blablabla.

● The capital balance of Dory at the end of the fiscal year is

190800
49. Mr Chow, Ms. King, Mr. Jolly and Ms. Bee formed a partnership on Jan. 01, 2017 with original capital
contributions of P300,000, P100,000, P200,000 and P400,000, respectively. On Jan. 01, 2019 capital
accounts of Mr. Chow, Ms King, Mr. Jolly and Ms. Bee showed the beginning balance for the year of
P450,000, P300,000, P250,000, and P400,000 , respectively. On Sept. 30 Mr. Chow and Ms. King
invested P100,000 each. Ms. Bee withdrew her investment of P100,000 on Oct. 01 for personal
reasons. The partnership suffered a net loss of P240,000.

● How much is the share of Ms. Jolly on the loss for 2019 if there is no agreement on the
distribution of profit and loss?
(48,000)

● How much is the share of Ms. Chow on the loss for 2019 if there is no agreement on the
distribution of profit and loss?
(72,000)

● How much is the average capital balance of Ms. King for the year 2019?
325,000

● How much is the average capital balance of Mr. Jolly for the year 2019?
250,000

● How much is the average capital balance of Mr. Bee for the year 2019?
375,000

50. YET Partnership began its first year of operations with investment from Y, P143,000, E, P104,000, and
T, P143,000. The Articles of Partnership provides that profit and losses be assigned in the following
manner:
a. Y and T were to be given annual salary of P26,000 and P13,000, respectively,
b. Each partner was to be given interest of 10% on capital balance as of the first day of the year,
c. Remainder was to be distributed on 5:2:3 ratio respectively for Y, E, and T.

Each Partner was allowed to withdraw up to P13,000 each year. For the first year of operation, the
partnership incurred a net loss of P26,000. In the second year, it earned net income of P52,000. Each
partner withdraw the maximum amount from the business each year.*

● E’s share in net loss for the first year is

10400

● The balance of the capital of Y at the end of the first year is

118300

● Y’s share in the net income for the second year is

28080

● The balance of the capital of T at the end of the second year is

132860

51. Assume the following data for GH Partnership:

 Assets Liabilities and Capital

Cash 3,000 Liabilities 9,000

Non-cash Assets 39,000 G, Capital (60%) 24,000

G, Loan 3,000 H, Capital (40%) 12,000

Total 45,000 Total 45,000

The % in parentheses represents the P/L ratio. The partners agree to admit J to the partnership. J must
invest cash of P28,800 equivalent to 37.50% interest in total agreed capital of P76,800. Assets are to
be revalued. *

● The amount of revaluation is

12000

● The revised capital of H after the admission of J is

16800

The % in parentheses represents the P/L ratio. The partners agree to admit J to the Partnership and the
total agreed capital after admission is P48,000. J invests P12,000 for 35% interest in the firm.

● The capital of H after the admission of J is

10,080 12480

● The capital credit of J is

16800

The % in parentheses represent the P/L ratio. The partners agree to admit J to the partnership. J
conveyed a tangible assets with a fair value of P30,000 with an assumed mortgage of P6,000 in
exchange for a 30% interest in capital with bonus being to be recognized, keeping in mind that J would
be acquiring a 1/4 interest in profits.

● The capital of G after the admission of J is

27600

52. Edwin and Darren have decided to form a partnership. Edwin contributes P80,000 cash and
merchandise inventory with a current market value of P20,000. Darren contributes a parcel of land
which was acquired two years ago at P100,000 but with a current value of P130,000. If Darren is to
make additional cash investment to have a 60% in the business, how much cash should he invest?
20000

53. John, Jeff and Jane decided to engage in a real estate venture as a partnership. John invested
P100,000 cash and Jeff provided office equipments that is carried on his books at P82,000. The
partners agree that the equipment has a fair value of P110,000. There is a P30,000 note payable
remaining on the equipment to be assumed by the partnership. Although Jane has non physical assets
to invest in the partnership, both John and Jedd believe that her experience as a real estate appraiser
 is a valuable skill needed by the partnership and is a basis for granting her a capital interest in the
partnership.

Assume that each partner is to receive an equal capital interest in the partnership and an upward
revaluation of assets by P90,000 is to be recorded.

● The capital of Jane upon formation is

90000

Assume that each partner is to receive an equal capital interest in the partnership and bonus method is
applied.
● The amount of capital transferred from John is
40000

● The capital of Jeff upon formation is

60000

54. The partnership of PP, EE and TT asked you to assist in winding up its business. You complete the
following information. The trial balance of the partnership on June 30, 20x4, is:

ACCOUNTS DEBIT CREDIT

Cash 6,000

Accounts receivable (net) 22,000

Inventory 14,000

Plant and equipment (net) 99,000

Accounts payable 17,000

PP, Capital 55,000

EE, Capital 45,000

TT, Capital 24,000

Total 141,000 141,000

The partners share profit and losses as follows: PP, 50 percent; EE, 30 percent; and TT, 20 percent.
Cash is to be distributed to the partners at the end of each month. A summary of the liquidation
transactions follows:

July
1 P16,500 collected on accounts receivable balance is uncollectible
2 P10,000 received for the entire inventory
3 P1,000 liquidation expense paid
4 P17,000 paid to creditors
5 P8,000 cash retained in the business at the end of the month
August
6 P1,500 in liquidation expense paid
7 As part payment of his capital, TT accepted an item that he develop, which had a book value of
P4,000. The part of P10,000 should be placed on this item for liquidation purposes
8 P2,500 cash retained in the business at the end of the month

September
9 P75,000 received on sale of remaining plant and equipment
10 P1,000 liquidation expenses paid. No cash retained in the business

● The amount received by PP in August cash distribution is ______.

0

● In the final cash distribution, the amount received by PP is ______.

41500

● The amount of cash available for distribution to partners in August is _______.

4000

● The amount of cash available for final distribution to partners is ______.

76500

● The amount of cash available for distribution to partners in July is ______.

6500

● In the final cash distribution, the amount received by TT is ______.

8600

● In the final cash distribution, the amount received by EE is ______.

26400

● The amount received by EE in July cash distribution is ______.

6500

The partners share profit and losses as follows: PP, 50 percent; EE, 30 percent; and TT, 20 percent.

The partners are considering an offer of P100,000 for the accounts receivable, inventory and plant and
equipment as of June 30. The P100,000 will be paid to creditors and the partners in installments, the
number and amount of which are to be negotiated.

● The partner who is most vulnerable to losses is

PP

● If the offer to sell the assets is accepted, the amount of cash to be received by TT is
17000

● The partner who first receives cash is

EE
 ● If the offer to sell the assets is accepted, the amount of cash to be received by EE is
34500

● If the offer to sell the assets is accepted, the amount of cash to be received by PP is
37500

55. In the absence of partnership agreement, the law says that income (and loss) should allocated based
on:
The ratio of capital investments

56. In a cash priority program for use in installment liquidation, the partner with the highest loss absorption
balance is the most vulnerable partner. The amount of cash to be distributed to partners in installment
liquidation can be determined by preparing a cash priority program.
Only statement 2 is true

57. Statement 1: A limited partner is liable only to the extent of his her contribution in the partnership.
Statement 2: A limited partner can use the right of offset against his capital deficiency, but he is not
required to make additional contribution out of his/her personal properties.
Only the first statement is true

58. An entry is not required in the liquidation of a partnership to record the

Allocation of a capital deficiency to partners with credit balances when the deficient partner is
solvent

59. Statement 1: In case the partnership is insolvent, the general partners are liable to pay the partnership
creditors from his/her personal properties
Statement 2: A deficient partner may apply the right of offset to a loan balance owing to him or her by
the partnership.
Both statements are true

60. Statement 1: In the event of liquidation, outside creditors has priority claim over the partnership assets.
Statement 2: When a partner becomes insolvent, the claim against his separate properties shall be paid
first to his personal creditors.
Both statements are true

61. A deficiency occurs for a partner when

Hi share in the losses of the partnership is more than his capital balance

62. Statement 1: Liquidation is the process of winding up the affairs of the business towards its termination.
Statement 2: The deficiency of a partner absorbed by the other partners is allocated based on capital
contribution.
Only the first statement is true

63. Statement 1: If A’s capital is deficient but there is a loan payable to B, the right of offset can be applied.
Statement 2: A partner whose personal assets are less than his personal liabilities is deficient.
Both statements are false

64. Partner Morgan is personally insolvent, owing P600,000. Personal assets will only bring P200,000
when liquidated. At the same time, Morgan has a credit capital balance in the partnership of P120,000.
 The capital amounts of the other partners total a credit balance of P250,000. Under the doctrine of
marshalling of assets, how much the personal creditors of Morgan can collect?
P320,000

65. Statement 1: When a partner dies and the remaining partners decide to terminate the business is called
dissolution.
Statement 2: In liquidation, the sale of non-cash assets is called realization.
Only the second statement is true

66. Statement 1: Gain or loss on realization is the difference between the cash proceeds and the book
value of the assets sold.
Statement 2: Loss on realization would decrease the partner’s capital account.
Both statements are true

67. A, B and C decided to liquidate their partnership business. The financial position of the partnership
shows: A, Capital (30%) P210,000; B, Capital (20%) P150,000; C, Capital (50%) P210,000. Upon
liquidation, all of the partnership’s assets are sold and sufficient cash is realized to pay all liabilities
except on for P30,000. All partners are solvent except C.

● By what amount would the capital of A change?

234,000 decrease

● How much is the additional contribution required of B?

6,000

68. ABC Partnership is liquidated and the non-cash assets are considered worthless. A and C are
general partners while B is a limited partner. The creditors will look to whose partner’s personal
assets for settlement of their claims?
The personal assets of Partners A and C

69. Charlize and Megan are partners with capitals of P80,000 and P40,000, respectively. They share profits
in the ratio of 3:1. The partners agree to admit Caleb as a member of the firm.

● If bonus is recognized and Caleb invests P30,000 for a 15% interest in the firm, what is Megan’s
capital after the admission of Caleb?
P41,875

70. 1. All the partners in a general partnership are personally liable for all debts incurred by the partnership.
2. A limited partnership must have at least one general partner.
Both statements are true

71. The accounts of the partnership of R, S and T at the end of the fiscal year November 30, 2020 are as
follows:
Cash 103,750
Non-cash assets 707,500
Loans to R 15,000
Liabilities 262,500
Loans from S 20,000
R, Capital 266,250
 S, Capital 136,250
T, Capital 141,250

R, S and T have been sharing profits and losses in the ratio 5:3:2 respectively.

● If in the first cash distribution, S received 50,000, the amount received by R is _______.
74167

● The most vulnerable among the partners is _______.

R

● If in the first cash distribution, S received 50,000, the amount realized from the first sale of non-
cash assets is _______.
900000 353,333 333333 559167

● If in the first cash distribution, T received P50,000 and assets with carrying value of P300,000
were sold, the gain or loss recognized on the sale of these assets is _______.
(48750)

72. Egay and Egoe who share profits and losses equally have a capital balance of 200,000 and 240,000
respectively. They admit Engyl for a 1/3 interest in partnership capital and profits for an investment of
250,000.

By how much were the net assets undervalued?

60,000

73. Partners Roger, Sergio and Tito, who share profit and loss in the ratio of 3:5:2, respectively have
decided to liquidate their partnership. The Statement of Financial Position of the partnership at the time
of liquidation is shown below:
Assets Liabilities and Capital
Cash P120,000 Accounts Payable P93,000
Other Assets 360,000 Loan from Sergio 30,000
Roger, Capital 108,000
Sergio, Capital 120,000
Tito, Capital 129,000
P480,000 P480,000

The partners desire to prepare an installment distribution schedule showing how cash would be
distributed to partners as assets are realized.

● The schedule of possible losses on capital balances would indicate that the first cash distributed
after the payment of outside creditors would be distributed to
Tito, in the amount of P57,000

● If Roger has received P30,000, how much would Sergio had received?
20,000

● In the schedule of maximum absorbable loss, the maximum absorbable loss for each partner
would be
 Roger, 360,000; Sergio, 300,000; Tito, 645,000

● Assuming that the first sale of other assets having book value of P150,000 realized P45,000
and all available cash is distributed, the partners would receive
Roger, P9,000; Sergio, P0; Tito, P63,00

74. Statement 1: A deficient and insolvent partner will still have a chance to receive cash from the
partnership if there is a loan payable to him which is higher than his capital deficiency.
Statement 2: A deficient and limited partner who has a loan to the partnership can apply the right of
offset to eliminate his deficiency.
Both statements are true
Both statements are false
Only the first statement is true
Only the second statement is true

75. Jurado, Katindig, Lazaro, and Marcelo are partners sharing earnings in the ratio of 3:4:6:8. The balance
of their capital accounts on December 31, 2015 are as follows:
Jurado P1,000
Katinding 25,000
Lazaro 25,000
Marcelo 9,000

The partners decide to liquidate, and they accordingly convert the non-cash assets into P23,200 of
cash. After paying the liabilities amounting to P3,000, they have P22,000 to divide.

● Assume that a debit balance in any of partner’s capital is uncollectible. The share of Jurado in
the loss upon conversion of the non-cash assets into cash was:
P5,400

● Assume that a debit balance in any of partner’s capital is uncollectible. The book value of non-
cash assets amounted to:
P61,000

● Assume that a debit balance in any of partner’s capital is uncollectible. When the P22,200 was
divided, Lazaro got
P8,320

76. The statement of Financial Position for the partnership of Eclavo, Eclara, and Elorda, who share profits
and losses in the ratio 4:5:1, is as follows:
Cash P100,000 Accounts Payable P300,000
Inventory 720,000 Eclavo, Capital 320,000
Eclara, Capital 90,000
Elorda, Capital 110,000
P820,000 P820,000

● Assuming Elorda is a limited partner, and the inventory is sold for P360,000, how much should
she receive upon liquidation of the partnership?
74,000
 ● Assuming Eclara is an insolvent partner, and the inventory is sold for P360,000, how much
should Eclavo receive upon liquidation of the partnership?
104,000

● If the inventory is sold for P600,000, how much should Eclavo receive upon liquidation of the
partnership?
P272,000

77. The following is the priority sequence on which liquidation proceeds will be distributed for a partnership:
Partnership liabilities, partnership loans, partnership capital balances

78. Statement 1: Solvent partners are partners with sufficient remaining personal assets after deducting or
liquidating the personal liabilities.
Statement 2: Right of offset is a legal right to apply a part or all of the amount owing to a partner against
his or her capital deficiency.
Both statements are true

79. Statement 1: A deficient partner has to make an additional investment to make up for his deficiency in
all instances.
Statement 2: Partnership creditors have priority over partnership properties; in the same manner that
the partners’ personal creditors have priority over partners’ personal properties.
Only the second statement is true

80. Iyah, Ayah and Mia operate a business as a partnership and share net income and net loss in a 3:3:4
ratio, respectively. The personal assets and liabilities of the partners, gathered from their personal
records show:

Partner Assets Liabilities

Iyah (General Partner) P470,000 P450,000

Ayah (General Partner) 200,000 280,000

Mia (Limited Partner) 305,000 300,000

The statement of financial position is as shown below. Assets are sold for P175,000. Liabilities are paid
as soon as cash is available. Creditors collect from solvent partners whenever necessary.

Cash P10,000 Accounts Payable P200,000

Non-Cash 375,000 Loan, Mia 5,000

Iyah, Capital 50,000

Ayah, Capital 70,000

Mia, Capital 60,000

● How much cash was received by Mia in the final settlement?

20,000
 5,000
0
10,000

● How much is the capital balance of Iyah after the sale of non-cash assets?
(P10,000)

● How much additional investment was made by Mia?

P0

● How much cash was received by Ayah in the final settlement?

0

● Who among the partners have received the cash in the final settlement?
Mia

● How much is the additional investment made by Ayah?

0

● How much is the share of Mia from the gain (loss) on sale of non-cash assets?
(P80,000)

● How much is the additional investment made by Iyah?

20,000

81. As of December 31, the books of AME Partnership showed capital balances of: A- P40,000; M-
P25,000; E-P5,000. The partners’ profit and loss ratio was 3:2:1, respectively. The partners decided to
dissolve and liquidate. They sold all the non-cash assets for P37,000 cash. After settlement of all
liabilities amounting to P12,000, they still have P28,000 cash left for distribution.

● The loss on the realization of the non-cash assets was

P42,000

● Assuming that any partner’s capital debit balance is uncollectible, the share of A in the 28,000
cash for distribution would be
P17,800

82. The statement of financial position of the partnership A, B, and C shows: Cash, P22,400; Other Assets,
P212,000; Liabilities, P38,400; A, Capital (50%) P76,000; B, Capital (25%) P64,000, and C, Capital
(25%) P56,000.

● If B received a total of P31,000 from partnership liquidation, how much was the loss on
realization?
P127,000

● If C received P10,000 from the first cash distribution, how much was the total cash distributed to
partners?
P28,000
 ● How much is the additional contribution required of B?
P6,000

● The partners realized P56,000 from the first installment sale of non-cash assets with total
carrying amount of P120,000. How much did B receive from the partial liquidation?
P24,000

● If A received a total of P10,000 from partnership liquidation, how much was the proceeds from
the sale of all non-cash assets?
P85,000

83. The order of the liquidation process is

Sell assets, pay liabilities, disburse cash to partners

84. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk
Partnership. The partner’s capital balances are P300,000 and P190,000, respectively.

● Before the realization of non-cash assets, the partnership has a zero balance in its cash
account and a P200,000 balance in its liabilities. If on final settlement of partners’ claims Jack
received P261,000, how much was the net proceeds from the sale of non-cash assets?
P560,000

● If all partnership assets and liabilities are realized and settled at their carrying amounts, how
much would Beans receive from liquidation?
P190,000

● If all partnership assets are realized and all liabilities are settled, the partnership has remaining
cash of P120,000, how much would Beans receive from the liquidation?
None

● If on final settlement of partners’ claims Beans received P99,000, how much did Jack receive?
P261,000

● The partnership has total liabilities of P200,000. If all partnership assets are realized for
P500,000, how much would Jack receive from the liquidation?
243,000

85. The liabilities and capital balances of the partners before the sale of the assets and payments of
liabilities including personal assets and liabilities of the partners were:

Partnership Personal Assets Personal Liabilities

Cash P10,000

Liabilities 70,000

Kath 65,000 P1,200,000 P1,500,000

Pau 20,000 2,500,000 2,490,000

 Jas 15,000 3,000,000 3,200,000

After the assets were sold the capital balances of the partners were as follows: Kath, P48,000; Pau,
P12,000; and Jas, (P10,000)

● How much cash was received by Jas in the final settlement?

P0

● What is the P/L ratio of Jas? [34% - Kath; 16% - Pau]

50%

● How much is the gain/(loss) from sale of non-cash assets?

(P50,000)

● How much is the proceeds from sale of non-cash assets?

P110,000

● How much is the non-cash assets?

P160,000

86. Clyde, Warren and Neil formed a partnership on Jan. 1,2020 with investments of 100,000, 150,000, and
200,000 respectively. For division of income, they agreed the following conditions:
a. interest of 10% of the beginning capital balance each year.
b. annual compensation of 10,000 to Warren and
c. sharing of the remainder of the income or loss in a ratio of 20% for Clyde and 40% each for
Warren and Neil.

Net income was 150,000 in 2020 and 180,000 in 2021. Each partner withdrew 1,000 for personal use
every month during 2020 and 2021.

● The capital balance of Clyde at the end of 2021 is _______.

139420

● The capital balance of Warren at the end of 2021 is _______.

264540

● The capital balance of Neil at the end of 2021 is _______.

304040

● The share of Neil in the net income for 2021 is

70040

● The share of Warren in the net income for 2020 is

63000

● The capital balance of Clyde at the end of 2020 is _______.

117000
87. Chua and Wong are forming a partnership. Chua will invest a building that currently is being used by
another business owned by Chua. The building has a market value of P900,000. Also, the partnership
will assume responsibility for a P300,000 note secured by a mortgage on that building. Wong will invest
P500,000 cash. For the partnership, the amounts to be recorded for the building and for Chua’s Capital
account are:
Building, P900,000 and Chua, Capital, P600,000

88. The partner’s personal account which was collected by the partnership and credited to its accounts
receivable is a violation of the
Business entity concept

89. Partner B is investing in a partnership with Partner A. B contributes as part of his initial investments.
Accounts Receivable of P60,000, an Allowance for Doubtful Accounts of P9,000, Furniture of P30,000
with accumulated depreciation of P8,500 and P6,000 cash. The partners agreed that prepaid expenses
of P2,000 and accrued expenses of P1,800 have to be recognized. The entry that the partnership
makes to record B’s initial contribution includes a
Credit to B, Capital at P78,700

90. Jack holds an ownership interest of 63% and Teresa holds an ownership interest of 37% in the J and T
Partnership. This year, in order to further develop the business, Jack contributes an additional P6800
and Teresa contributes an additional P3200 to the partnership. Which of the following is TRUE of this
scenario?
Individual contributions of P6800 by Jack and P3200 by Teresa will be recorded

91. Partners’ non-cash investments are valued at

Market value

92. 1. One of the partners in a proposed partnership is a multi-millionaire. The stipulation in the articles of
partnership that this partner shall be excluded from sharing in the profits of the partnership is void.
2. A partnership may be established for charity.
Only statement 1 is true.

93. 1. The essence of partnership is that each partner must share in the profits or losses of the venture.
2. As long as the action is within the scope of the partnership, any partner can bind the partnership.
Both statements are true

94. In the absence of a partnership agreement, the law says that income (and loss) should be allocated
based on
The ratio of capital investments

95. Steve owns 64% and Mark owns 36% of a partnership business. They purchase equipment with a
suggested value of P9600. The current market value of the equipment at the time of purchase was
P9100. At the time of the balance sheet preparation, depreciation of P160 was recorded. Based on the
information provided, which of the following is TRUE of the partnership?
The equipment account will be debited at P9100 on the date of purchase

96. 1. A partnership has a limited life because any change in the relationship of the partners dissolves the
partnership.
2. In a limited partnership, the general partner’s liability is limited to his investment.
 Only statement 1 is true

97. 1. All partners in a general partnership are personally liable for all debts incurred by the partnership.
2. A limited partnership must have at least one general partner.
Both statements are true

98. Which of the following statements about partnerships is incorrect?

Right over profits and right over assets represent claims of partners that are allocated based on
partners’ capital accounts.

99. 1. A limited partnership normally has one or more general partners whose liability is unlimited.
2. A partnership is a legal entity separate and apart from its owners.
Both statements are true

100. Airamae and Aimery agreed to form AiAi Partnership. Airamae’s business which amounted to
P500,000 was audited and appraised at 75% of its book value.

● If they agreed that Aimery should invest cash equal to 60% of Airamae’s investment, Aimery
should invest?
P225,000

● If they agreed that Aimery should invest P325,000 cash and that each partner should be
credited for an equal share based on total actual contributions, Airamae’s capital credit should
be
P375,000
P350,000
P412,500
P500,000

● If they agreed that Aimery should invest cash equal to 60% of Airamae’s investment, the total
partnership capitalization would be
P600,000

● If they agreed that Aimery should invest P325,000 cash and that each partner should be
credited for an equal share based on total actual contributions, the bookkeeper should
recognize
Bonus for Aimery

101. Edwin and Darren have decided to form a partnership. Edwin contributes P80,000 cash and
merchandise inventory with a current market value of P17,000. Darren contributes P2400 cash and
office furniture with a current market value of P3200.

● When journalizing these transactions _____

Office Furniture will be debited for P3200

● If the partners decide to have equal interest in the partnership and the total actual contributions
is equal to total agreed capital, which statement is true?
There is bonus
102. Alana & Ansley enter into a partnership agreement in which Alana will be given 60% interest in
capital and profits. Alana contributes the following:
Land - P500,000 ?
Building - 5,000,000 fair value is 60% of its cost
Equipment - 1,000,000 fair value is 75% of its cost
There is P1,000,000 mortgage on the building which the partners agreed to assume.
The partners agreed that the total partnership capitalization should be P6M.

● Alana, Capital should be credited for

P3,600,000

● How much should be Ansley’s agreed capitalization?

P2,400,000

● Land should be recorded in the amount of

P850,000

103. Rica is a sole proprietor who invested her grocery when she invited Belle to form a new
partnership business. The following are the assets and liabilities of the grocery:

Cash P50,000

Merchandise 30,000 (book value)

20,000 (market value)

Fixed assets (P100,000 less Accumulated 90,000 (book value)

Depreciation of P10,000)

70% of cost (market value)

Accounts Payable 20,000

Accrued Expenses 7,000

Belle invested the following:

Cash P60,000

Land (mortgaged with a balance of P50,000 200,000 (book value)

plus accrued interest for 6 months at 18%)

500,000 (market value)

Store furniture (costing P40,000 less 30,000

accumulated depreciation of P10,000)

● The total assets of the newly formed partnership would be

P730,000

● If the mortgage note plus interest is to be assumed by the partnership, Belle. Capital should be
credited for
 P535,500

● The total liabilities of the newly formed partnership would be

P81,500

104. In comparison to a corporation, the owners of a general partnership ___

Have an unlimited personal liability for the debts of the business

105. In comparison to a corporation, the owners of a general professional partnership ___

Have an unlimited personal liability for the debts of the business

106. 1. An advantage of the partnership form of business is that each partner’s potential loss is
limited to that partner’s investment in the partnership.
2. Ownership is easily transferred in a partnership.
Both statements are false

107. 1. There is no income tax imposed on a partnership.

2. Mutual agency means that each partner has the right to bind the partnership to contracts
Only statement 2 is true

108. Partnership capital and drawings accounts are similar to the corporate
Paid in capital, retained earnings, and dividends accounts

109. An advantage of the partnership as a form of business organization would be

A partnership is created by mere agreement of the partners

110. Harold and Dwayne formed Hayne’s Partnership, with Harold investing cash of P150,000.

● If Dwayne is given 60% interest in assets and profits, how much is the partnership total agreed
capitalization?
P375,000

● How much should Dwayne invest for a 60% interest in assets and profits?
P225,000

111. The Metro Fashion partnership owned by Mary and May is terminated when creditor claims
exceed partnership assets by P40,000. Partner May is a millionaire and Mary has no personal assets.
Mary’s partnership interest is 75% and May’s 25%. Creditors
May collect the entire P40,000 from May

112. Jameson and Larry are forming a partnership. Jameson will invest a truck with a book value of
P100,000 and fair market value of P140,000. Larry will invest a building with a book value of P300,000
and a fair market value of P420,000, with a mortgage of P150,000.

● What amount should be recorded in Larry’s capital account?

P270,000

● At what amount should the building be recorded?

P420,000
 ● If it was agreed that both partners will have equal share in the net assets, using the cash
method, how much should be the additional cash investment by Jameson?
P130,000

113. Which of the following is specified in the articles of partnership?

Procedures for withdrawal of assets by the partners

114. Partner B is investing in a partnership with Partner A. B contributes as part of his initial
investments. Accounts Receivable of P60,000, an Allowance for Doubtful Accounts of P9,000; and
P6,000 cash. The entry that the partnership makes to record B’s initial contribution includes a
Credit to B, Capital for P57,000

115. Bob is investing in a partnership with Jerry. Bob contributes equipment that originally cost
P63,000, has a book value of P30,000, and a fair market value of P39,000. The entry that the
partnership makes to record Bob’s initial contribution includes a
Debit to Equipment for P39,000

116. A loan due from a partner is classified in the statement of financial position as a/an
Current assets

117. Tim and Michelle have decided to form a partnership with a 60/40 partnership interest ratio. Tim
contributes P7,500 cash and merchandise inventory with a market value of P1,500. While journalizing
this transaction___.
Tim, Capital will be credited for P9,000

118. Which one of the following would not be considered a disadvantage of the partnership form of
organization?
Ease of Formation

119. Andrea invested the following in the partnership:

Cash P10,000

Accounts receivable 50,000

Allowance for Bad Debts 5,000

Merchandise Inventory 120,000

Furnitures & Fixtures 75,000

Accumulated Depreciation 7,500

● If the Accounts Receivable has a net realizable value of P40,000 and there is an Accounts
Payable amounting to P60,000. How much should be credited to Andrea, Capital?
P177,500

● Accounts Receivable, Merchandise Inventory, and Furniture & Fixtures will respectively be
debited at the Partnership books for:
 45,000; 110,000; 60,000

● If the current fair value of the furniture and fixtures is P60,000 and that of the merchandise
inventory is 110,000, Andrea should be credited for
P225,000

120. 1. A nominal partner actively participates in the management of the business.

2. An ostensible partner is unknown to the public that he/she is a partner.
Both statements are false

121. A firm has two partners: Jim and Bill. Jim owns 60% of the partnership and Bill owns 40%. In
which of the following transactions will the partnership be held responsible for an individual partners’
actions?
Bill signs a contract to buy furniture for official use in the partnership

122. Partnership JB has two partners: Jim and Bill. Jim owns 60% of the partnership and Bill owns
40%. In which of the following transactions will the partnership be held responsible for an individual
partners’ transactions?
Bill signs a contract to buy furniture for official use in the partnership

123. If a partner’s capital account is credited with the amount that he or she contributed in cash,
which of the following financial statements will be affected?
The statement of partners’ equity

124. Edwin and Darren have decided to form a partnership. Edwin contributes P80,000 cash and
merchandise inventory with a current market value of P20,000. Darren contributes a parcel of land
which was acquired two years ago at P100,000 but with a current value of P130,000. If Darren is to
make additional cash investment to have a 60% in the business, how much cash should he invest?
P20,000

125. Rica is a sole proprietor who invested her grocery when she invited Belle to form a new
partnership business. The following are the assets and liabilities of the grocery:

Cash P50,000

Merchandise 30,000 (book value)

20,000 (market value)

Fixed assets (P100,000 less Accumulated 90,000 (book value)

Depreciation of P10,000)

70% of cost (market value)

Accounts Payable 20,000

Accrued Expenses 7,000

● Rica’s Capital account should be credited for

P113,000
126. Which of the following is TRUE of a partnership?
Partnership firms have a limited life

127. The partners have the following rights, except?

Transfer ownership at will

128. A characteristic describing a partnership as a judicial personality which can acquire, sell, or
dispose properties and incur obligations is called
Legal Entity

129. A partnership is a _______

Business with two or more owners that is not organized as a corporation

130. Which of the following is TRUE of a partnership balance sheet?

Each partner’s equity will be shown separately

131. In a partnership, mutual agency means that___

Any partner can bind the business to a contract within the scope of its regular business
operations

132. Blau and Rubi are partners who share profits and losses in the ratio of 6:4, respectively. On May
1, 2018, 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 P40,000. The new partnership began with a total capital of P150,000 immediately after
Lind’s admission, Blau’s capital should be
P54,000

133. When a partner retires and receives in cash less than his capital balance, how should the
difference be treated?
The difference should be credited to the remaining partners in their remaining profit and loss
ratio

134. LOV Partnership decided to admit E, who purchased a 20% interest from L, whose capital
balance was P400,000. E paid her P100,000.

● The effect of this transaction is a/an

Decrease in L’s capital

● The journal entry to record the admission of E will include a

Debit to L, Capital

135. LOV Partnership decided to admit E, who purchased a 30% interest from L, whose capital
balance was P400,000. E paid her P125,000.

● The effect of this transaction is a/an

Increase in E’s capital
 ● The journal entry to record the admission of E will include a:
Credit to E, Capital

136. Which of the following conditions constitutes a legal dissolution of a partnership?

All of the choices given

137. If the new partner is admitted by purchase of interest of an old partner at an amount higher than
its book value, this will result in
No change in partnership’s net assets

138. The capital accounts of the partnership of R and O on January 30, 2014, are as follows:
R, Capital P80,000
O, Capital P40,000

The partners share profits and losses in the ratio of 6:4. The partnership is desperate for cash and they
agreed to admit Y as a new partner with a 1/3 interest in capital and profits upon the latter’s capital
infusion of P30,000.

After Y’s admission, what are the corresponding capital balances of R, O, and Y, respectively, assuming
assets and liabilities are fairly valued?
P68,000; P32,000; P50,000

139. Charlize and Megan are partners with capitals of P80,000 and P40,000, respectively. They
share profits in the ratio of 3:1. The partners agree to admit Caleb as a member of the firm.

● If no bonus is recognized and Caleb invests P80,000 for a 50% interest in the firm, what is
Charlize’s capital after the admission of Caleb?
P65,000

● If no bonus is recognized and Caleb invests P30,000 for a 20% interest in the firm, what is
Megan's capital after the admission of Caleb?
P40,000

● If total agreed capital is based on Caleb’s contribution and Caleb Invests P30,000 for a 15%
interest in the firm, What is Megan’s capital after the admission of Caleb?
P52,500

● If no bonus is recognized and Caleb invests P80,000 for a 50% interest in the firm, what is the
profit sharing ratio of Charlize after the admission of Caleb?
37.5%

140. Charlize and Megan are partners with capitals of P80,000 and P40,000, respectively. They
share profits in the ratio of 2:3. The partners agree to admit Caleb as a member of the firm.
● If no bonus is recognized and Caleb invests P80,000 for a 50% interest in the firm, what is the
profit sharing ratio of Charlize after the admission of Caleb?
20%
141. CAR Partnership decided to admit E who invested P100,000 for a 25% interest in the
partnership with a total capitalization of P500,000.

● The capital credit of E is

P125,000

● The journal entry to record the admission of E will include

A recognition of bonus to E

● The effect of this transaction is a/an

Increase in capital

142. CAR Partnership decided to admit E who invested P120,000 for a 25% interest in the
partnership with a total capitalization of P500,000.

● The capital credit of E is

P100,000

143. Egay and Egoe who share profits and losses equally have capital balances of P200,000 and
P240,000, respectively. They admit Engyl for a 1/3 interest in partnership capital and profits for an
investment of P260,000.

By how much were the net assets undervalued? (Engyl is credited for his capital contribution)
P80,000

144. Which of the following best describes the admission of new partner by investing an amount
more than his capital credit under the bonus method?
Increase on both net assets and total capital

145. The partnership of Lim and Mallorca provides for equal sharing of profits and losses. Prior to the
admission of a third partner Zamora, the capital accounts are Lim, P75,000 and Mallorca, P105,000.
Zamora invests P90,000 for a P75,000 interest and partners agreed that the net assets of the new
partnership would be P270,000. This admission involves
Bonus to old partners of P15,000

146. Peter, Queen and Roy are partners with capital balances of P300,000. P300,000 and P200,000,
respectively, and sharing profits and losses equally. Roy is to retire and it is agreed that he will take
certain office equipment with a second hand value of P50,000 and a note for his interest. The office
equipment carried in the books at P65,000 but brand new would cost P80,000. Roy’s acquisition of the
office equipment would result in
Reduction in capital of P55,000 for Roy

147. On June 30, 2018 the condensed balance sheet for the partnership of Eddy, Fox and Grimm
together with their respective profit and loss sharing percentage was as follows
Assets, net of liabilities P 320,000
Eddy , Capital (50%) P 160,000
Fox, Capital (30%) P 96,000
Grimm, Capital (20%) P 64,000
P 320,000
 ● Eddy decided to retire from the partnership and by mutual agreement is to be paid P180,000 out
of partnership funds for his interest. Total goodwill implicit in the agreement is to be recorded.
After Eddy’s retirement, what are the capital balances of the other partner?
108,000 (Fox) 72,000 (Grimm)

● Assume that Eddy remains in the partnership and that Hamm is admitted as a new partner with
a 25% interest in the capital of the new partnership for a cash payment of P140,000. Total
goodwill implicit in the transaction is to be recorded. Immediately after admission of Hamm,
Eddy’s capital account balance should be
P210,000

148. Matthew, Paulo and Claude share partnership profits in the ratio 2:3:5. On September, 30
Claude opted to retire from the partnership. Prior to Claude’s investment, the capital balances of the
three partners are P25,000 ,P40,000 and P35,000, respectively.

● How much is Paulo’s capital after Claude’s retirement if Claude is paid P30,000 in full settlement
of his partnership interest?
P43,000

● How much is the capital of Matthew after Claude’s retirement if Claude is paid P39,000 in full
settlement of his partnership interest?
P23,400

● How much is the capital of Matthew after Claude’s retirement if Claude is paid P25,000 in full
settlement of his partnership interest?
P31,000
P29,000
P26,600
P23,400

149. When Jill retired from the partnership of Jill, Bill and Hill, the final settlement of her interest
exceeded her capital balance. Under the bonus method, the excess
Reduced the capital balance of Bill and Hill

150. When Jill retired from the partnership of Jill, Bill and Hill, the final settlement of her interest is
less than her capital balance. Under the bonus method, the difference
Increased the capital balance of Bill and Hill

151. Jeric, Ken, and Lemuel are partners sharing profits in the ratio 5:3:2 respectively, as of
December 31, 2013, their capital balances were P95,000 for Julian, P80,000 for Ken and P60,000 for
Lemuel.

On January 1, 2019 the partners admitted Mark as a new partner and according to their agreement
Mark will contribute P80,000 in cash to the partnership and also pay P10,000 for 15% for Ken’s share.
Mark will be given a 20% share in profits. While the original partners’ share will be proportionately the
same as before. After the admission of Mark, the total capital will be P330,000 and Mark’s capital will
be P70,000
 ● The bonus in the admission of Mark would be
P22,000

● The balance of Ken’s Capital after the admission of Mark would be

P79,100

● The amount of asset revaluation is

P15,000

152. Which of the following best characterizes the bonus method of recording a new partner’s
investment in a partnership?
Assuming that recorded assets are properly valued, the book value of the new partner is equal
to the book value of the previous partnership and the investment of the new partner.

153. B and N are partners sharing profits and losses in the ratio 7:3. On January 1,2013 their credit
balance capital accounts are P30,000 for B and P20,000 for N, W is to be admitted as a partner by
buying 50% of B’s interest for P20,000.

The capital balance of B after W’s admission is

P15,000

154. B and N are partners sharing profits and losses in the ratio 7:3. On January 1,2013 their credit
balance capital accounts are P70,000 for B and P30,000 for N, W is to be admitted as a partner by
buying 50% of B’s interest for P40,000.

The capital balance of B after W’s admission is

P35,000

155. Mike and Tess are partners with capital balances of P70,000 and P50,000 respectively. They
share profits and losses in the ratio of 3:1, respectively. Voce is to be admitted in the partnership for a
cash contribution of P60,000 for a ½ interest in the partnership capital and in future profits and losses.

If Voce would be given a capital credit of P90,000, how much would be charged to Mike’s capital
account?
P15,000

156. Mike and Tess are partners with capital balances of P70,000 and P50,000 respectively. They
share profits and losses in the ratio of 3:1, respectively. Voce is to be admitted in the partnership for a
cash contribution of P70,000 for a ½ interest in the partnership capital and in future profits and losses.

If Voce would be given a capital credit of P80,000, how much would be charged to Mike’s capital
account? (no asset revaluation)
P7,500

157. Partner’s Nitz, Pat and Candy share profits and losses 50:30:20 respectively. Capital balances
are P74,000 P130,000 and P96,000 respectively. The carrying values of assets and liabilities are equal
to their fair values. Emmie is to be admitted as a new partner with a 20% capital interest and a 20%
share of profits and losses in exchange for a cash contribution. No bonus is to be effected.
 How much should Emmie contribute?
P75,000

158. J decided to withdraw from the JOY Partnership. A cash settlement was made by the
partnership this will
Decrease Assets

159. The partnership of Noynoy, Manny and Gibo have capital balances as follows: Noynoy -
P35,000, Manny - P50,000, Gibo - P40,000. Their profit and loss ratio are 30% 50% and 20%
respectively, With the consent of Noynoy and Manny, Gibo sold one-half of his interest to Erap for
P30,000 , Gibo was paid in cash by Erap.

● What is the Capital Balance of Noynoy after the admission of Erap to the partnership?
P35,000

● What is the Capital Balance of Manny after the admission of Erap to the partnership?
P50,000

160. An adjustment of the assets and liabilities of the partnership to their fair market values before
dissolution is called
Asset revaluation

161. Paul, Melvin and Elrick are partners sharing profits and losses in the ratio of 2:2:1. On July 31,
2018, their capital balances are as follows: Paul - P700,000; Melvin - P500,000; Elrick - P400,000. The
partners agree to admit Laurence on the following conditions:
A. Laurence is to pay Paul P400,000 for 1/2 of Paul’s interest:
B. Laurence is also to invest P400,000 in the partnership
C. The total interest of Laurence is 25% of the total partnership capital, which is also his share in
the new partnership profit and loss sharing ratio. The old partners are sharing in their old ratio

● How much is Paul’s capital after the admission of Laurence?

P450,000

● What is the percentage of Elrick’s share in the new profit and loss sharing ratio?
15%

162. A partnership agreement most likely will stipulate that assets be reappraised when
A partner retires

163. A partnership agreement most likely will stipulate that assets be reappraised when
New partner is admitted to the partnership

164. The following transactions will affect the balance of the total partnership capital except
Admission by purchase

165. The following transactions will affect the balance of the total partnership capital except
Retirement of a partner by selling interest to another partner
166. Ben and Ric are partners who share profits and losses in the ratio of 6:4, respectively. On May
1, 2019, their respective capital accounts were as follows:
Ben P60,000
Ric P50,000

On that date, Lito was admitted as a partner with a one-third interest in capital and profits for an
investment of P40,000. The new partnership began with a total capital of P150,000. Immediately after
Lito’s admission, Ben’s capital account balance should be
P54,000

167. The admission of a new partner involving bonus will result in

Bonus to either old or new, but not both

168. Statement 1: The admission of new partner through his direct investment in the partnership will
increase the partnership capital even under bonus method
Statement 2: The admission of new partner through purchase of interest of existing partner will increase
partnership capital
Only statement 1 is true

169. Luke and Mark, who share profits and losses equally, agree to take John into the partnership for
a 40% share in capital and profits. Luke and Mark retain 30% interest each. Luke and Mark have
Capital balances of P100,000 and P140,000 respectively before the admission of John. John pays
P120,000 directly to Luke and Mark for his 40% interest. All assets of the partnership, except for land
are fairly valued.

● What would be the capital balance of Mark, immediately after the admission of John?
P102,000

● By how much was land undervalued?

P60,000

170. Dada and Elma are partners with capital balances of P400,000 and P600,000, respectively.
They share profits and losses equally. They decided to admit Jhai as a partner who will invest P200,000
for a 16% interest. Total agreed capital is P1,250,000. Which of the following statements is true?
There is revaluation of assets equal to P50,000

171. On June 30, 2018 the balance sheet for the partnership of Coll, Maduro and Prieto together with
their respective profit and loss ratios was as follows
Assets, at cost 180,000
Coll, Loan 9,000
Coll, Capital (20%) 42,000
Maduro,Capital (20%) 39,000
Prieto, Capital (60%) 90,000
Total 180,000

Coll decided to retire from the partnership by mutual agreement, the assets are to be adjusted to their
fair value of P216,000 at June 30,2018. It was agreed that the partnership would pay Coll P61,200 cash
for Coll’s partnership interest,including Coll loan which is to be repaid in full. No goodwill is to be
recorded. No goodwill is to be recorded.
 After Coll’s retirement, what is the balance of Maduro's capital account?
P45,450

172. Pascual invested P400,000 for a 10% interest in a partnership that has a total capital of
P3,000,000 after admitting Pascual. Which of the following is true?
The original partners received a bonus of P100,000

173. B and N are partners sharing profits and losses in the ratio 7:3. On January 1, 2014 their credit
balance capital accounts are P30,000 for B and P20,000 for N. W is to be admitted for a 25% interest in
the capital directly from the partners for P45,000.

Each partner’s capital account is to be charged pro rata for amounts in their capital ratio that will
provide W with the 25% interest.

The capital balance of B after W’s admission is

P22,500

174. Partnership A has an existing capital of P70,000. Two partners currently own the partnership
and split profits of 50/50. A new partner is to be admitted and will contribute net assets with a fair value
of P90,000. For no goodwill or bonus (depending in whichever method is used) to be recognized, what
is the interest in the partnership granted the new partner?
56.25%

175. Total partners’ equity remains the same if a new partner is admitted by purchase of interest.
In partnership dissolution, bonus is computed as a percentage of net income.
Only statement 1 is true.

176. The capital accounts of Ed, Nick and Vic are presented below with their respective profit and
loss ratio:
Ed P139,000 (½)
Nick 209,000 (⅓)
Vic 96,000 (⅙)

Tony was admitted to the partnership when he purchased directly, for P132,000 a proportionate interest
from Ed and Nick in the net assets and profits of the partnership. As a result, Tony acquired a one-fifth
interest in the net assets and profits of the firm. Assuming no revaluation of net assets is recorded, what
is the combined gain realized by Ed and Nick upon the sale of a portion of their interests in the
partnership to Tony?
P43,200

177. At December 31, Rod and Sol are partners with capital balances of P40,000 and P20,000, and
they share profits and losses in the ratio of 2:1, respectively. On this date Pete invests P17,000 in cash
for a one-fifth interest in the capital and profit of the new partnership. Assuming that assets are not
revalued, how much should be credited to Pete’s capital account on December 31?
P15,400
178. In lump-sum liquidation, capital deficiency resulting from division of loss from realization must be
eliminated before making any payment to partners. Any resulting capital deficiency of an insolvent
partner is eliminated by charging the capital accounts of the remaining partners.
Both statements are true

179. Partners Ray and Allan received a salary of P150,000 and P300,000, and share profit and loss
at 2:1 ratio, respectively. If the partnership suffered a P150,000 loss in 2020, by how much Allan’s
capital account would increase or decrease?
100,000

180. Two sole proprietors, E and J, agreed to form a partnership on January 1, 2021. The trial
balance for each proprietor is shown below as of January 1, 2021.

E E J J

BV FV BV FV

Cash 40,000 40,000 30,000 30,000

AR (net) 60,000 52,000 70,000 56,000

Merchandise 100,000 94,000 100,000 114,000

Inventory

Building (net) 280,000 320,000 250,000 280,000

Furniture and 60,000 64,000 40,000 44,000

fixtures (net)

AP 110,000 110,000 80,000 80,000

Mortgage Payable 200,000 200,000 150,000 150,000

E, Capital 230,000

J, Capital 260,000

The EJ partnership will take over the assets and assume the liabilities of the proprietors as of January
1, 2021.

● The total capital of the partnership amounts to

554000

● The total assets of the partnership amounts to

1094000

● The total liabilities of the partnership amounts to

540000

181. Total partners’ equity changes if a new partner is admitted by purchase of interest.
In partnership dissolution, bonus is computed as a percentage of net income.
Only statement 2 is true
Only statement 1 is true
 Both statements are false
Both statements are true

182. Partner Fe is investing in a partnership with Partner Ann. Fe contributes as part of her initial
investment. Accounts Receivable of P80,000; an Allowance for Doubtful Accounts of P12,000. Accounts
of P8,000 should be written off. The entry that the partnership makes to record Fe’s initial contribution
includes a
Credit to Fe, Capital for P68,000

183. Faith, Hope, and Love are partners sharing profits and losses in the ratio 2:2:1 and have capital
balances of P800,000, P800,000, and P400,000, respectively. Mercy pays P220,000 directly to Love for
½ of her share in the partnership. Partners agree that it is time to revalue the assets of the partnership
using as a basis, the amount Mercy is willing to pay.

● Total partnership capital after the admission of Mercy is

P2,200,000

184. Partner’s Nitz, Pat and Candy share profits and losses 50:30:20 respectively. Capital balances
are P74,000 P130,000 and P96,000 respectively. The carrying values of assets and liabilities are equal
to their fair values. Emmie is to be admitted as a new partner with a 40% capital interest and a 40%
share of profits and losses in exchange for a cash contribution. No bonus is to be effected.

How much should Emmie contribute?

P200,000

185. Mini Partnership was formed on January 2021. According to the partnership agreement, each
partner has an equal capital balance accounted for under goodwill (revaluation of asset) approach.
Partnership net income or loss is allocated 60:40 to Mi and Ni, respectively. Mi originally contributed
assets costing P30,000 with a fair value of P60,000 on January 1, 2021, while Ni invested P20,000 in
cash. Partners’ drawings during 2021 totaled P3,000 by Mi and P9,000 by Ni. Net income for 2021 was
P25,000.**

● The capital credit of Mi upon partnership formation is

60000

● The share of N in the net income for 2021 is

10000

186. Ben and Ric are partners who share profits and losses in the ratio of 6:4, respectively. On May
1, 2019, their respective capital accounts were as follows:
Ben P50,000
Ric P50,000

On that date, Lito was admitted as a partner with a one-third interest in capital and profits for an
investment of P50,000. The new partnership began with a total capital of P150,000. Immediately after
Lito’s admission, Ben’s capital account balance should be
P60,000
P56,667
P54,000
 P50,000

187. Partners Piolo and Jericho received a salary of P400,000 and P600,000 and share in profit and
loss at 60%; 40% ratio, respectively. If the partnership generated a net profit of P540,000 in 2020, by
how much Jericho’s capital account would increase or decrease?
124,000
(276,000)
416,000
(184,000)

188. Statement 1: When a new partner enters into a partnership by purchasing in existing partner’s
interest, the total assets and equity of the business increase.
Statement 2: When a new partner is admitted to a partnership by purchasing an existing partner’s
interest, the business’s accounting records do not record the transfer of cash from the new partner to
the existing partner.
Only statement 2 is true

189. Ace and Hoby formed a partnership on May 29, 2019 by contributing P300,000 and P500,000,
respectively. Ace and hoby agreed to receive 10% interest on capital contribution, and that Ace will
receive a monthly salary of P10,000 starting August 1, 2019. The remaining balance will be divided
according to capital contribution. At the end of the year, the partnership generated a revenue of
P800,000 and expenses of P650,000.

How much is the share of Hoby from the net profit?

80,000
87,500
62,500

How much is the share of Ace from the net profit?

87,500

190. Faith, Hope, and Love are partners sharing profits and losses in the ratio 2:2:1 and have capital
balances of P800,000, P800,000, and P400,000, respectively. Grace purchases half of Faith’s interest
by paying her directly for an amount that earned her a profit of P60,000.

● The entry to record the admission of Grace in the partnership includes a

Credit to Grace, Capital, P400,000

191. Statement 1: A bonus to the remaining partners results when a retiring partner receives
partnership assets which are less than his or her capital balance on the date of withdrawal.
Statement 2: If a new partner invests in a partnership at book value and acquires ¼ interest in total
partnership capital, it indicates that a bonus was paid to the original partners.
Only statement 1 is true

192. The partnership agreement of Adrian and Arzel provides a 5% capital interest on the initial
capital contributions of P300,000 and P500,000 respectively. The agreement also provides a salary
allowance of P200,000 to Adrian. The agreed profit and loss ratio is 40% for Adrian and 60% for Arzel.
The partnership generated a net profit of P180,000 in 2020. How much is the share of Arzel on the
profit?
 (11,000)

193. Bel and May have capital balances of P900,000, and P1,300,000 as of December 31, 2020. Bel
and May share 40% and 60% in the profits and losses. The partners believe that the following assets
should be adjusted:
Accounts receivable - (book value) - P240,000; (market value) - P200,000
Inventory - (book value) - P400,000; (market value) - P450,000

Len is interested in buying 40% interest from anyone of the partner.

● If May is willing to sell 40% of her interest and profit at a price that will earn her a profit of
P25,000. How much will Len pay?
P547,400
P545,000
P520,000
P522,400
● After recording the adjustments, the revised capital of Bel is
P904,000

194. This method of distributing Profit and Loss discourages additional investments
Capital balances, beginning
Capital balances, end
Average capital balances
Original capital contribution

195. The admission of a new partner involving asset revaluation will result in:
Unequal total agreed equity and total capital contribution

196. One of the provisions in the ABC Partnership is for A to receive a 10% interest on her average
capital balance for the year 2021. A first contributed P20,000 of capital on February 1, 2021. On June 1,
she contributed another P20,000. On September 1, she withdrew P15,000 from the partnership.
Withdrawals in excess of P5,000 are charged to the partner’s capital account. The partnership’s fiscal
year ends in December 31.

The amount of interest allocated to A is ____

2667

197. Partners Deeca and Annel received a salary of P280,000 and P320,00, and share profit and
loss at 3:5 ratio, respectively. If the partnership generated a net profit of P440,000 in 2020, by how
much Deeca’s capital account would increase or decrease?
220,000

198. Statement 1: New partners will always be admitted to a partnership at a contribution equal to or
greater than the book value of their interest.
Statement 2: When a partner sells his interest to another party, the journal entry simply credits the
withdrawing partner’s capital account and debits the new partner’s capital.
Both statements are false

199. What are the considerations in determining the best method in distributing profit?
All of the above
200. Which among the following is not correct in the distribution of profit or loss?
Original capital contribution may prove equitable if there are material changes in the capital
accounts during the year

201. Dada and Elma are partners with capital balances of P400,000 and P600,000, respectively.
They share profits and losses equally. They decided to admit Jhai as a partner who will invest P200,000
for a 15% interest. Total agreed capital is P1,250,000. Which of the following statements is true?
Jhai’s capital is credited for P187,500

202. Statement 1: If the proceeds from sale is less than the book value of the non-cash assets sold,
this will increase the partnership assets but decrease the partner’s equity.
Statement 2: The feature of unlimited liability covers all partners except industrial partner
Both statements are false

203. The admission of a new partner effected through purchase of interest in the partnership is
Recorded in the partnership books as a transfer within equity

204. When mill retired from the partnership, the final settlement of Mill’s interest exceeded Mill’s
capital balance. Under the bonus method, the excess
Reduced the capital balances of the remaining partners

205. In the absence of agreement as to distribution of losses but there is an agreement for
distribution of profits, the industrial partner shall share losses based on
Shall not be liable for any losses

206. The most equitable distribution of partnership profit based on capital contributions uses which of
the following capital concept?
Average Capital
True-False Statements

1. A partnership is an association of two or more investors to carry on as co-owners a

business for profit. - TRUE

2. Only individuals are allowed to be partners in a partnership. - FALSE

3. Proprietorships and partnerships are similar in that they are both easily formed. - TRUE

4. Proprietorships and partnerships are different in that proprietors have unlimited legal

the partnership. - FALSE

5.
partnership is unable to meet its obligations. - TRUE
6. Partnerships are not required to prepare financial statements in accordance with
Generally Accepted Accounting Principles unless they have publicly traded debt or are
required to follow GAAP by a creditor. - TRUE

7. For a partnership to get an unqualified audit opinion, the financial records must conform
to Generally Accepted Accounting Principles. - FALSE

8. Most small partnerships maintain their financial information in accordance with

Generally Accepted Accounting Principles. FALSE

9. Tax authorities basically view partnerships and proprietorships as extensions of their

owners. TRUE

10. Partnerships are not required to pay any taxes. FALSE

11. The taxable income of all partners does not necessarily sum to the net income of the
partnership. TRUE

12. The only accounting difference that must exist between partnerships and corporations is
the reporting of the ownership equity. TRUE

13. The manner in which a partnership and a corporation are formed is very similar. FALSE

14. It is generally easier to transfer ownership interest in a corporate form of business than in
a partnership. TRUE

15. A partnership legally ceases to exist each time a new partner joins the partnership or an
existing partner leaves the partnership TRUE

16. The proprietary theory of equity is based on the notion that a business entity is distinct
from the owners. FALSE

17. The entity theory of equity is based on the notion that a business entity is distinct from
the owners. TRUE

18.
entity theory of equity. FALSE

19. The dissolution of a partnership because of the admission of a new partner or withdrawal
of an existing partner is an example of the proprietary theory of equity. TRUE

20. The fact that partnerships can enter into contracts is an example of the proprietary theory
of equity. FALSE

21. Contributed assets becoming property of the partnership is an example of the entity
theory of equity. TRUE
22. The Uniform Partnership Act is the basis for partnership laws in many states. TRUE

23. A written agreement is required to form a partnership. FALSE

24. When a partnership is formed without a written agreement, the state laws where the
partnership is formed will establish the legal relationship between partners. TRUE

25. All provisions of state partnership law must be applied when a partnership is formed.
FALSE

26. Partners make contributions of equal size when forming a partnership FALSE

27. There are different ways the partnership can value noncash assets contributed to the
partnership. TRUE

28. Appraisals are not necessarily required when assigning value to noncash assets
contributed to the partnership. TRUE

29.
of gain or loss if the asset is sold. TRUE

30.
accounts of partners. FALSE

31. The tax basis of contributed noncash assets must be used to determine partnership
income allocation for tax reporting purposes. TRUE

32. Partnerships are required to file an informational return (Form 1065) with the IRS
indicating the amount of partnership income allocated to each partner. TRUE

33. The income assigned to each partner for financial accounting purposes will equal the
return.
FALSE

34. The market value of noncash assets contributed to the partnership may be used for
income. FALSE

35.
assets contributed but a market value assignment is not required. TRUE

36. The market value of noncash assets contributed to a partnership is the only relevant value
balances. FALSE

37. The assumption of a liability by the partnership with regard to a noncash asset

capital account. TRUE

38. The tax basis of a noncash asset contributed to a partnership with an accompanying
liability will not change as a result of the contribution. FALSE

39. When a noncash asset is contributed to a partnership with an accompanying liability, the

financial records. FALSE

40. The assumption of a liability related to a noncash asset contributed to a partnership

reduces the value contributed. TRUE

41. Initial partner capital balances must equal the sum of the net assets contributed to the
partnership by the partner. FALSE

42. Initial partner capital balances are determined by agreement among the partners. TRUE

43. Only tangible assets contributed to the partnership can be considered when creating
initial capital balances. FALSE

44. There are two ways to consider unidentifiable intangible assets contributed to a
partnership: the bonus method and the goodwill method. TRUE

45. The bonus method of recognizing unidentifiable intangible assets contributed at a

equity.
TRUE

46. The bonus method of recognizing unidentifiable intangible assets contributed at a

equal.
FALSE

47. The bonus method of recognizing unidentifiable intangible assets contributed at a

increasing.
FALSE

48. Application of the goodwill method when forming a partnership requires partners to
agree on the amount of goodwill to be assigned to a partner(s). TRUE

49. At the date the partnership is formed, the total partner capital will be the same regardless
of whether the bonus method or the goodwill method is used to recognize unidentifiable
intangible assets. FALSE

50. Goodwill can be assigned to more than one partner at the date the partnership is formed.
TRUE

51. The ability of partners to withdraw resources from the partnership is controlled
exclusively by the laws of the state where the partnership resides. FALSE

52. The articles of partnership often control the size of withdrawals partners are allowed to
make. TRUE
 53. If a partnership makes a payment on behalf of a partner, a withdrawal has occurred.
TRUE
54. Partnerships are required to indicate the manner in which profits and losses are to be
allocated among the partners. FALSE

55. With the exception of the residual profit and loss ratio, partners can agree to apply profit
and loss allocation components in any order. TRUE

56. The interest component of partnership profit and loss allocation rewards the partner for
labor and expertise brought into the partnership. FALSE

57. The purpose of the interest on capital balances component of partnership profit and loss
allocation is to reward partners for contributing economic resources to the partnership.
TRUE

58. The interest on capital balances component of partnership profit and loss allocation is
balance. FALSE

59. The interest on capital balances component of partnership profit and loss allocation is
generally stated as a percentage of the capital balance. TRUE

60. The salary portion of the profit and loss allocation is set in the articles of partnership and
will not change over time. FALSE

61. The salary portion of the partnership profit and loss allocation is not included in the
statement. TRUE

62. The salary portion of the partnership profit and loss allocation is used to compensate
partners for the time and effort expected in the business. TRUE

63. Partnerships are required to have bonus clauses in the articles of partnership. FALSE

64. Bonus to partners can be based on any criteria on which the partners agree. TRUE

65. Partnership bonus arrangements must consider net income as part of the bonus
calculation. FALSE

66. A residual interest is always a component of partnership profit and loss allocation. TRUE

67. Partnership profit and loss residual percentages must be equal. FALSE

68. Partnership profit and loss residual percentages must be the same for profits as they are
for losses. FALSE
69. Partnership profit and loss residual percentages are used to allocate any remaining profit
or loss to partners after all other allocation components have been considered. TRUE

70. Partnership residual profit and loss percentages may be changed by agreement of the
partners. TRUE
71. Partnership residual profit and loss percentages do not have to be the last component
applied in the profit and loss allocation process. FALSE

72. When partnership profit and loss ratios are changed, the difference between market and
book values should be determined and allocated to partners based on the currently
existing profit and loss ratios. TRUE

73. Partnerships must revalue assets up and/or down when the profit and loss ratios are
adjusted. FALSE

74. When an error is discovered in the financial records of a partnership, it should be

corrected immediately. Allocation of any change to capital accounts as a result of an
error correction should be based on the profit and loss ratios that existed when the error
occurred. TRUE

75. The dissolution of a partnership occurs only when the partnership is terminating
operations and going out of business. FALSE

76. One reason a change in the number of partners in a partnership through the addition or
withdrawal of a partner is important because the partners have unlimited liability.
TRUE

77. A new partner in a partnership accepts unlimited liability for actions that occurred before
that partner joined the partnership. FALSE

78. The admission of a new partner into a partnership can occur without any new assets
being invested into the partnership. TRUE

79. If a new partner is going to acquire an ownership interest in a partnership directly from
another partner, the other partners do not need to approve the admission. FALSE

80. ity in the partnership, the

allocation. FALSE

81. When a new partner is joining a partnership by making a payment to the partnership for
an amount more than book value, the partners are required to choose one of three
value. FALSE

82. The revaluation of assets and liabilities at the date a new partner joins the partnership, by
investing assets directly into the partnership, does not eliminate the possibility that the
partnership might need to record bonuses or goodwill as part of the admission of the new
partner. TRUE

83. The amount that assets are revalued when a new partner joins a partnership is always
shared by existing partners equally. FALSE
84.
assets records.
FALSE

85. The recognition of a bonus to existing partners at the date a new partner is admitted to a
partnership often occurs in lieu of the recognition of goodwill for the existing partners.
TRUE

86. The bonus recognized by existing partners when a new partner is admitted to a
partnership is commonly shared among the existing partners based on the existing
ratios. TRUE

87. It is possible for a

than the market value of the identifiable assets invested. TRUE

88. New partners are never recipients of bonuses when they join the partnership. FALSE

89. A bonus paid to a new partner results in a reduction to the capital accounts of the existing
partners in proportion to their profit and loss sharing ratios. TRUE

90. The goodwill method of admitting a new partner to a partnership results in greater total
assets than the bonus method of admitting a new partner. TRUE

91. When the goodwill method is applied to recognize the admission of a new partner and

will always be established equal to the amount of the contribution to the partnership.
TRUE

92. The existing partners will always recognize goodwill when a new partner is admitted to
the company and the goodwill method is applied. FALSE

93. When the goodwill method is applied to recognize the admission of a new partner and

established at the amount of the contribution. FALSE

94. When new partner goodwill is recognized at the date the partner joins the partnership, the

admission TRUE

95. A partner may withdraw from a partnership at any time without notice given to the
existing partners. FALSE

96. A withdrawing partner may have his/her partnership interest acquired by an outside
investor agreed to by the remaining partners, the remaining partners, or the partnership.
TRUE

97. ng partners must

ratios. FALSE
98. The revaluation of assets when a partner withdraws from the partnership may be a
complete revaluation or a partial revaluation, reflecting the change in value with regard
interest. TRUE

99. revalued when a partner withdraws. FALSE

100.

cannot be acquired by an outside investor or the existing partners personally. FALSE

101. Withdrawing partners from a partnership may receive a bonus or pay a bonus to
remaining partners. TRUE

102.
be no bonus recorded. FALSE

103. A bonus can be recorded for a retiring partner only if the partnership acquires the equity
of the partner. TRUE

104. At the date a partner withdraws from a partnership, the partners must choose to either
recognize the goodwill with respect to the withdrawing partner or they can choose to
goodwill. FALSE

105. Any goodwill recognized at the date a partner withdraws from a partnership is usually
allocated to partners based on their residual profit and loss ratios. TRUE

106. Partnerships may have both a revaluation of assets and liabilities as well as goodwill
recognition at the date a partner withdraws from a partnership. TRUE

107. Which of the following is not a reason for forming a partnership?

a. Combine economic resources
b. Share managerial talent
c. Avoid complicated tax laws
d. Undertake a specific business objective

108. Which of the following business entity forms is (are) required to maintain their financial
information in accordance with Generally Accepted Accounting Principles?
a. Corporations
b. Corporation and Partnership
c. Partnership and Proprietorships
d. Corporation, Partnerships, and Proprietorships

109. Which of the following statements is not true with regard to tax issues of partnerships?
a. Partnerships are viewed as an extension of the owners
b. Partnerships are required to pay some forms of taxes
 c. The IRS must be informed as to the manner partnership income is allocated to the
partners
d. All of the above are true

110. Which of the following is not a similarity that exists between proprietorships and
partnerships?
a. Neither requires approval by a state to form
b. Both can use an accounting method that does not conform to GAAP
c. return
d. All of the above are similarities of proprietorships and partnerships

111. Which of the following is not an area where there are differences when comparing
partnerships and corporations?
a. The ease of formation
b. The level of owner legal liability
c. The ease of ownership transferability
d. All of the above are areas where partnerships and corporations differ

112. Which of the following is not a difference when comparing partnerships and
corporations?
a. Corporations must conform to GAAP whereas partnerships are not required to
conform to GAAP
b. Partnerships and corporations neither are required to attain state approval to form
c. Partners have unlimited liability while corporation shareholders generally do not
have unlimited liability
d. Corporations are required to pay income tax while partnerships are not required to
pay income taxes

113. What theory of equity is applicable for partnerships?

a. Proprietary theory
b. Entity theory
c. A mix of proprietary and entity theory
d. Partnership theory

114. Which of the following is not an example of the proprietary theory of equity?
a. Partners do not have claims to specific assets
b. Individual partners are liable for all debts of the partnership
c.
the partnership does not pay income taxes
d. Salaries of partners are viewed as distributions of income, not components of net
income

115. Which of the following is not an example of the entity theory of equity?
a. Continuity of the partnership when admission or withdrawal of partners occurs
b. A partnership can enter into contracts
 c. Assets contributed to the partnership retain the existing tax basis to the partner
contributing
d Partnership creditors have priority claim to partnership assets and the creditors of
liquidation

116. Which of the following statements is not true with regard to articles of partnership?
a. Written articles of partnership are not required to form a partnership
b. The Uniform Partnership Act provides a list of items that must be included in
articles of partnership
c. A written partnership agreement enables the partners to detail the agreed working
relationship among the partners
d. State law applies only if there is not agreement among the partners with regard to
that specific issue

117. When a partnership agreement is silent with regard to any aspect of a partnership
operations?
a. State law
b. Uniform Partnership Act
c. Majority vote of stockholders
d. Decision by senior partner

118. Which of the following valuation amounts is not allowed when assigning values to
noncash assets in a partnership formation?
a. value
b. basis
c. Market (appraised) value
d. All of the above valuation amounts are allowed

119. Which of the following statements is correct with regard to the creation of initial capital
records?
a. The capital accounts can be created for any dollar amount agreed by all partners
b. The market value of noncash assets must be considered when creating the initial
capital balances
c. -zero value assigned to it
d. All of the above statements are correct

120. Which of the following statements is not true with regard to assigning the carrying value
formation?
a. can result in the misstatement of the
accounts
b. Assigning the historical cost to noncash assets contributed to a partnership may
require the partnership agreement to address profit/loss distribution that will
occur when the contributed asset is sold
c. Assigning the historical cost to noncash assets contributed to a partnership will not

income
 d. All of the above statements are correct

121. Which of the following statements is true with regard to assigning a noncash asset
contributed to a partnership the tax basis of the contributing partner?
a. The tax basis of noncash assets contributed must be used if the partnership is a
taxable entity
b. The t
taxable partnership income
c.
records
d. None of the above statements are true

122. Which of the following statements is not true with regard to assigning the market value
formation?
a. Gains or losses would likely not be recorded if the asset were sold at the date for
partnership is formed
b. The
the difference between the market value and tax basis at the date the asset is
contributed to the partnership
c. The market value is the most commonly assigned value to contributed noncash
assets
d. All of the above statements are correct

123. Which of the following statements is correct with regard to the contribution of assets and
associated liabilities to a partnership?
a. Liabilities associated with assets contributed to a partnership remain the liability
of the contributing partner
b. Liabilities associated with assets contributed to a partnership become the liability
of the partnership
c. Liabilities associated with assets contributed to a partnership become the liability
of both the contributing partner and the partnership
d. Assets may not be contributed to a partnership if there is a liability associated
with the asset

124. The bonus method of recognizing unidentifiable intangible asset contributions to a

partnership does which of the following?
a. It recognizes that partners may contribute more than the observable assets to the
partnership
b. It increases total partnership capital
c. Can only increase partner capital accounts
d. b and c are correct

125. This method of recognizing unidentifiable intangible assets does not result in a change to
total contributed capital.
a. Goodwill method
b. Bonus method
 c. Reciprocal method
d. None of these methods will result in a change to total contributed capital

126. When can the bonus method be applied?

a. When a partnership is formed
b. When a new partner is added to the partnership
c. When an existing partner retires from the partnership
d. The bonus method can be applied in all three of the above circumstances

127. Shawn, Harris, and Derek are forming a partnership. The partners agree that Harris

capital accounts will have the dollar assigned dollar amounts altered due to the
recognition of the goodwill?
a. Shawn
b. Harris
c. Derek
d. altered.

128. This method of recognizing unidentifiable intangible assets results in a change to total
contributed capital.
a. Goodwill method
b. Bonus method
c. Reciprocal method
d. None of these methods will result in a change to total contributed capital

129. The goodwill method always results in which of the following?

a. accounts
b. account
c. An account
d.
capital account

130. For what purpose(s) might a drawing account be used for a partnership?
a. To keep a list of business contacts made by a partner
b. To recognize a loan made to a partner
c. To recognize inventory removed from the partnership by the partner
d. None of the above ore possible uses of a drawing account

131. drawing
account?
a. Removal of cash by a partner
b. partnership
c. Removal of inventory by a partner
d. All of the above may be found in a drawing account
132. Which of the following statements is correct with regard to drawing accounts that may be
used by a partnership?
a.
accounting period
b. Drawing accounts establish the amount that may be taken from the partnership by a
partner in a given time period
c. Drawing accounts are similar to Retained Earnings in a corporation
d. Drawing accounts appear on the balance sheet as a contra-equity account

133. Which of the following should not be done by the accountant with regard to partnership
profit and loss allocation?
a. Prepare an analysis of alternative methods to allocate profits and losses
b. Recommend a particular method for allocating profits and losses
c. Inform partners of different ways that profits and losses could be allocated
d. All of the above are reasonable duties of the accountant

134. What is the underlying purpose of the interest on capital balances component of
allocating partnership profits and losses?
a. Compensate partners who contribute economic resources to the partnership
b. Reward labor and expertise contributions
c. Reward for special responsibilities undertaken
d. None of the above

135. What is the underlying purpose of the salary component of allocating partnership profits
and losses?
a. Compensate partners who contribute economic resources to the partnership
b. Reward labor and expertise contributions
c. Reward for special responsibilities undertaken
d. None of the above

136. Which of the following interest component calculation bases is least susceptible to
manipulation when allocating profits and losses to partners?
a. Beginning capital account balance
b. Average of beginning and ending capital account balances
c. Weighted average capital account balance
d. Ending capital account balance

137. Which component of the partnership profit and loss allocation compensates partners for
the routine time and effort expended in the business?
a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest

138. Which component of the partnership profit and loss allocation is most commonly offered
to the partner who manages the business?
 a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest

139. bonus?
a. Operating income
b. Market share
c. Average cost per unit
d. All of bonus

140. Which component of the partnership profit and loss allocation must be performed last?
a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest

141. Which of the following statements is true with regard to partnership residual profit and
loss ratios?
a. ratio
b. Residual profit and loss ratios can be changed by agreement
c. The residual profit and loss ratio must always be applied
d. All of the above are true statements

142. Applying the partnership residual profit and loss ratio can have which of the following
loss?
a. Increase
b. Decrease
c. Increase or decrease
d. The residual profit and loss ratio is not used for the allocation or profit and/or loss

143. Which of the following should be done when the partnership profit and loss ratios are
changed?
a. The book and market value of assets and liabilities should be evaluated
b. The capital accounts should be modified to reflect the new profit and loss ratios
c. The creditors should be informed that the profit and loss ratios have been changed
d. The partners must draft new articles of partnership.

144. Which of the following is not a common way to address the difference between market
and book values of assets and liabilities when the partnership profit and loss ratios are
changed?
a. Assets and liabilities are revalued to market value
b. Assets with a difference between market and book value are sold and the profit is
distributed to partners based on existing profit and loss ratios
c. A list of differences between market value and book value are made
 d. Capital accounts of the partners are altered to reflect the difference between
market and book values at the date the profit and loss ratios change

145. Which of the following occurs every time a new partner is admitted to a partnership or an
existing partner leaves the partnership?
a. Dissolution
b. Termination
c. Dissolution and termination
d. None of the above occurs

146. Which of the following forms of new partner admission will not result in a change in the
assets?
a. Purchase of an ownership interest directly from the partnership
b. Purchase of an ownership interest directly from an existing partner
c. Either of the above
d. Neither of the above

147. Which of the following must occur for a new partner to enter the partnership by
acquiring an ownership interest directly from an existing partner?
a. Existing partners must know the amount the new partner is paying for the
ownership interest
b. interest
c. Existing partners must approve the admission of the new partner into the
partnership
d. The new partner must live in the same state as the other partners

148. Which of the following must be true when a new partner acquires an ownership interest
directly from an existing partner?
a. Capital must be assigned to the new partner
b.
account balance
c. The new partner must be allocated some amount of profit and loss
d.
liabilities to the new partner

149. When a new partner joins a partnership by investing assets into the partnership, what
method may be used to record the admission of the new partner?
a. Revaluation of existing assets
b. Recognition of goodwill
c. Application of the bonus method
d. Any of the three or a combination may be applied

150. Which of the following is a reason to not revalue partnership assets at the date a new
partner is admitted to the partnership?
a. There has been a change in ownership
b. A new legal entity exists
 c. The partnership has not ceased operations
d. All three are reasons to not revalue partnership assets at the date of a new
admission

151. A bonus is recognized by existing partners at the date a new partner joins a partnership
when which of the following relationships occur?
a.
capital after the investment is made
b.
capital after the investment is made
c.
capital after the investment is made
d. It is not possible to determine the answer to this question

152. Which of the following is not a criterion for recognizing a bonus to existing partners
when a new partner joins the partnership?
a. Only cash assets were contributed to the partnership by the new partner
b. The existing partners desire to not recognize goodwill on the balance sheet
c. The articles of partnership indicate that the bonus method will be used to admit
new partners
d. The new partner invests more into the partnership that his/her share of total
partnership capital after the investment is made

153. Which method of recording the admission of a new partner into a partnership potentially
value?
a. Bonus method
b. Goodwill method
c. Either bonus method or goodwill method
d.
into a partnership.

154. A bonus recognized by a new partner at the date of admission into the partnership is
generally shared by the existing partners in what way?
a. Equally
b. In proportion to capital account balances
c. In proportion to profit and loss residual ratios
d. In proportion to salaries

155. Which of the following is not a criterion for recognizing a bonus to a new partner when
the new partner joins the partnership?
a. Only cash assets were contributed to the partnership by the new partner
b. The existing partners desire to not recognize goodwill on the balance sheet
c. The articles of partnership indicate that the bonus method will be used to admit
new partners
d. The new partner invests less into the partnership that his/her share of total
partnership capital after the investment is made
156. When the goodwill method of recognizing the admission of a new partner is applied and
the existing partners contribute the goodwill, which of the following will result?
a. An increase in the capital accounts of existing partners
b. A decrease in the amount invested by the new partner
c. assets
d. than the amount invested

157. Which of the following will occur when the existing partners contribute goodwill and a
new partner is admitted to the partnership?
a. decreased
b. The existing partner will receive cash from the partnership
c. increased
d. The new partner will be required to reduce his/her profit and loss sharing ratio

158. Which of the following statements is false with regard to the goodwill recognized for a
new partner entering a partnership?
a. invested
b. unchanged
c. The amount invested by the new partner will be less than his/her proportion of the
value before goodwill is recognized
d. The three partners will have equal capital account balances when the transaction
is completed

159. Which of the following statements presents a reason that goodwill may be recorded with
regard to partnership?
a. The existing partnership is worth more than the appraised value of the tangible
net assets
b. The new partner has a strong desire to become a member of the partnership
c. The total value
the value of the identifiable net assets contributed
d. percent

160. revalued when a partner withdraws from

the partnership?
a. revalued
b. revalued
c.
revalued
d. Partnership assets may not be revalued when a partner withdraws

161. Who may acquire the ownership interest of a partner who is withdrawing from a
partnership?
a. Existing partners
b. New investor
c. The partnership
 d. All of the above

162. If existing partners acquire the equity of a withdrawing partner, in what manner do they
divide the equity?
a. In any manner they choose
b. Equally
c. Proportionate to their residual profit and loss ratios
d. Existing partners are not permitted to acquire the equity of a withdrawing partner

163. Which of the following must exist to create the potential for a retiring partner to have a
bonus recognized at the date of withdrawal?
a. The retiring partner must be paid more than the book value of his equity
b. The existing partners must decide to not admit a new partner to the partnership
c. partnership
d. All of the above are necessary for a bonus to be recognized

164. In what manner do the remaining partners share in the bonus paid to a withdrawing
partner?
a. In proportion to their residual profit and loss ratios
b. Equally
c. In proportion to their capital account balances
d. The partner with the greatest capital account is assigned the bonus

165. Which of the following statements is true with regard to a withdrawing partner?
a. A bonus must be paid to the retiring partner
b. A bonus may be paid to the retiring partner
c. A bonus must be paid to the retiring partner or to the remaining partners
d. Recognizing a bonus is not appropriate when a partner retires

166. capital accounts when a withdrawing partner

is assigned goodwill at the date of withdrawal?
a.
proportion of the goodwill assigned to the withdrawing partner
b. ital accounts increase
c. change
d. Goodwill cannot be recognized with regard to withdrawing partners

167. What amount of goodwill can be recognized at the date a partner withdraws from a
partnership?
a. The withdrawing goodwill
b. goodwill
c. Goodwill may not be recognized at the date a partner withdraws
d.
to the entire partnership
168. Which of the following will occur when the goodwill method is used to recognize the
withdrawal of a partner?
a. The partnership must acquire the equity of the withdrawing partner
b. The withdrawing partner will be paid the book value of his/her equity after the
goodwill is recognized
c. The existing partners will divide the salary of the withdrawing partner
d.
withdrawal

COMPUTATIONAL MC PROBLEMS
169. Paul, Jeremy, and Juan are forming a partnership. Juan contributes a building having an
historical cost, accumulated depreciation, and market value of $290,000, $100,000, and

Two years later the building is sold for a $270,000 gain.

What portion of the profit or loss should be allocated to Juan?
a. $20,000
b. $230,000
c. $210,000
d. $90,000

170. Philip, Ray, and Sarah are forming a partnership. Philip contributes cash of $100,000;
Ray contributes inventory with a value of $100,000; and Sarah contributes a building
with a market value of $300,000. The partnership also assumed the $210,000 mortgage
on the building. What is the amount of capital assigned to each partner?
Philip Ray Sarah
a. $30,000 $30,000 $230,000
b. $56,000 $56,000 $174,000
 c. $100,000 $100,000 $90,000
d. $100,000 $100,000 $300,000

171. Max, Ike, and Tony are forming a partnership. The appraised value of assets contributed
is $60,000, $80,000, and $100,000, respectively. In addition, Max and Tony agree that

applicable. What is the total capital recorded at the date the partnership is formed?
a. $210,000
b. $240,000
c. $270,000
d. Some other dollar amount

172. Richardson, Peterson, and Wilkerson are forming a partnership. The partners contribute
cash and noncash assets valued at $30,000, $50,000, and $25,000, respectively. The
partners choose to apply the bonus method where applicable. If the partners agree to
establish equal capital account balances when the partnership is formed, how much of a
bonus is received by Richardson?
a. $15,000
b. $10,000
c. $5,000
d. Richardson does not receive a bonus

173. Richardson, Peterson, and Wilkerson are forming a partnership. The partners contribute
cash and noncash assets valued at $30,000, $50,000, and $25,000, respectively. The
partners choose to apply the bonus method where applicable. If the partners agree to
establish equal capital account balances when the partnership is formed, how much
capital is Peterson sacrificing to give a bonus to Richardson and Wilkerson?
a. $15,000
b. $10,000
c. $5,000
d. Richardson does not receive a bonus

174. Albert, Claude, and Jamie form a partnership by contributing $25,000, $70,000, and
$80,000, respectively. In addition, the partners agree that Albert should receive $20,000
of goodwill because of his special skills relevant to this business. What amount of
capital will exist for Albert when the partnership is formed?
a. $20,000
b. $25,000
c. $65,000
d. $45,000

175. Albert, Claude, and Jamie form a partnership by contributing $25,000, $70,000, and
$80,000, respectively. In addition, the partners agree that Albert should receive $20,000
of goodwill because of his special skills relevant to this business. What amount of
capital will exist for Claude when the partnership is formed?
a. $60,000
 b. $65,000
c. $70,000
d. Some other amount

176. Chris and David are forming a partnership with contributions of $75,000 and $125,000,
respectively. In addition, they agree that they will recognize $25,000 goodwill with
exist
for the partnership immediately after it is formed?
a. $75,000
b. $125,000
c. $150,000
d. $225,000

177. Chris is a partner in a local partnership. The profit and loss sharing agreement includes
an interest allocation of 7 percent on the invested capital. The capital account of Chris
reveals that he had a beginning capital account balance of $50,000. He withdrew
$10,000 on May 1 and invested $25,000 on October 31. Rounded to the nearest dollar,

a. $57,500
b. $51,667
c. $47,500
d. $28,333

178. Richard is a partner in a local partnership. The profit and loss sharing agreement
includes an interest allocation of 8 percent on the invested capital. Richard had a
beginning capital balance of $60,000. He invested $30,000 on March 1, withdrew
$20,000 on August 1, and invested $40,000 on December 1. Rounded to the nearest
dollar, what dollar amount is allocated to Richard as interest on capital balance if the
weighted average capital balance is used as the basis of the computation?
a. $82,500
b. $6,400
c. $80,000
d. $6,600

179. Shawn is a managing partner in a local business. Part of his profit allocation is a bonus

excess of $200,000 after deducting the bonus. If operating income for the year is

a. $3,703
b. $40,000
c. $20,000
d. $4,000

180. James has a bonus as part of his partner profit allocation. The bonus is based on the
partnerships net income. James receives a bonus equal to 5 percent that the net income
 exceeds $150,000. If the net income in the current year is $180,000, how much bonus
does James receive?
a. $30,000
b. $7,500
c. $1,500
d. $9,000

181. Cheryl is the manager of a local store. She is also a partner in the company and she

increase in revenues recorded during the period. The bonus arrangement is that Cheryl
receives 1 percent of net income for every full percentage point growth for revenues in
excess of a 5 percent revenue growth. During the most recent period, revenues grew
from $500,000 to $540,000 and net income grew from $98,000 to $120,000. How much
bonus does Cheryl receive for this period?
a. $2,000
b. $1,100
c. $6,000
d. $3,600

182. Norman, Sarah, and Taylor are partners. The partnership income for the period is
$130,000. The partnership agreement assigns salaries to the partners of $10,000,
$15,000, and $18,000, respectively. In addition, the partners have profit and loss
residual ratios of 30%, 45%, and 25%. What is the amount of profit and loss allocated to
Sarah as a result of applying the residual ratios?
a. $39,150
b. $54,150
c. $58,500
d. $51,750

183. Jim and Scott are partners who have residual profit and loss ratios of 55% and 45%,
respectively. The partnership has income of $60,000 for the current period. How much
of this income is allocated to Scott?
a. $30,000
b. $33,000
c. $14,850
d. $27,000

184. Mike and Michelle are partners in a local business. The business has a $25,000 loss this
year. How much of this loss is allocated to Mike?
a. $12,500
b. $0
c. $25,000
d. Losses cannot be allocated without residual profit and loss ratios
185. Nick, Joe, and Mike are partners. The company has $150,000 net income for the period.
How is this income divided to the partners if the following profit and loss allocation
process is followed?
Nick Joe Mike
Weighted average capital $200,000 $350,000 $180,000
Salary 25,000 15,000 35,000
Bonus .1 (NI - $100,000)
Residual profit/loss ratios .25 .45 .30
Return on invested capital 9%

Nick Joe Mike

a. $43,000 $46,500 $60,500
b. $45,325 $50,685 $53,990
c. $50,000 $50,000 $50,000
d. $44,075 $48,435 $57,490

186. Harriet, Bob, and Tim are partners. Income for the current year is $500,000. The profit
and loss agreement states that salaries are $35,000, $50,000, and $40,000, respectively.
In addition, the residual profit and loss ratios are 40%, 30%, and 30%, respectively.
How much of the profit is allocated to Harriet?
a. $150,000
b. $185,000
c. $162,500
d. $152,500

187. Suzanne, Thomas, and Vicky are partners. They have average capital account balances
of $200,000, $250,000, and $400,000, respectively. In addition, they have residual profit
and loss ratios of 15%, 25%, and 60%, respectively. If income for the year is $300,000
and the partners earn 8 percent return on invested capital, how much will be allocated to
Thomas?
a. $78,000
b. $100,000
c. $50,800
d. $171,200

188. Johnson and Pritchard are partners. They are changing the profit and loss ratios from the
current 60/40 to 70/30. At the date of the change, vacant land owned by the partnership
has a book value of $50,000 and a market value of $60,000. The partners choose to
prepare an itemized list of assets with market values different from book values. If the
land is sold in the future for $80,000, how much of the gain will be assigned to Johnson?
a. $21,000
b. $18,000
c. $27,000
d. $20,000
189. Johnson and Pritchard are partners. They are changing the profit and loss ratios from the
current 60/40 to 70/30. At the date of the change, vacant land owned by the partnership
has a book value of $50,000 and a market value of $60,000. The partners choose to
prepare an itemized list of assets with market values different from book values. If the
land is sold in the future for $80,000, how much of the gain will be assigned to
Pritchard?
a. $12,000
b. $10,000
c. $9,000
d. $13,000

190. Karen and Andrea are currently changing their partnership profit and loss ratios from
75/25 to 60/40. They have created a list of assets that have market and book value
differences. One of the assets is a building with a $300,000 market value and $200,000
book value. Two years after changing the profit and loss ratios, the building is sold for
$380,000. How much of the profit is allocated to Karen?
a. $135,000
b. $108,000
c. $123,000
d. $183,000

191. Karen and Andrea are currently changing their partnership profit and loss ratios from
75/25 to 60/40. They have created a list of assets that have market and book value
differences. One of the assets is a building with a $300,000 market value and $200,000
book value. Two years after changing the profit and loss ratios, the building is sold for
$380,000. How much of the profit is allocated to Andrea?
a. $57,000
b. $45,000
c. $72,000
d. $97,000

192. Peter and Ronald are partners. They have shared profits and losses 65/35 for a number of
years. Peter has indicated that he is going to reduce his involvement in the partnership so
the profit and loss ratio is being modified to 45/55. At the date of the change in the
profit and loss ratio, the partnership own vacant land with a market value of $300,000
and a book value of $100,000. Peter and Ronald compile a list of assets with market and
book value differences. Two years after the change in the profit and loss ratios, the land
is sold for $450,000. How much of the gain is allocated to Peter?
a. $197,500
b. $227,500
c. $157,500
d. $287,500

193. Peter and Ronald are partners. They have shared profits and losses 65/35 for a number of
years. Peter has indicated that he is going to reduce his involvement in the partnership so
the profit and loss ratio is being modified to 45/55. At the date of the change in the
 profit and loss ratio, the partnership own vacant land with a market value of $300,000
and a book value of $100,000. Peter and Ronald compile a list of assets with market and
book value differences. Two years after the change in the profit and loss ratios, the land
is sold for $450,000. How much of the gain is allocated to Ronald?
a. $122,500
b. $192,500
c. $152,500
d. $262,500

194. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is

capital account at the date the land is revalued?

a. $72,000
b. $42,000
c. $30,000
d. $28,000

195. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is

account at the date the land is revalued?

a. $72,000
b. $42,000
c. $30,000
d. $28,000

196. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is

capital account at the date the land is sold?

a. $48,000
b. $67,500
c. $31,500
d. $36,000

197. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
 account at the date the land is sold?
a. $44,000
b. $82,500
c. $32,000
d. $60,000

198. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is

capital account at the date the building is revalued?

a. $105,000
b. $91,000
c. $45,000
d. $39,000

199. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is

capital account at the date the building is revalued?

a. $105,000
b. $91,000
c. $45,000
d. $39,000

200. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is

capital account at the date the building is sold?

a. $91,000
b. $78,000
c. $39,000
d. $52,000

201. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
 different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000.
capital account at the date the building is sold?
a. $91,000
b. $78,000
c. $39,000
d. $52,000

202. Theresa and Craig are partners. Their current profit and loss ratios (70/30) are being
changed to (60/40). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, land has a market value of
$250,000 a
adjusted at the date of the change in the profit and loss ratios?
a. $52,000 increase
b. $13,000 increase
c. $52,000 decrease
d. $13,000 decrease

203. Theresa and Craig are partners. Their current profit and loss ratios (70/30) are being
changed to (60/40). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, land has a market value of

adjusted at the date of the change in the profit and loss ratios?
a. $52,000 increase
b. $13,000 increase
c. $52,000 decrease
d. $13,000 decrease

204. Eric and Phillip have been partners for several years. During that time they have shared
profits and losses (60/40). They are currently revising the profit and loss ratios to
(70/30). Eric and Phillip decide to adjust the capital accounts at the date of the change to
reflect the difference between market value and book value of assets and liabilities. At
the date of the change, the partnership owns a building with a book value of $350,000

date of the change in the profit and loss ratios?

a. $25,000 increase
b. $50,000 increase
c. $25,000 decrease
d. $50,000 decrease

205. Eric and Phillip have been partners for several years. During that time they have shared
profits and losses (60/40). They are currently revising the profit and loss ratios to
(70/30). Eric and Phillip decide to adjust the capital accounts at the date of the change to
 reflect the difference between market value and book value of assets and liabilities. At
the date of the change, the partnership owns a building with a book value of $350,000

the date of the change in the profit and loss ratios?

a. $25,000 increase
b. $50,000 increase
c. $25,000 decrease
d. $50,000 decrease

206. Jenna is about to purchase some of C

partnership equity of $84,500. If Jenna pays Cynthia $30,000 for 30 percent of her
capital, what amount will be recorded in the partnership accounting records?
Jenna Cynthia
a. $30,000 credit $25,350 debit
b. $25,350 credit $25,350 debit
c. $30,000 credit $30,000 debit
d. $25,350 debit $25,350 credit

207. Sam and Ray are partners with capital accounts of $150,000 and $225,000, respectively.
They are considering allowing Richard to purchase 30 percent of Ra

and allocate any differences based on their 40/60 profit sharing agreement. Assume that
the net market versus book value differences is $100,000. What amount would Richard
pay for the 30 percent interest?
a. $67,500
b. $76,500
c. $97,500
d. The amount cannot be determined from the information provided

208. Jesse, Joseph, and Leslie are partners with capital accounts of $70,000, $120,000, and
$90,000, respectively. The partnership share profits and losses 45%, 30%, and 25%,
respectively. They are considering allowing Hans to join the partnership by investing

admission. Neith
book value $150,000, how much will Hans invest to acquire a 20% equity interest in the
partnership?
a. $107,500
b. $86,000
c. $70,000
d. $100,000

209. Sandra and Joshua are partners. They have capital account balances of $250,000 and
$200,000, respectively, and they share profits and losses 70/30. The partners are
considering admitting Judy as a new partner with a 25 percent equity interest for an
investment in the partnership of $180,000. Before admission, Sandra and Joshua will
 a. $575,000
b. $337,500
c. $528,500
d. $262,500

210. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity

account at the date of admission?

a. $142,500
b. $150,000
c. $144,000
d. The dollar amount cannot be determined from this information

211. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of bonus recognized
admission?
a. $4,500
b. $34,500
c. $6,000
d. $1,500

212. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of bonus recognized
admission?
a. $6,000
b. $1,500
c. $144,000
d. $4,500

213. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity

account at the date of admission?

a. $274,500
b. $304,500
c. $144,000
d. $271,500
214. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity

account at the date of admission?

a. $271,500
b. $301,500
c. $144,000
d. $304,500

215. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the
the date of admission?
a. $933,000
b. $450,000
c. $388,750
d. $622,000

216. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of bonus recognized in
admission?
a. $98,000
b. $61,250
c. $24,500
d. $36,750

217. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of bonus recognized in
admission?
a. $98,000
b. $61,250
c. $24,500
d. $36,750

218. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus met
the date of admission?
 a. $516,750
b. $661,750
c. $649,500
d. $504,500

219. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest

the date of admission?

a. $516,750
b. $661,750
c. $649,500
d. $504,500

220. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity

account at the date of admission?

a. $137,500
b. $120,000
c. $143,333
d. The dollar amount cannot be determined from this information

221. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of bonus recognized
admission?
a. $70,000
b. $23,333
c. $17,500
d. $52,500

222. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of the reduction to
admission?
a. $5,250
b. $12,250
c. $17,500
d. $100,333
223. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of the reduction to
unt at the date of admission?
a. $5,250
b. $12,250
c. $17,500
d. $100,333

224. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity

account at the date of admission?

a. $157,750
b. $254,750
c. $164,750
d. $247,750

225. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the
account at the date of admission?
a. $157,750
b. $254,750
c. $164,750
d. $247,750

226. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg into
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest

the date of admission?

a. $60,000
b. $78,530
c. $429,250
d. $75,750

227. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest

capital account at the date of admission?

a. $6,300
 b. $9,450
c. $54,300
d. $81,450

228. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonu
capital account at the date of admission?
a. $6,300
b. $9,450
c. $54,300
d. $81,450

229. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest

the date of admission?

a. $255,550
b. $258,700
c. $173,700
d. $170,550

230. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest

at the date of admission?

a. $255,550
b. $258,700
c. $173,700
d. $170,550

231. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, which partner(s) are contributing the goodwill?
a. Both new and existing partners are contributing goodwill
b. New partner is contributing goodwill
c. Existing partners are contributing goodwill
d. There is not enough information to answer this question

232. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
 They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jacob is admitted?
a. $130,000
b. $26,000
c. $87,500
d. $32,500

233. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Jacob immediately after he
is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000

234. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Michelle immediately after
Jacob is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000

235. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Steve immediately after
Jacob is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000

236. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
 interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
d. There is not enough information to answer this question

237. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jane is admitted?
a. $31,250
b. $125,000
c. $183,333
d. $41,667

238. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Jane immediately after she is
admitted?
a. $225,000
b. $281,250
c. $293,750
d. $183,333

239. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Susan immediately after Jane is
admitted?
a. $318,750
b. $356,250
c. $368,750
d. $306,250

240. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of David immediately after Jane is
admitted?
 a. $318,750
b. $356,250
c. $368,750
d. $306,250

241. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jason is admitted?
a. $11,250
b. $8,438
c. $186,250
d. $15,000

242. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Jason immediately after he
is admitted?
a. $190,000
b. $175,000
c. $15,000
d. $186,250

243. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Dan immediately after Jason
is admitted?
a. $285,000
b. $186,250
c. $250,000
d. $320,000

244. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Stephanie immediately after
Jason is admitted?
a. $285,000
b. $186,250
 c. $250,000
d. $320,000

245. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
d. There is not enough information to answer this question

246. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Julia is admitted?
a. $142,000
b. $150,000
c. $10,000
d. $8,000

247. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Julia immediately after she is
admitted?
a. $160,000
b. $150,000
c. $152,000
d. $158,000

248. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Juan immediately after Julia is
admitted?
a. $280,000
b. $142,000
c. $320,000
d. $240,000
249. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Felix immediately after Julia is
admitted?
a. $280,000
b. $142,000
c. $320,000
d. $240,000

250. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. Harry is withdrawing from the partnership. At the date of

amount of capital account adjustment that will be recorded?

a. $50,000
b. $70,000
c. $80,000
d. $200,000

251. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. Harry is withdrawing from the partnership. At the date of

p
capital account adjustment that will be recorded?
a. $50,000
b. $70,000
c. $80,000
d. $200,000

252. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. The partners have capital account balances of $80,000, $110,000,
and $55,000, respectively. Harry is withdrawing from the partnership. At the date of
increase of

rounded to the nearest dollar?

a. $110,000
b. $230,000
c. $282,308
d. Sus given

253. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. The partners have capital account balances of $80,000, $110,000,
and $55,000, respectively. Harry is withdrawing from the partnership. At the date of
 of total

a. $245,000
b. $445,000
c. $365,000
d. $295,000

254. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw

retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
withdrawal?
a. $40,000
b. $24,000
c. $20,000
d. $16,000

255. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw

ownership interest for $250,000. The profit and loss residual ratios
retirement are 45 percent, 30 percent, and 25 percent, respectively. What will be the
withdrawal?
a. $160,000
b. $104,000
c. $184,000
d. $136,000

256. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw

ownership interes
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will

a. $40,000
b. $24,000
c. $20,000
d. $16,000

257. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partn
ownership interest for $250,000. The profit and loss residual ratios before
 retirement are 45 percent, 30 percent, and 25 percent, respectively. What will be the
s method is applied for the withdrawal?
a. $120,000
b. $104,000
c. $184,000
d. $136,000

258. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase

much

withdrawal?
a. $36,000
b. $60,000
c. $24,000
d. $30,000

259. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase

t, 30 percent, and 28 percent, respectively. What will

withdrawal?
a. $336,000
b. $300,000
c. $264,000
d. $246,000

260. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
residual ratios before

withdrawal?
a. $36,000
b. $60,000
c. $24,000
d. $30,000

261. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
 Ra

withdrawal?
a. $336,000
b. $300,000
c. $264,000
d. $246,000

262. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partn are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners

is purchased by a new partner (Deborah) approved by Claire and Jack, what is the
tal account?
a. $150,000
b. $170,000
c. $172,500
d.
equity is not known

263. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners

is purchased by

a. $238,500
b. $307,500
c. $186,750
d. $180,000

264. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
ity
 a. $397,500
b. $294,000
c. $285,000
d. $159,000

265. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the
quity is purchased by a new

capital account?
a. $150,000
b. $170,000
c. $172,500
d.
equity is not known

266. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
thdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the

a. $175,500
b. $247,500
c. $257,250
d. $327,750

267. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
al are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the

withdrawal?
a. $175,500
 b. $247,500
c. $257,250
d. $327,750

268. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
0
percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.

a. $240,000
b. $390,000
c. $320,000
d. The amount cannot be determined because the amount Mary p
equity is not known

269. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.

withdrawal?
a. $446,000
b. $494,000
c. $424,000
d. $376,000

270. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is

percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.

a. $446,000
b. $494,000
c. $424,000
d. $376,000
271. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is

percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the

equity is purchased by a new partner (Mary) approved by Bonnie and Gwen, what is the

a. $87,500
b. $237,500
c. $350,000
d.
equity is not known

272. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is

percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the

equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is the amount of
withdrawal?
a. $441,000
b. $490,000
c. $560,000
d. $420,000

273 Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is

percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the

equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is the amount of
withdrawal?
a. $441,000
b. $490,000
c. $560,000
d. $420,000

274. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is

percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
 equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is total
partnership equity after the withdrawal?
a. $980,000
b. $780,000
c. $830,000
d. $630,000

Problems

274. (10 Points) moderate

Alan, Betty, and Carl are forming a partnership. Each will contribute cash and noncash
assets. Assume the initial capital account balances will be determined based on the value
of the assets contributed. Information regarding the initial contributions is provided
below:

Alan Betty Carl

Cash $150,000 $275,000 $125,000
Plant Assets - historical cost 280,000 350,000 540,000
Plant Assets - carrying value 215,000 225,000 300,000
Plant Assets - tax basis 200,000 190,000 230,000
Plant Assets - market value 350,000 260,000 310,000

Required:
a. accounts and the
assets assuming the carrying value is used to determine the value assigned to

assigned a value equal to the cash and noncash assets contributed by that partner.
b.
assets assuming the carrying value is used to determine the value assigned to

are equal when the journal entry is completed.

c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?

Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($215,000 + $225,000 + $300,000) 740,000
Alan, Capital ($150,000 + $215,000) 365,000
Betty, Capital ($275,000 + $225,000) 500,000
Carl, Capital ($125,000 + $300,000) 425,000
Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($215,000 + $225,000 + $300,000) 740,000
Alan, Capital ($550,000 + $740,000)/3 430,000
Betty, Capital ($550,000 + $740,000)/3 430,000
Carl, Capital ($550,000 + $740,000)/3 430,000
 Part c. Alan has significantly more capital when it is divided equally when compared to
assigning the sum of the carrying values of assets contributed. On the other hand,
Betty has significantly less capital when it is divided equally. Carl has
approximately the same amount under either assignment method. One possibility
is that Betty is giving up some capital to Alan because Alan has substantially
more expertise in running the business. Thus, Betty is paying a bonus to Alan.

275. (10 Points) moderate

Alan, Betty, and Carl are forming a partnership. Each will contribute cash and noncash
assets. Assume the initial capital account balances will be determined based on the value
of the assets contributed. Information regarding the initial contributions is provided
below:

Alan Betty Carl

Cash $150,000 $275,000 $125,000
Plant Assets - historical cost 280,000 350,000 540,000
Plant Assets - carrying value 220,000 225,000 300,000
Plant Assets - tax basis 200,000 190,000 230,000
Plant Assets - market value 350,000 260,000 310,000

Required:
a.
assets assuming the tax basis is used to determine the value assigned to noncash
pital account is assigned a
value equal to the cash and noncash assets contributed by that partner.
b.
assets assuming the tax basis is used to determine the value assigned to noncash

when the journal entry is completed.

c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?

Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($200,000 + $190,000 + $230,000) 620,000
Alan, Capital ($150,000 + $200,000) 350,000
Betty, Capital ($275,000 + $190,000) 465,000
Carl, Capital ($125,000 + $230,000) 355,000

Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($200,000 + $190,000 + $230,000) 620,000
Alan, Capital ($550,000 + $620,000)/3 390,000
Betty, Capital ($550,000 + $620,000)/3 390,000
Carl, Capital ($550,000 + $620,000)/3 390,000
 Part c. Alan and Carl each have significantly more capital when it is divided equally
when compared to assigning the sum of the carrying values of assets contributed.
On the other hand, Betty has significantly less capital when it is divided equally.
One possibility is that Betty is giving up some capital to Alan and Carl because
they have substantially more expertise in running the business. Thus, Betty is
paying a bonus to Alan and Carl.

276. (10 Points) moderate

Alan, Betty, and Carl are forming a partnership. Each will contribute cash and noncash
assets. Assume the initial capital account balances will be determined based on the value
of the assets contributed. Information regarding the initial contributions is provided
below:

Alan Betty Carl

Cash $150,000 $275,000 $125,000
Plant Assets - historical cost 280,000 350,000 540,000
Plant Assets - carrying value 220,000 225,000 300,000
Plant Assets - tax basis 200,000 190,000 230,000
Plant Assets - market value 350,000 260,000 310,000

Required:
a.
assets assuming the market value is used to determine the value assigned to
account is
assigned a value equal to the cash and noncash assets contributed by that partner.
b.
assets assuming the market value is used to determine the value assigned to

are equal when the journal entry is completed.

c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?

Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($350,000 + $260,000 + $310,000) 920,000
Alan, Capital ($150,000 + $350,000) 500,000
Betty, Capital ($275,000 + $260,000) 535,000
Carl, Capital ($125,000 + $310,000) 435,000

Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($350,000 + $260,000 + $310,000) 920,000
Alan, Capital ($550,000 + $920,000)/3 490,000
Betty, Capital ($550,000 + $920,000)/3 490,000
 Carl, Capital ($550,000 + $920,000)/3 490,000

Part c. Carl has significantly more capital when it is divided equally when compared to
assigning the sum of the carrying values of assets contributed. On the other hand,
Betty has significantly less capital when it is divided equally. Alan has
approximately the same amount under either assignment method. One possibility
is that Betty is giving up some capital to Carl because Carl has substantially more
expertise in running the business. Thus, Betty is paying a bonus to Carl.

277. (5 Points) easy

Alex, Bill, and Martha contribute the following assets to begin partnership operations:

Alex Bill Martha_

Cash $150,000 $225,000 $175,000
Inventory 57,000 89,000
Plant Assets 350,000 100,000
Accounts Payable 14,000 40,000
Notes Payable 160,000

Record

Answer:
Cash ($150,000 + $225,000 + $175,000) 550,000
Inventory ($57,000 + $89,000) 146,000
Plant Assets ($350,000 + $100,000) 450,000
Accounts Payable ($14,000 + $40,000) 54,000
Notes Payable 160,000
Alex, capital ($150,000 + $57,000 - $14,000) 193,000
Bill, capital ($225,000 + $350,000 - $160,000) 415,000
Martha, capital ($175,000 + $89,000 + 324,000
$100,000 - $40,000)

278. (10 Points) moderate

William, Casey, and Samantha are forming a partnership. Below is a table outlining the
contributions of each partner.

William Casey Samantha

Cash $ 15,000 $20,000 $ 10,000
Inventory 100,000 60,000 80,000
Plant Assets 250,000 160,000
Liabilities Assumed by Partnership 130,000 90,000

In addition, Casey brings significant experience needed to run the business. It is agreed
that partners will receive capital allocations equal to the market value of the net assets
contributed and that Casey will receive additional capital of $75,000 and the bonus
 method will be applied. Two-thirds of the bonus is to come from William and one-third
from Samantha. Record the journal entry for the creation of the partnership.

Answer:
Cash ($15,000 + $20,000 + $10,000) 45,000
Inventory ($100,000 + $60,000 + $80,000) 240,000
Plant Assets ($250,000 + $160,000) 410,000
Liabilities ($130,000 + $90,000) 220,000
Casey, Capital ($20,000 + $60,000 + $75,000) 155,000
Samantha, Capital [$10,000 + $80,000 + 135,000
$160,000 - $90,000 - ($75,000/3)]
William, Capital [$15,000 + $100,000 + 185,000
$250,000 - $130,000 - ($75,000 x 2/3)]

279. (10 Points) moderate

Bonnie, Connie, and Deborah are forming a partnership. The partners will contribute the
following identifiable assets:

Bonnie Connie Deborah

Cash $150,000 $200,000 $140,000
Inventory 160,000 190,000 180,000
Plant Assets 300,000 340,000
Liabilities Assumed by Partnership 180,000 130,000

In addition, Bonnie brings significant experience because she has run a similar type of
business. It is agreed that Bonnie will receive additional capital of $80,000 and the
bonus method will be applied. Sixty percent of the bonus is to come from Deborah and
forty percent from Connie. Record the journal entry for the creation of the partnership.

Answer:
Cash ($150,000 + $200,000 + $140,000) 490,000
Inventory ($160,000 + $190,000 + $180,000) 530,000
Plant Assets ($300,000 + $340,000) 640,000
Liabilities ($180,000 + $130,000) 310,000
Bonnie, Capital ($150,000 + $160,000 + 510,000
$300,000 - $180,000 + $80,000)
Connie, Capital [$200,000 + $190,000 - 358,000
($80,000 x .4)]
Deborah, Capital [$140,000 + $180,000 + 482,000
$340,000 - $130,000 - ($80,000 x .6)]

280. (10 Points) moderate

Able, Baker, and Charlie are forming a partnership. Charlie has significant experience in
the type of business the partners are starting. As a result, Able and Baker agree that
goodwill of $50,000 should be recognized with regard to Charlie. The partners
contribute the following tangible assets:
 Able Baker Charlie
Cash $20,000 $35,000 $55,000
Plant Assets 75,000 90,000 60,000
Liabilities 25,000 45,000 15,000

Record the journal entry to establish the partnership.

Answer:
Cash ($20,000 + $35,000 + $55,000) 110,000
Plant Assets ($75,000 + $90,000 + $60,000) 225,000
Goodwill 50,000
Liabilities ($25,000 + $45,000 + $15,000) 85,000
Able, Capital ($20,000 + $75,000 - $25,000) 70,000
Baker, Capital ($35,000 + $90,000 - $45,000) 80,000
Charlie, Capital ($55,000 + $60,000 - $15,000 + 150,000
$50,000)

281. (15 Points) moderate

Jessica, Mary, and Susan currently operate three separate businesses. They are planning
to combine and form a partnership to operate as one business. The prospective partners
agree that, in addition to the net market value of the tangible assets contributed to the
partnership, Jessica and Susan should have goodwill recognized in the amounts of
$80,000 and $40,000, respectively. The following table presents the market value of the
assets and liabilities contributed to the partnership.

Jessica Mary Susan

Cash $100,000 $250,000 $170,000
Inventory 280,000 400,000 450,000
Plant Assets 750,000 500,000 600,000
Accounts Payable 190,000 270,000 260,000
Mortgage Payable 340,000 200,000 320,000

Required:
a. Record the journal entry to establish the partnership.
b.
partnership?

Answer:
Part a.
Cash ($100,000 + $250,000 + $170,000) 520,000
Inventory ($280,000 + $400,000 + $450,000) 1,130,000
Plant Assets ($750,000 + $500,000 + $600,000) 1,850,000
Goodwill 120,000
Accounts Payable ($190,000 + $270,000 + 720,000
$260,000)
 Mortgage Payable ($340,000 + $200,000 + 860,000
$320,000)
Jessica, Capital ($100,000 + $280,000 + 680,000
$750,000 - $190,000 - $340,000 + $80,000)
Mary, Capital ($250,000 + $400,000 + 680,000
$500,000 - $270,000 - $200,000)
Susan, Capital ($170,000 + $450,000 + 680,000
$600,000 - $260,000 - $320,000 + $40,000)

Part b.
The apparent intent of the partners is to make all three partner capital accounts of equal
dollar amount when the partnership is formed.

282. (20 Points) moderate

Tom, Jon, and Sandy are partners in a thriving business. You work for the firm that
provides accounting services to the partnership. The accounting period recently ended
and you have been assigned the task of helping with the profit allocation to the partners.

Date Tom Jon Sandy

1/1 Balance $850,000 Balance $680,000 Balance $450,000
4/30 Withdraw $75,000 Withdraw $30,000
9/1 Invest $120,000 Withdraw $100,000
12/1 Invest $90,000 Invest $40,000 Withdraw $60,000

The partnership agreement stipulates that the weighted-average capital balance is the
basis for the interest on capital component of profit and loss allocation and the rate of
return on invested capital is 12 percent. What is the amount of interest on capital
allocated to each partner as a part of the profit and loss allocation?

Answer:

Capital Time Average

Date Invest/Withdraw Balance Invested Capital
January 1 $850,000 4 months $ 3,400,000
April 30 Withdraw $75,000 775,000 4 months 3,100,000
September 1 Invest $120,000 895,000 3 months 2,685,000
December 1 Invest $90,000 985,000 1 month 985,000
$10,170,000
Average capital ($10,170,000 / 12) $847,500

AVERAGE CAPITAL BALANCE

Capital Time Average
Date Invest/Withdraw Balance Invested Capital
January 1 $680,000 8 months $5,440,000
September 1 Withdraw $100,000 580,000 3 months 1,740,000
 December 1 Invest $40,000 620,000 1 month 620,000
$7,800,000
Average capital ($7,800,000 / 12) $650,000

Capital Time Average

Date Invest/Withdraw Balance Invested Capital
January 1 $450,000 4 months $1,800,000
April 30 Withdraw $30,000 420,000 7 months 2,940,000
December 1 Withdraw $60,000 360,000 1 month 360,000
$5,100,000
Average capital ($5,100,000 / 12) $425,000

Interest on capital contributions:

Tom: $847,500 x .12 = $101,700
Jon: $650,000 x .12 = $78,000
Sandy: $425,000 x .12 = $51,000

283. (20 Points) moderate

John, Roger, and Troy are partners in a local business. You are a staff accountant at a
firm that provides accounting services to the partnership. You were just assigned the task
of helping prepare the profit allocation to the partners. The following information was
records:

Date John Roger Troy

1/1 Balance $250,000 Balance $350,000 Balance $500,000
3/31 Withdraw $30,000 Invest $50,000
8/31 Invest $40,000 Withdraw $90,000
11/1 Invest $25,000 Invest $60,000 Withdraw $60,000

The partnership agreement stipulates that the weighted-average capital balance is the
basis for the interest on capital component of profit and loss allocation and the rate of
return on invested capital is 10 percent. What is the amount of interest on capital
allocated to each partner as a part of the profit and loss allocation?

Answer:

Capital Time Average

Date Invest/Withdraw Balance Invested Capital
January 1 $250,000 3 months $ 750,000
March 31 Withdraw $30,000 220,000 5 months 1,100,000
August 31 Invest $40,000 260,000 2 months 520,000
November 1 Invest $25,000 285,000 2 months 570,000
$2,940,000
Average capital ($2,940,000 / 12) $245,000
 Capital Time Average
Date Invest/Withdraw Balance Invested Capital
January 1 $350,000 8 months $2,800,000
August 31 Withdraw $90,000 260,000 2 months 520,000
November 1 Invest $60,000 320,000 2 months 640,000
$3,960,000
Average capital ($3,960,000 / 12) $330,000

Capital Time Average

Date Invest/Withdraw Balance Invested Capital
January 1 $500,000 3 months $1,500,000
March 31 Invest $50,000 550,000 7 months 3,850,000
November 1 Withdraw $60,000 490,000 2 months 980,000
$6,330,000
Average capital ($6,660,000 / 12) $527,500

Interest on capital contributions:

John: $245,000 x .10 = $24,500
Roger: $330,000 x .10 = $33,000
Troy: $527,500 x .10 = $52,750

284. (10 Points) easy

Philip is the managing partner of a local company. Part of his profit and loss allocation
is a bonus based on the store operating income. The bonus arrangement is 8 percent of
operating income in excess of
bonus this year if operating income before deducting the bonus is $350,000?

Answer:
Bonus = .08($350,000 - $200,000 - B)
1.08 Bonus = $12,000
Bonus = $11,111.11

285. (10 Points) easy

Sally is a partner, and business manager, in a local partnership. Part of the profit and loss
agreement in the articles of partnership is a bonus to be paid to the business manager.
The bonus is currently calculated at 12 percent of income in excess of $250,000 after
subtracting the bonus.

How much bonus will Sally receive if income is $400,000?

Answer:
Bonus = .12 ($400,000 - $250,000 - B)
Bonus = $16,071.43
286. (10 Points) easy
Frank, George, and Hank are partners. Partnership profits for the year are $90,000.

Required:
a. How much is allocated to each partner if the profit and loss residual ratios are
30%, 20%, and 50%, respectively?

b. How would the profit be allocated if there were no profit and loss residual ratios?

Answer:
Part a.
Frank $90,000 x .30 = $27,000
George $90,000 x .20 = $18,000
Hank $90,000 x .50 = $45,000

Part b.
Frank, George and Hank $90,000/3 = $30,000

287. (30 Points) difficult

Beverly, Brad, and Bob are partners in the 3Bs company. The partners have been in
business for a number of years. The following information exists with regard to the
allocation of profits and losses.

Beverly _ Brad Bob

Weighted-average capital balance $400,000 $650,000 $550,000
Salary 40,000 65,000 80,000
Bonus .1(Net income - $200,000)
Residual 40% 35% 25%

The interest portion of the profit and loss allocation is 8 percent of the weighted-average
capital balance. Profit allocation is determined in the order presented above. Assume the
allocation is completed regardless of the level of profit. Partnership losses, on the other
hand, are allocated by the residual ratios only.

Required:
a. Determine the profit allocation if the partnership net income is $580,000.
b. Determine the profit allocation if the partnership net income is $250,000.
c. Determine the loss allocation if the partnership net loss is ($50,000).

Solution:
Part a.
Beverly Brad Bob Total
Interest on capital
$400,000 x .08 $ 32,000
$650,000 x .08 $ 52,000
 $550,000 x .08 $ 44,000 $128,000
Salary 40,000 65,000 80,000 185,000
Bonus
.1($580,000 - $200,000) 38,000 38,000
Residual
$229,000 x .4 91,600
$229,000 x .35 80,150
$229,000 x .25 57,250 229,000
$163,600 $235,150 $181,250 $580,000

Part b.
Beverly Brad Bob Total
Interest on capital
$400,000 x .08 $32,000
$650,000 x .08 $ 52,000
$550,000 x .08 $44,000 $128,000
Salary 40,000 65,000 80,000 185,000
Bonus
.1($250,000 - $200,000) 5,000 5,000
Residual
($68,000) x .4 (27,200)
($68,000) x .35 (23,800)
($68,000) x .25 (17,000) (68,000)
$44,800 $98,200 $107,000 $250,000

Part c.
Beverly Brad Bob Total
Residual
($50,000) x .4 ($20,000)
($50,000) x .35 ($17,500)
($50,000) x .25 ($12,500) ($50,000)

288. (15 Points) difficult

Tiffany, Jason, and Shanel are partners in a marketing firm. They allocate profits and
losses based on four criteria: (1) 6 percent return on invested capital; (2) salary, based on
$40 per billable hour; (3) bonus to Jason for managing the business [.15 (net income -
$250,000 - bonus)]; and (4) residual allocation. For the year, the partners have the
following average invested capital and billable hours.

Tiffany Jason Shanel_

Average invested capital $200,000 $180,000 $160,000
Billable hours 1,500 1,700 2,200

amounts to the nearest dollar.

 Solution:
Tiffany Jason Shanel Total_
Interest on capital
$200,000 x .06 $ 12,000
$180,000 x .06 $ 10,800
$160,000 x .06 $ 9,600 $ 32,400
Salary
1,500 x $40 60,000
1,700 x $40 68,000
2,200 x $40 88,000 216,000
Bonus
.15($450,000 - $250,000 - B) 26,087 26,087
Residual
$175,513/3 58,504 58,504 58,505 175,513
$130,504 $163,391 $156,105 $450,000

289. (10 Points) moderate

Stan and Allan have been partners for several years. Their current partnership profit and
loss ratios are being changed from 75/25 to 60/40. As part of the change, they have
created a list of assets that have market and book value differences. One of the assets is
vacant land with a $200,000 market value and a $110,000 book value. One year after
changing the profit and loss ratios, the building is sold for $280,000. Record (1) the sale
of the land and (2) the distribution of the gain on sale to the partners.

Solution:
Cash 280,000
Land 110,000
Gain on Sale of Land 170,000

Gain on Sale of Land 170,000

Stan, capital ($200,000 - $110,000)(.75) + 115,500
($280,000 - $200,000)(.60)
Allan, capital ($200,000 - $110,000)(.25) + 54,500
($280,000 - $200,000)(.40)

290. (10 Points) moderate

Susan and Mary have been partners for several years. Their current partnership profit
and loss ratios are being changed from 65/35 to 55/45. As part of the change, they have
created a list of assets that have market and book value differences. One of the assets is a
building with a $370,000 market value and a $150,000 book value. One year after
changing the profit and loss ratios, the building is sold for $500,000. Record (1) the sale
of the building and (2) the distribution of the gain on sale to the partners.

Solution:
Cash 500,000
 Building 150,000
Gain on Sale of Building 350,000

Gain on Sale of Land 350,000

Susan, capital ($370,000 - $150,000)(.65) + 214,500
($500,000 - $370,000)(.55)
Mary, capital ($370,000 - $150,000)(.35) + 135,500
($500,000 - $370,000)(.45)

291. (10 Points) easy

Janice and Richard are partners who are changing their profit and loss ratios from 40/60
to 55/45. At the date of the change, the partners chooses to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$250,000 and a market value of $420,000. Two years after the profit and loss ratio is
changed, the land is sold for $600,000. Record (1) the revaluation of the land, (2) the
sale of the land, and (3) the distribution of the gain on sale of land to the partners.

Solution:
Land ($420,000 - $250,000) 170,000
Janice, capital ($170,000 x .40) 68,000
Richard, capital ($170,000 x .60) 102,000

Cash 600,000
Land 420,000
Gain on Sale of Land ($600,000 - $420,000) 180,000

Gain on Sale of Land 180,000

Janice, capital ($180,000 x .55) 99,000
Richard, capital ($180,000 x .45) 81,000

292. (10 Points) moderate

John and Renee are partners who are changing their profit and loss ratios from 70/30 to
60/40. At the date of the change, the partners chooses to revalue assets with market
value different from book value. One asset revalued is a building with a net book value
of $100,000 and a market value of $340,000. One year after the profit and loss ratio is
changed, the building is sold for $270,000. Record (1) the revaluation of the building,
(2) the sale of the building, and (3) the distribution of the loss on sale of the building to
the partners.

Solution:
Building ($340,000 - $100,000) 240,000
John, capital ($240,000 x .70)
168,000
Renee, capital ($240,000 x .30) 72,000

Cash 270,000
 Loss on Sale of Building ($270,000 - $340,000) 70,000
Building 340,000

John, capital ($70,000 x .60) 42,000

Renee, capital ($70,000 x .40) 28,000
Loss on Sale of Building 70,000

293. (10 Points) moderate

Tom and Darris are partners. Their current profit and loss ratios (80/20) are being
changed to (70/30). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, land has a market value of
$350,000 and a book value of $140,000. Record the adjustment to the capital accounts at
the date of the change in the profit and loss ratios.

Solution:
Darris, capital [($340,000 - $150,000)(.20-.30)] 21,000
Tom, capital [($340,000 - $150,000)(.80 - .70)] 21,000

294. (10 Points) moderate

Tim and Donna are partners. Their current profit and loss ratios (60/40) are being
changed to (45/55). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, a building has a book
value of $400,000 and a market value of $650,000. Record the adjustment to the capital
accounts at the date of the change in the profit and loss ratios.

Solution:
Donna, capital [($650,000 - $400,000)(.40-.55)] 37,500
Tim, capital [($650,000 - $400,000)(.60 - .45)] 37,500

295. (5 Points) easy

Wesley, Slyvia, and Mel are partners. They have capital accounts of $60,000, $95,000,
and $105,000, respectively. Heather is talking to Mel about joining the partnership and
acquiring 1/3 of his equity. Wesley and Slyvia know Heather and they have approved

Solution:
Mel, capital ($105,000/3) 35,000
Heather, capital 35,000

296. (10 Points) moderate

John, Linda, and Bill are partners with capital accounts of $78,000, $59,000, and
$183,000, respectively. In addition, they share profits and losses 30%, 25%, and 45%,
respectively. Bill is planning to partially retire and has asked John and Linda if they
 would approve Mitch as a new partner. John and Linda respond that Mitch is acceptable

the admission, the net assets are written up $250,000. Mitch pays Bill $200,000 for 60
percent of his equity. Record the revaluation of the assets and the admission of Mitch
into the partnership.

Solution:
Assets 250,000
John, capital ($250,000 x .30)
75,000
Linda, capital ($250,000 x .25) 62,500
Bill, capital ($250,000 x .45) 112,500

Bill, capital ($183,000 + $112,500)(.60) 177,300

Mitch, capital 177,300

297. (20 Points) moderate

Susan and Tom are partners with capital accounts of $280,000 and $182,500,
respectively. The partners share profits and losses 60/40. They are considering
admitting Scott into the partnership as a 25% equity ownership for an investment into the

revalued up $100,000. Record the revaluation of the assets and the admission of Scott
into the partnership.

Solution:
Assets 100,000
Susan, capital ($100,000 x .60) 60,000
Tom, capital ($100,000 x .40)
40,000

Book value of capital before the investment $562,500

($280,000 + $182,500 + $100,000)
187,500
Total book value of capital after the investment $750,000
percentage ownership 0.25
percentage capital $187,500

Cash 187,500
Scott, capital 187,500

298. (20 Points) moderate

Wayne and Dennis are partners with capital accounts of $250,000 and $300,000,
respectively. The partners share profits and losses 30/70. They are considering
admitting Dorothy into the partnership with a 20% equity ownership for an investment
 will be revalued up $225,000. Record the revaluation of the assets and the admission of
Dorothy into the partnership.

Answer:
Assets 225,000
Wayne, capital ($225,000 x .30) 67,500
Dennis, capital ($225,000 x .70) 157,500

Book value of capital before the investment $775,000

($250,000 + $300,000 + $225,000)
193,750
Total book value of capital after the investment $968,750
0.20
$193,750

Cash 193,750
Dorothy, capital 193,750

299. (10 Points) easy

Louise and Jane are considering admitting Mary into their partnership. Louise and Jane
share profits at losses 70/30 and their capital account balances are $260,000 and
$190,000, respectively. The partnership agreement indicates that the bonus method will
be applied when new partners are admitted to the company. Louise and Jane want to
know what the journal entry would look like if Mary is admitted with a 20 percent equity
interest in the partnership for an investment of $140,000. Prepare the journal entry at the
date of admission.

Answer:
Cash 140,000
Jane, capital ($140,000 - $118,000)(.30) 6,600
Louise, capital ($140,000 - $118,000)(.70) 15,400
Mary, capital ($260,000 + $190,000 + $140,000)(.20) 118,000

300. (10 Points) easy

Steve and Ray are partners with capital accounts of $300,000 and $460,000, respectively.
They share profits and losses 60/40. Their business is growing and they need to admit a
new partner. Sheila has indicated that she would like to be part of the business.
Negotiations occur and Sheila is admitted with a 25 percent equity interest for $325,000.
Record the admission of Sheila if the bonus method is applied.

Answer:
Cash 325,000
Sheila, capital ($300,000 + $460,000 + 271,250
$325,000)(.25)
Ray, capital ($325,000 - $271,250)(.40) 21,500
Steve, capital ($325,000 - $271,250)(.60) 32,250
301. (20 Points) moderate
Deborah and Randy are partners who share profits and losses 55/45. They have capital
account balances of $450,000 and $380,000, respectively. The partners have been
negotiating with Marsha about her joining the partnership. The parties agree that the
partnership will revalue assets to their market value ($150,000 above book value) and
that Marsha will invest $250,000 for a 15 percent equity interest. Record the revaluation
and the admission of Marsha into the partnership assuming the bonus method is applied.

Answer:
Assets 150,000
Deborah, capital ($150,000 x .55) 82,500
Randy, capital ($150,000 x .45) 67,500

Cash 250,000
Deborah, capital ($250,000 - $184,500)(.55) 36,025
Marsha, capital ($450,000 + $380,000 + 184,500
$150,000 + $250,000)(.15)
Randy, capital ($250,000 - $184,500)(.45) 29,475

302. (10 Points) easy

Jennifer and Juan are partners with capital accounts of $100,000 and $160,000,
respectively. They share profits and losses 45/55. The business is expanding and they
need to admit a new partner. Kathryn has indicated that she would like to join the
partnership. Negotiations occur and Kathryn is admitted with a 25 percent equity interest
for $75,000. Record the admission of Kathryn assuming the bonus method is applied.

Answer:
Cash 80,000
Jennifer, capital ($85,000 - $80,000)(.45) 2,250
Juan, capital ($85,000 - $80,000)(.55) 2,750
Kathryn, capital ($100,000 + $160,000 + 85,000
$80,000)(.25)

303. (10 Points) easy

Fred and Laurie are considering admitting John into their partnership. Fred and Laurie
share profits at losses 60/40 and their capital account balances are $160,000 and
$290,000, respectively. The partnership agreement indicates that the bonus method will
be applied when new partners are admitted to the company. Fred and Laurie have asked
you to prepare the journal entry to admit John with a 25 percent equity interest in the
partnership for an investment of $125,000.

Answer:
Cash 125,000
Fred, capital ($143,750 - $125,000)(.60) 11,250
Laurie, capital ($143,750 - $125,000)(.40) 7,500
 John, capital ($160,000 + $290,000 + 143,750
$125,000)(.25)

304. (20 Points) moderate

Jo Ann and Robert are partners who share profits and losses 30/70. They have capital
account balances of $150,000 and $280,000, respectively. The partners have been
negotiating with Bill about him joining the partnership. The parties agree that the
partnership will revalue assets to their market value ($80,000 above book value) and that
Bill will invest $100,000 for a 20 percent equity interest. Record the revaluation and the
admission of Bill into the partnership assuming the bonus method is applied.

Answer:
Assets 80,000
Jo Ann, capital ($80,000 x .30) 24,000
Robert, capital ($80,000 x .70) 56,000

Cash 100,000
Jo Ann, capital ($122,000 - $100,000)(.30) 6,600
Robert, capital ($122,000 - $100,000)(.70) 15,400
Bill, capital ($280,000 + $150,000 + 122,000
$80,000 + $100,000)(.20)

305. (20 Points) moderate

Robert and Steven are partners in a local company. They have capital accounts in the
amounts of $250,000 and $320,000, respectively, when they agree to admit a new
partner, Don, to the company. Don has agreed to contribute $225,000 for a 25 percent

partnership, Robert and Steven share profits and losses 80 percent and 20 percent,
respectively. Record the admission of Don assuming the goodwill method is applied.

Answer:
Book value of capital before the investment $570,000
225,000
Total book value of capital after the investment $795,000
0.25
$198,750

Goodwill to existing partners

$225,000 = (.25)($795,000 + Goodwill)

$225,000 = $198,750 + .25 (Goodwill)
$26,250 = .25 (Goodwill)
Goodwill = $105,000

Cash 225,000
Goodwill 105,000
 Don, capital 225,000
Robert, capital ($105,000 x .80) 84,000
Steve, capital ($105,000 x .20) 21,000

306. (20 Points) moderate

Ann and Sarah are partners in a local company. They have capital accounts in the
amounts of $150,000 and $220,000, respectively, when they agree to admit a new
partner, John, to the company. John has agreed to contribute $175,000 for a 25 percent

partnership, Ann and Sarah share profits and losses 40 percent and 60 percent,
respectively. Record the admission of John assuming the goodwill method is applied.

Answer:
Book value of capital before the investment $370,000
175,000
Total book value of capital after the investment 545,000
0.25
136,250

Goodwill to existing partners

$175,000 = (.25)($495,000 + Goodwill)

$175,000 = $136,250 + .25 (Goodwill)
$38,750 = .25 (Goodwill)
Goodwill = $155,000

Cash 175,000
Goodwill 155,000
Ann, capital ($155,000 x .40) 62,000
John, capital 175,000
Sarah, capital ($155,000 x .60) 93,000

307. (30 Points) difficult

Bob and Norman are partners and they share profits and losses 70/30. They have capital
accounts balances of $350,000 and $480,000, respectively, when they agree to admit
Richard to the company. All parties have agreed that the partnership will first revalue
tangible assets to their market value ($150,000 above book value) and then Richard will

revaluation and the admission of Richard into the partnership assuming the goodwill
method is applied.

Answer:
Assets 150,000
Bob, capital ($150,000 x .70) 105,000
Norman, capital ($150,000 x .30) 45,000
 Book value of capital before the investment $ 980,000
($350,000 + $480,000 + $150,000)
300,000
Total book value of capital after the investment $1,280,000
0.20
$ 256,000

Goodwill to existing partners

$300,000 = (.20)($1,280,000 + Goodwill)

$300,000 = $256,000 + .20 (Goodwill)
$44,000 = .20 (Goodwill)
Goodwill = $220,000

Cash 300,000
Goodwill 220,000
Bob, capital ($220,000 x .70) 154,000
Norman, capital ($220,000 x .30) 66,000
John, capital 300,000

308. (10 Points) moderate

Skip and Amy are partners in a struggling company. An investor, James, has offered to
join the partnership and provide the needed expertise. Skip and Amy have capital
account balances in the amount of $120,000 and $160,000, respectively, at the date
James is admitted to the partnership and their respective profit and loss ratios are 60
percent and 40 percent. James agrees to invest $60,000 for a 20 percent interest in the
partnership capital. Assuming the goodwill method is applied, record the admission of
James.

Answer:
Book value of capital before the investment $280,000
($120,000 + $160,000)
60,000
Total book value of capital after the investment $340,000
0.20
percentage capital $ 68,000

Goodwill to new partner

$60,000 + goodwill = (.20)($340,000 + Goodwill)

$60,000 + goodwill = $68,000 + .20 (Goodwill)
.80 goodwill = $8,000
Goodwill = $10,000

Cash 60,000
Goodwill 10,000
 James, capital 70,000

309. (10 Points) moderate

Rich and Barbara are partners who share profits and losses 70/30. They have been
looking for a new partner to help with the expanding business. Frank has expressed an
interest and discussions are underway. Frank is willing to join the partnership by
investing $270,000 for a 25 percent equity interest. At the date Frank joins the
partnership, Rich and Barbara have capital account balances of $370,000 and $500,000,
respectively. Assuming the goodwill method is applied, record Fran
partnership.

Answer:
Book value of capital before the investment $ 870,000
($370,000 + $500,000)
270,000
Total book value of capital after the investment 1,140,000
0.25
Book $ 285,000

Goodwill to new partner

$270,000 + goodwill = (.25)($1,140,000 + Goodwill)

$270,000 + goodwill = $285,000 + .25 (Goodwill)
.75 goodwill = $15,000
Goodwill = $20,000

Cash 270,000
Goodwill 20,000
Frank, capital 290,000

310. (30 Points) difficult

Clark and Nick are partners and they share profits and losses 75/25. They have capital
accounts balances of $250,000 and $380,000, respectively, when they agree to admit Ron
to the company. All parties have agreed that the partnership will first revalue tangible
assets to their market value ($200,000 above book value) and then Ron will invest

applied.

Answer:
Assets 200,000
Clark, capital ($200,000 x .75) 150,000
Nick, capital ($200,000 x .25) 50,000

Book value of capital before the investment $ 830,000

($250,000 + $380,000 + $200,000)
 $ 170,000
Total book value of capital after the investment $1,000,000
0.20
$ 200,000

Goodwill to new partner

$170,000 + goodwill = (.20)($1,000,000 + Goodwill)

$170,000 + goodwill = $200,000 + .20 (Goodwill)
.80 goodwill = $30,000
Goodwill = $37,500

Cash 170,000
Goodwill 37,500
Ron, capital 207,500

311. (10 Points) easy

Sarah, Tanya, and Theresa are partners who share profits and losses 25 percent, 35
percent, and 40 percent, respectively. Theresa has decided to leave the partnership. The
fixed assets of the partnership are undervalued by $50,000. The capital accounts of

$156,000, respectively. The articles of partnership state that the withdr

share of any differences between market value and carrying value should be recognized
when a partner leaves the partnership. Record the journal entry for the revaluation of the

equity.

Answer:
Assets ($50,000 x .40) 20,000
Theresa, capital ($50,000 x .40) 20,000

Theresa, capital ($156,000 + $20,000) 176,000

Marsha, capital 176,000

312. (10 Points) easy

Sarah, Tanya, and Theresa are partners who share profits and losses 25 percent, 35
percent, and 40 percent, respectively. Theresa has decided to leave the partnership. The
fixed assets of the partnership are undervalued by $50,000. The capital accounts of
,000, $130,000, and
$156,000, respectively. The articles of partnership state that the full market value of all
assets and liabilities should be recognized when a partner leaves the partnership. Record
the journal entry for the revaluation of the assets. R

Answer:
Assets 50,000
 Sarah, capital ($50,000 x .25) 12,500
Tanya, capital ($50,000 x .35) 17,500
Theresa, capital ($50,000 x .40) 20,000

Theresa, capital ($156,000 + $20,000) 176,000

Marsha, capital 176,000

313. (10 Points) moderate

Sam, Tim, and Tyrone are partners who share profits and losses 15 percent, 40 percent,
and 45 percent, respectively. Tyrone has decided to leave the partnership. The fixed

balances before the withdrawal are $70,000, $190,000, and $250,000, respectively. The

between market value and carrying value should be recognized when a partner leaves the
partnership. Record the journal entry for the revaluation of the assets. Record the
withdrawal assuming that Sam purchases 30 percent and Tim purchase 70 percent of

Answer:
Assets ($80,000 x .45) 36,000
Tyrone, capital 36,000

Tyrone, capital ($250,000 + $36,000) 286,000

Sam, capital ($286,000 x .30) 85,800
Tim, capital ($286,000 x .70) 200,200

314. (10 Points) moderate

Sam, Tim, and Tyrone are partners who share profits and losses 15 percent, 40 percent,
and 45 percent, respectively. Tyrone has decided to leave the partnership. The fixed

balances before the withdrawal are $70,000, $190,000, and $250,000, respectively. The
articles of partnership state that the full market value of all assets and liabilities should be
recognized when a partner leaves the partnership. Record the journal entry for the
revaluation of the assets. Record the withdrawal assuming that Sam purchases 30 percent
equity.

Answer:
Assets 80,000
Sam, capital ($80,000 x .15) 12,000
Tim, capital ($80,000 x .40) 32,000
Tyrone, capital ($80,000 x .45) 36,000

Tyrone, capital ($250,000 + $36,000) 286,000

Sam, capital ($286,000 x .30) 85,800
Tim, capital ($286,000 x .70) 200,200
315. (10 Points) easy
Don, Mark, and James are partners who share profits and losses 25 percent, 20 percent,
and 55 percent, respectively. Mark has decided to leave the partnership. The articles of

value and carrying value should be recognized when a partner leaves the partnership.

account balances before the withdrawal are $90,000, $110,000, and $240,000,
respectively. Record the journal entry for the revaluation of the assets. Record the

Answer:
Assets ($75,000 x .20) 15,000
Mark, capital 15,000

Mark, capital ($110,000 + $15,000) 125,000

Cash 125,000

316. (10 Points) easy

Don, Mark, and James are partners who share profits and losses 25 percent, 20 percent,
and 55 percent, respectively. Mark has decided to leave the partnership. The articles of
partnership state that the full market value of all assets and liabilities should be
recognized when a partner leaves the partnership. The fixed assets of the partnership are

are $90,000, $110,000, and $240,000, respectively. Record the journal entry for the
revaluation of the assets. Record the withdrawal assuming that the partnership acquires

Answer:
Assets 75,000
Don, capital ($75,000 x .25) 18,750
Mark, capital ($75,000 x .20) 15,000
James, capital ($75,000 x .55) 41,250

Mark, capital ($110,000 + $15,000) 125,000

Cash 125,000

317. (30 Points) difficult

Berry, Carl, and Phil have been partners for many years. Carl has indicated that he plans
to withdraw from the partnership. To prepare for his departure, the following
information is gathered:

Book Market
Value Value_
Current Assets 210,000 210,000
Fixed Assets 850,000 980,000
Total Assets 1,060,000
 Current Liabilities 110,000 110,000
Long-term Debt 220,000 180,000
Berry, Capital (45%) 380,000
Carl, Capital (25%) 180,000
Phil, Capital (30%) 170,000
Total Liabilities and Partnership Equity 1,060,000

in value of any assets and liabilities should be recognized at the date of withdrawal. The

ownership equity. The assets are to be financed by borrowing the money on long-term
notes payable. Record these events assuming that the bonus method is used to recognize
the withdrawal.

Answer:
Fixed Assets ($980,000 - $850,000)(.25) 32,500
Long-term Debt ($220,000 - $180,000)(.25) 10,000
Carl, capital 42,500

Cash 300,000
Long-term Debt 300,000

Carl, capital ($180,000 + $42,500) 222,500

Berry, capital ($300,000 - $222,500)(45/75) 46,500
Phil, capital ($300,000 - $222,500)(30/75) 31,000
Cash 300,000

318. (10 Points) moderate

Barbara, Mitch, and Susan are partners with capital accounts of $280,000, $350,000, and
$420,000, respectively. Barbara has informed Mitch and Susan that she is withdrawing
from the partnership. The partners have agreed that the partnership will purchase

Bar

Answer
Barbara, capital 280,000
Mitch, capital ($340,000 - $280,000)(28/70) 24,000
Susan, capital ($340,000 - $280,000)(42/70) 36,000
Cash 340,000

319. (10 Points) easy

Fred, Greg, and Sam are partners with capital accounts of $175,000, $225,000, and
$150,000, respectively. Sam informs Fred and Greg that is withdrawing from the
partnership. The
 the bonus method is applied.

Answer:
Sam, capital 150,000
Fred, capital ($200,000 - $150,000)(45/80) 28,125
Greg, capital ($200,000 - $150,000)(35/80) 21,875
Cash 200,000

320. (10 Points) moderate

Jack, Ken, and Laura are partners in a local company. Ken has announced his
withdrawal from the company. The articles of partnership indicate that the withdrawing

share profits in a 30 percent, 25 percent, and 45 percent ratio, respectively, and their
respective capital accounts just prior to the withdrawal are $225,000, $260,000, and

is $80,000. Prepare the journal entry (entries) necessary to reflect the withdrawal of Ken
assuming that Martin has been approved to become the new partner. Martin pays Ken
$380,000 for 100 percent of his partnership equity.

Answer:
Goodwill 80,000
Ken, capital 80,000

Ken, capital ($260,000 + $80,000) 340,000

Martin, capital 340,000

321. (10 Points) moderate

Doris, Elmer, and Fran are partners in a local company. Doris has announced her
withdrawal from the company. The articles of partnership indicate that the withdrawing
date of withdrawal. Doris, Elmer, and Fran
share profits in a 20 percent, 35 percent, and 45 percent ratio, respectively, and their
respective capital accounts just prior to the withdrawal are $120,000, $180,000, and
$275,000, respectively. Estimated good
is $50,000. Prepare the journal entry (entries) necessary to reflect the withdrawal of
Doris assuming that Greg has been approved to become the new partner. Greg pays
Doris $190,000 for 100 percent of her partnership equity.

Answer:
Goodwill 50,000
Doris, capital 50,000

Doris, capital ($120,000 + $50,000) 170,000

Greg, capital 170,000

322. (10 Points) moderate

 Shawn, Teresa, and Mark are partners who share profits and losses 25 percent, 35
percent, and 40 percent, respectively. Mark announced his withdrawal from the

respectively.

ownership percentage is $75,000. Prepare the journal entry (entries) necessary to reflect

equity.

Answer:
Goodwill 75,000
Mark, capital 75,000

Mark, capital ($210,000 + $75,000) 285,000

Shawn, capital ($285,000 x .60) 171,000
Theresa, capital ($280,000 x .40) 114,000

323. (10 Points) moderate

David, Eric, and Glenn are partners who share profits and losses 35 percent, 40 percent,
and 25 percent, respectively. Eric announced his withdrawal from the company when the
he

ownership percentage is $90,000. Prepare the journal entry (entries) necessary to reflect
pays

equity.

Answer:
Goodwill 90,000
Eric, capital 90,000

Eric, capital ($200,000 + $90,000) 290,000

David, capital ($290,000 x .30) 87,000
Glenn, capital ($290,000 x .70) 203,000

324. (10 Points) easy

Rich, Sam, and Clarence are partners who share profits and losses 15 percent, 45 percent,
and 40 percent, respectively. Sam announced his withdrawal from the company when
he

ownership percentage is $60,000. Prepare the journal entry (entries) necessary to reflect
Sa equity.
 Answer:
Goodwill 60,000
Sam, capital 60,000

Sam, capital ($210,000 + $60,000) 270,000

Cash 270,000

325. (10 Points) easy

Hal, Norris, and Eddie are partners who share profits and losses 25 percent, 15 percent,
and 60 percent, respectively. Hal announced his withdrawal from the company when the
e

percentage is $30,000. Prepare the journal entry (entries) necessary to reflect Hal
equity.

Answer:
Goodwill 30,000
Hal, capital 30,000

Hal, capital ($120,000 + $30,000) 150,000

Cash 150,000

326. (10 Points) moderate

James, Kris, and Lance are partners in a local company. Kris has announced her
withdrawal from the company. The articles of partnership indicate that the entire

Lance share profits in a 30 percent, 25 percent, and 45 percent ratio, respectively, and
their respective capital accounts just prior to the withdrawal are $160,000, $120,000, and
$225,000, respectively. Estimated goodwill is $180,000. Prepare the journal entry
(entries) necessary to reflect the withdrawal of Kris assuming that Felix has been
approved to become the new partner. Felix pays Kris $175,000 for 100 percent of her
partnership equity.

Answer:
Goodwill 180,000
James, capital ($180,000 x .30) 54,000
Kris, capital ($180,000 x .25) 45,000
Lance, capital ($180,000 x .45) 81,000

Kris, capital ($120,000 + $45,000) 165,000

Felix, capital 165,000

327. (10 Points) moderate

Nicole, Melvin, and Joshua are partners in a local company. Melvin has announced his
withdrawal from the company. The articles of partnership indicate that the entire
 Joshua share profits in a 40 percent, 25 percent, and 35 percent ratio, respectively, and
their respective capital accounts just prior to the withdrawal are $200,000, $150,000, and
$190,000, respectively. Estimated goodwill is $120,000. Prepare the journal entry
(entries) necessary to reflect the withdrawal of Melvin assuming that Hans has been
approved to become the new partner. Hans pays Melvin $160,000 for 100 percent of his
partnership equity.

Answer:
Goodwill 120,000
Nicole, capital ($120,000 x .40) 48,000
Melvin, capital ($120,000 x .25) 30,000
Joshua, capital ($120,000 x .35) 42,000

Melvin, capital ($150,000 + $30,000) 180,000

Hans, capital 180,000

328. (10 Points) moderate

Kim, Jennifer, and David are partners who share profits and losses 40 percent, 25
percent, and 35 percent, respectively. Kim announced her withdrawal from the company
ere $250,000, $180,000, and $210,000,

to be recognized at the date of withdrawal. Estimated goodwill is $95,000. Prepare the

journal entry (entries) necessary to r

equity.

Answer:
Goodwill 95,000
Kim, capital ($95,000 x .40) 38,000
Jennifer, capital ($95,000 x .25) 23,750
David, capital ($95,000 x .35) 33,250

Kim, capital ($250,000 + $38,000) 288,000

Jennifer, capital ($288,000 x .60) 172,800
David, capital ($288,000 x .40) 115,200

329. (10 Points) moderate

Natalie, Oscar, and Paul are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Paul announced his withdrawal from the company when
. The

at the date of withdrawal. Estimated goodwill is $110,000. Prepare the journal entry
d Oscar acquire
pays
 Answer:
Goodwill 110,000
Natalie, capital ($110,000 x .30) 33,000
Oscar, capital ($110,000 x .25) 27,500
Paul, capital ($110,000 x .45) 49,500

Paul, capital ($320,000 + $49,500) 369,500

Natalie, capital ($369,500 x .30) 110,850
Oscar, capital ($369,500 x .70) 258,650

330. (10 Points) easy

Cindy, Tony, and Ben are partners who share profits and losses 25 percent, 55 percent,
and 20 percent, respectively. Ben announced his withdrawal from the company when the

at the date of withdrawal. Estimated goodwill is $40,000. Prepare the journal entry
quires
equity.

Answer:
Goodwill 40,000
Cindy, capital ($40,000 x .25) 10,000
Tony, capital ($40,000 x .55) 22,000
Ben, capital ($40,000 x .20) 8,000

Ben, capital ($100,000 + $8,000) 108,000

Cash 108,000

331. (10 Points) easy

Mary, Nick, and Shawn are partners who share profits and losses 15 percent, 25 percent,
and 60 percent, respectively. Mary announced her withdrawal from the company when

at the date of withdrawal. Estimated goodwill is $50,000. Prepare the journal entry
acquires

Answer:
Goodwill 50,000
Mary, capital ($50,000 x .15) 7,500
Nick, capital ($50,000 x .25) 12,500
Shawn, capital ($50,000 x .60) 30,000

Mary, capital ($80,000 + $7,500) 87,500

Cash 87,500
 Short Answer Questions

332. Helen and Richard are considering forming a partnership. They have worked out many
of the issues but they are unsure about how the accounting records have to be maintained.
They come to you for information pertaining to the application of GAAP for partnership
records.

Answer: Partnerships are not required to comply with generally accepted accounting
principles (GAAP) unless the entity has publicly traded debt securities or the entity is
required to comply with GAAP by a creditor.

333. What are the similarities and differences among proprietorships, partnerships, and
corporations with regard income tax filing.

Answer: Partnerships and proprietorships are viewed as an extension of the owners.

Neither entity is separately taxed on income. The taxable income or loss is allocated to

individual tax return. The partnership is required to file an informational tax return
(Form 1065) to disclose how the taxable income has been allocated to the partners. The
corporation, on the other hand, is a taxable entity and income tax is paid on the
income.

334. Three individuals are considering forming a business together. One of their concerns is
the liability exposure from the business. Prepare a short note to these individuals
explaining the extent of liability each has when forming a partnership and a corporation.

Answer: A partner may bind the partnership by contract when conducting business in the
name of the partnership. This results in each partner being liable for the partnership
business dealings of the other partners. In addition, partners have unlimited liability with
regard to partnership debts. On the other hand, stockholders of a corporation do not
share such legal liability. The corporation is a legal entity separate from the owners and
management can commit the corporation to legal contracts in the name of the
corporation, but not the stockholders. Thus, management of the corporation can sue in
the name of the corporation and the corporation can be sued. As a result, the
stockholders are generally not liable for the debts of the corporation beyond the amount
invested.

335. Alex is the owner of a small local business. He has operated as a proprietorship for many
years but his health is starting to fail. As a result, Alex is going to reduce the number of
hours worked in the business. He has asked you to explain how changing his business to
a partnership would affect him (legally). Prepare a brief memo outlining the similarity
and differences between a proprietorship and a partnership with regard to legal issues.
 Answer: Similarities to be discussed include (1) ease of formation and (2) unlimited

336. Compare and contrast the proprietary theory of equity and the entity theory of equity
with regard to partnerships.

Answer: The proprietary theory is based on the notion that the business entity is an
extension of the owners. The entity theory is based on the notion that the business entity
is distinct and separate from the owners. Partnerships contain elements of both the
proprietary and entity theories. Support for the proprietary theory can be found in the
following:
Individual partners are liable for all debts of the partnership
Salaries of partners are viewed as distributions of income, not components of net
income
The admission of a new partner or withdrawal of an existing partner results in the
dissolution of the partnership
Assets contributed to the partnership retain the existing tax basis to the partner
contributing
net income, and
the partnership does not pay income taxes

Support for the entity theory can be found in the following:

Assets contributed to the partnership become property of the partnership
A partnership can enter into contracts
Partners do not have claims to specific assets
Partnership creditors have priority claim to partnership assets and the creditors of

Continuity of the partnership when admission or withdrawal of partners occurs

337. Partnership accounting applies elements of both the proprietary and entity theories.
Explain the underlying theoretical basis for the proprietary theory and the entity theory.

Answer: The proprietary theory is based on the notion that the business entity is an
extension of the owners. The entity theory is based on the notion that the business entity
is distinct and separate from the owners.

338. Hans and Felix are attempting to work out the final issues for forming a partnership.
They are currently debating the values to assign to noncash assets contributed to the
partnership by each partner. Hans believe that the market value has to be assigned to
these assets while Felix believes there may be other alternatives. Prepare a short note to
the two potential partners clarifying this issue.

Answer: The three most likely valuations that can be assigned to noncash assets are the

of the asset. The amount to be assigned to the noncash assets can be determined by
agreement among the partners or by appraisal (if market values are used).

339. Berry and Charlie plan to start a partnership. One partner is contributing an old building
while the other partner is contributing several delivery trucks. Both partners are also
contributing cash. A difference of opinion exists regarding the amount at which the

the carrying values should be recorded. Charlie objects because it would give Berry too

be used. Berry objects to the tax basis for the same reason Charlie objects to the book
basis. The partners ask for your opinion. How do you respond?

Answer
assigned to each individual capital account. The amount recorded for the assets will help
determine total capital, not how total capital is divided between the partners.

340. Explain how the assumption of a liability by the partnership on an asset contributed by a
asset.

Answer: Generally the value assigned to the asset (e.g., carrying value, tax basis, market
value) is explicitly reduced by the amount of the liability assumed to determine the

agree to create capital accounts in equal amounts through such techniques as the
recognition of goodwill for other partners. The tax basis of a contributing partner is only
reduced by the part of the liability assumed by the partnership because the IRS interprets
this event as all partners sharing the obligation so the contributing partner is still
obligated for part of the liability.

341. Clark, Mitchell, and Thomas are forming a partnership. Each partner is contributing cash
and other tangible assets. In addition, Clark has a significant amount of experience in
operating the type of business being created. The partners do not like the idea of
 recording goodwill but they are not sure how to otherwise recognize the additional
contribution Clark is making. Prepare a brief memo explaining a different way to

Answer
contribution. Mitchell and Thomas would give up an agreed amount of capital to be
assigned to Clark. This approach is called the bonus method. Mitchell and Thomas are
giving a bonus to Clark because of the additional contribution that cannot be measured in
a traditional manner.

342. James and Rachel are forming a partnership. They agree on the values to assign to all of
the assets and liabilities. The partners also want to recognize that Rachel has many
contacts that will be of value to the business. A mutual friend who owns a business has
told them the bank will be unhappy with their balance sheet if they record goodwill for
contacts?

Answer: The bonus method can be used instead of the goodwill method. The bonus
method reallocates capital from James to Rachel to recognize the contribution made by
Rachel in excess of the identifiable assets. As a result, James will have a reduced capital
account balance and Rachel will have a greater balance.

343. Barry, George, and Felix are forming a partnership. Each partner is contributing cash
and other tangible assets. George and Felix are contributing greater amounts of cash and
other tangible assets but Barry has a significant amount of experience in operating the
type of business being created. A mutual friend has suggested that the three make their
initial capital accounts equal in value. George and Felix do not like the idea of recording
their capital accounts at an amount less than the market value of what they are
contributing but they are not sure how to otherwise recognize the additional contribution

contribution.

Answer: The additional contribution being made by Barry could be recorded as goodwill.
This intangible asset would be created at an amount agreed by the partners. Goodwill

344. Explain how partners may determine the dollar amount of goodwill recognized at the
date a partnership is formed.

Answer: The value assigned to goodwill can be determined in any legal manner
agreeable to the partners. One possibility is to have an independent appraisal of the
intangible asset contributed. Another possibility is for the partners to agree on an
assigned value of the intangible asset.

345. Explain how a drawing account used by a partnership is similar in concept to a dividend
account used by a corporation.
 Answer: Both accounts contain information pertaining to distributions to owners. These
distributions can take any form such as cash, inventory, and other assets. Both accounts

closed at the end of the accounting period to permanent equity accounts (partnership
capital accounts for drawing accounts and retained earnings for dividends).

346. Vicky, Robert, and Ray are forming a partnership. They have asked for some
information regarding the allocation of profits and losses among the partners. While they
believe that each partner will contribute significantly to the partnership, this contribution
will take different forms. They are unsure how to recognize these different types of
contributions. Prepare a short note explaining the different components that might be
considered when allocating partnership profits to individual partners.

Answer: Partnership profits and losses can be allocated in any manner but there are four
common components: interest on capital balance, salary, bonus, and residual percentages.
These different components reward partners for contributions of economic resources,
labor and expertise, taking on special responsibilities, and agreed allocation of any
residual profit or loss remaining after the other components have been considered.

347. Susan is joining an already existing partnership. She is reading the profit and loss
sharing part of the partnership agreement. She calls you with a question regarding a term
she does not understand, weighted average capital balance. Prepare a short note
explaining what is meant by this term.

Answer: The weighted average capital balance is the calculated average dollar amount in
the capital account after considering the length of time that balance existed. This method
of computing the average is less subject to manipulation that the simple average, which is
beginning amount plus ending amount divided by two.

348. Ben is a new partner in a local company. When he became a partner, he received a copy
of the partnership agreement including the profit and loss sharing agreement. Ben is
concerned about the interest on capital balance portion of the profit and loss sharing
agreement because his capital account is very small. Prepare a short note explaining the
reason this component of profit and loss allocation exists.

Answer: The interest on capital balance is meant to reward partners for contributions of
economic resources. As a new partner, a small capital account will likely exist and
therefore this component of the profit allocation will be small. As the capital account
grows through additional investment and profit accumulation, this component of the
profit and loss allocation will also grow.

349. Michelle is a new partner is considering becoming a partner in a small company. She
obtained a copy of the most recent income statement and is surprised when she does not
find salaries on the income statement. She asks you if it is unusual for partners to not
receive a salary from their work in the partnership.
 Answer: The lack of salary expense on the income statement does not mean that the
partners do not receive a salary. Partner salaries are not on the income statement, they
are part of the profit allocation.

350. Are there any differences between bonuses offered to partners and bonuses offered to
managers in corporations?

Answer: Bonuses offered to partners and bonuses offered to managers in corporations

are the same. Both are forms of compensations designed to encourage performance.
Furthermore, both should be based on criteria within the control of the person who will
receive the bonus.

351. Ben and Natalie are forming a partnership. They have worked out many of the details
but they are confused about how to divide profits and losses. They have spoken with
several associates who are in different partnership and there seems to be some
inconsistencies. Some partnerships have residual profit and loss ratios while others do
not. Prepare a note to Ben and Natalie informing them of the reason for this
inconsistency.

Answer: Residual profit and loss ratios are not needed if the ratios are to be equal. The
default profit and loss ratio, if not stated, is that all partners will share the residual profit
and loss equally. If the desire is to share the residual amount of profit or loss in some
other proportion, the allocation must be disclosed.

352. Do partnership residual profit ratios have to be the same as partnership residual loss
ratios? Why or why not.

Answer: Residual profit and loss ratios are part of a contractual agreement among the
partners. As a result, the partnership can apply any ratios agreed by the partners. The
ratios are typically the same for profits and losses but they can differ.

353. Alex, Shawn, and Tammy are partners in a local company. They have been conducting
business for a number of years and Shawn recently told the partners that he is going to
reduce his activities in the partnership. As a result, the partners have agreed that the
profit and loss sharing arrangement should be modified. They have agreed to adjust the
salaries and the profit and loss residuals. They come to you with a concern regarding the
assets that are currently owned by the partnership. The partners know that the assets are
worth more than the amount recorded on the financial records but they do not know how
this should be considered when the profit and loss ratios are changed. Prepare a short
note to the partners outlining the their options.

Answer: The difference between the market and book values of assets that exist when the
profit and loss ratios change can be addressed in several ways. One way is to make a list
of these assets and their market value at the date of the change. When the assets are sold,
the amount of the gain that existed when the profit and loss ratios were changed would be
 allocated based on the previous profit and loss ratios and any change in market value that
occurs after the ratios are changed would be allocated based on the new ratios. Another
approach is to revalue the assets at the date the profit and loss ratios are changed. The
gain would be allocated based on the previous ratios. A third approach is to determine
the impact of the unrealized gains on the capital accounts due to the change in the ratios
and directly adjust the capital accounts. The gain on the assets at the date of sale would
then be allocated based on the new ratios. All three approaches give the same end result,
the choice is a matter of preference by the partners.

354. Partners sometimes change the profit and loss ratios used to determine the allocation of
profits and losses. When this occurs, why would the partners choose to prepare a list of
assets with market values different from book values when they could have chosen to
revalue the assets to market value at the date the profit and loss ratios were changed?

Answer: Some partners and possibly their creditors may not want to have the assets
revalued to market value. The revaluation is a significant departure from GAAP and the
records
maintained in accord with GAAP.

355. Sarah, a friend who knows you are a CPA comes to you with a concern. She has been
asked by a colleague to consider becoming a partner in a small company. She will be the
fourth partner in the company. Sarah has had two meetings with the current partners.
She is concerned that one of the current partners who does not know her has been asking
a variety of questions pertaining to her business practices beliefs and her personal ethics.
Sarah asks if you have any idea why this partner would ask such questions. How do you
respond?

Answer: The current partner may be concerned because the existing partners will have
unlimited liability for the actions of the new partner. Given that this partner does not
know Sarah, he/she is gathering information so a choice can be made about accepting
such risk.

356. Don and Jerry are partners in a publishing company. Don is interested in reducing his
involvement in the company and they have been searching for a new partner to take on
some of the work. They learn that Ted is interested in joining the partnership and they
enter into negotiations. Don is willing to support Ted joining the partnership if Ted will
pay Don $250,000. Don will not transfer any of his equity to Ted but will allocate 30

unwillingness to allocate any equity to him even though a significant investment is

required. How do you respond?

Answer: There is no requirement for a partner to give up equity to a new partner

of the partnership. His capital account would start at $0 an increase as the partnership
has income.
357. Sally, Robert, and Stuart are partners in a manufacturing company. They are considering
allowing Dick to acquire an ownership interest in the partnership by purchasing part of

comes to you with a question just before a negotiating session with the current partners.

profit allocation or if that is a separate issue. How do you respond?

Answer
and losses. These two items have to be negotiated simultaneously but they are
independent. Dick has to be comfortable with the outcome on both issues if he is going
to acquire a part ownership in the partnership.

358. Fred is negotiating an investment to join a partnership. The existing partners are asking

Fred is encouraged by this proposal but then he learns that the partners plan to revalue
the
revaluations. Prepare a note to Fred explaining why the existing partners want to revalue
the assets before he is admitted.

Answer: The partners believe that the difference between market value and book value of
existing assets belong to them because they have been the partners during the time period
when the assets value increased. As a result, they intend to have the unrealized increase
in value added to their capital accounts so that it will not be shared with the new partner.
Any changes in value after Fred becomes a member of the partnership will be allocated
to all of the partners, including Fred.

359. Why are some people opposed to the revaluation of partnership assets when a new
partner is admitted to the partnership?

Answer: These individuals contend that the partnership is still in operation and there
should be no change in the values assigned to assets and liabilities while the partnership
is in operation. There has not been a change in ownership so there is no transaction to
justify the revaluation.

360. You are a staff accountant for a local company. The partners of a client are discussing
the admission of a new partner. Some
should be revalued before admission of the new partner while other partners are opposed
to the revaluation. Prepare a short note explaining why it may be appropriate to revalue
time.

Answer: The change in value of the assets has occurred over time and the partners during
that time should share in the increase in value. The new partner should have no claim to
addition, when the
new partner joins the company, there is a new legal entity so recording the assets at the
market value at that date is not inappropriate.
361. Sam and Mark are discussing bringing Susan into the partnership. Susan understands
that
understand why she should invest more in the partnership than her share of the market
at
it may require a greater investment to become a member of this partnership.

Answer

balance sheet but goodwill still exists. The amount that Susan is investing in excess of
the capital account created represents her investment in the goodwill that already exists in
the company. She is paying a bonus to the existing partners for allowing her to share in
the goodwill of the partnership.

362. Steve is negotiating with the partners in a local business. He would like to become a new
partner in the business but there are several issues he does not understand. One of the
primary issues pertains to the amount of his capital account at the date of investment.
The partners told Steve that he would have to invest $100,000 to join the business but his
capital account would be created for $85,000. Prepare a short note to Steve explaining
why his capital account would be recognized at an amount less than his investment.

Answer: The partnership has an unidentified asset (goodwill) that has value to the

sheet but goodwill still exists. The amount that Steve is investing in excess of the capital
account created represents his investment in the goodwill that already exists in the
company. He is paying a bonus to the existing partners for allowing him to share in the
goodwill of the partnership.

363. Jim and Fred have decided to admit Richard into their partnership. Jim and Fred know
that they are going to apply something called the bonus method to record the admission
of Richard into the partnership but they do not understand the technical accounting part

be created at an amount greater than the amount of his investment in the partnership.
Prepare a short note
is created for this amount.

Answer: The parties have agreed that Richard is going to receive a certain percentage of
o agreed on the
amount that Richard will invest. When the investment takes place, the bonus method

capital after the investment. This amount may be less than, equal to, or more than the
amount invested. If it is less than or more than the amount of the investment, the capital
accounts of the existing partners is adjusted to make up for the difference.

364. John and Joel are negotiating with a potential partner to join their local business. They
would like Laura to become a new partner in the business but there are several issues
they do not understand. One of the primary issues pertains to the amount of his capital
 account at the date of investment. The partners agreed that Laura would have to invest
$75,000 to join the business and they agree that he is going to have a 30% equity interest
in the partnership. What they did not realize is that their capital accounts were going to
decrease when Laura joined the partnership. Prepare a short note to John and Joel
explaining why their capital accounts would be reduced when Laura joins the company.

Answer: The partners have agreed that Laura is contributing something to the partnership
in addition to the tangible assets. They have also agreed on the value of this contribution

capital plus the investment) is allocated to the new and existing partners in the agreed
manner. If the new partner is receiving an equity interest more or less than the amount

capital account of the new partner is greater than the amount invested so the existing

365. Shawn is currently in discussion with Ted and Mark regarding his joining their
partnership. Initial discussions resulted in an agreement that Shawn would contribute
$50,000 for a 20 percent equity interest in the partnership. The last discussion was about

were greater in the pro forma balance

sheet and that goodwill had been added to the balance sheet. Shawn asks for an
explanation of this change. You are the accountant attending the meetings, how do you
respond?

Answer: The partnership agreement indicates that the goodwill method is to be applied
when new partners join the company. In this instance, Shawn is contributing more than
his share of the book value of the company. This implies that there exists goodwill in the
company. The goodwill is recorded and allocated to Ted and Mark because they were

recorded.

366. You are conducting training for new loan officers of a bank. The topic of the day is
partnerships and their changes in ownership. The bank often receives loan requests when
partnerships are expanding. At the same time, the partnership may also be adding a new
partner to increase the c
bank. You hand out several partnership balance sheets before and after a new partner has
joined. One loan officer asks about the reason for a change in existing partner capital
accounts and the addition of goodwill to the balance sheet. How do you respond?

Answer: Partnerships are permitted to record goodwill when a new partner joins the

equity, goodwill is said to exist in the current partners. As a result, this goodwill is
recorded and allocated to the current partners.
367. Three investors have asked for your assistance in planning the formation of a partnership.
After about two hours of discussion the group arrives at the topic of how to admit
additional partners in the future or retire existing partners. You explain that there are two
methods that can be used to account for these events: the bonus method and the goodwill
method. One of the partners listens to the explanation of the two methods and then asks
for you to summarize the criteria that may be used to determine which method this
request.

Answer: The difference that exists when comparing the bonus method and the goodwill
method is whether the partners wish to recognize goodwill on the balance sheet. The
goodwill method will result in greater total assets than the bonus method but the
relationship that exists among the partners will be the same regardless of the method
applied.

368. Why would partners in an existing partnership agree to allocate an equity interest to a
new partner that is greater than the value of the identifiable net assets contributed by the
new partner?

Answer: The existing partners would be willing to allocate a capital account to a new
partner greater than the value of the identifiable new assets contributed because the new
partner is contributing unidentifiable assets to the partnership. These other assets may
include business expertise, a good reputation, or existing customers. The additional
assets contributed to the partnership result in the new partner having goodwill.

369. You are an analyst for a local bank. A question just arrived in your email from a new
loan officer. The loan officer is reviewing information from a small partnership
requesting a loan. The partnership indicates that one of the partners is withdrawing from
the partnership. The remaining partners send a current balance sheet and a pro forma
balance sheet after the withdrawal. The loan officer is confused because the withdrawing

reduced?

Answer ould be
reduced. First, the partnership may have revalued assets to their market value. If the
market value were less than book value, the capital accounts would be reduced. The
second, and more likely, reason is that the remaining partners are going to pay a bonus to

will be reduced by his/her proportion of the bonus paid.

370. Jennifer is confused with regard to the recognition of the withdrawal of a partner from
the company. The partnership agreement indicates that they will apply the bonus method
to recognize the withdrawal and that any bonus will be shared by the remaining partners
based on their profit and loss ratio. Jennifer was surprised when she is assigned 40
percent of the bonus paid even though she only has a 35 percent ownership interest in the
partnership. How do you respond?
Answer: The remaining partners, based on their profit and loss residual ratios, absorb the
bonus paid to the withdrawing partner
became 40 percent of the remaining equity after the existing partner was removed from
consideration.