NATIONAL COLLEGE OF BUSINESS AND ARTS – FAIRVIEW

2ND SEMESTER - SY 2021-22

PRELIMINARY EXAMINATION
ACCOUNTING FOR SPECIAL TRANSACTIONS

1. Elijah developed an interesting idea for marketing sailboats in Death Valley. He interested
Caleb in joining him in a partnership. Following is the information you have collected relative
to their original contributions.
Caleb contributed P30,000 cash, a tract of land, and delivery equipment. Elijah contributed
P60,000 cash. Alter giving special consideration to the tax bases of the assets contributed, the
relative usefulness of the assets to the partnership versus the problems of finding buyers for the
assets and contributing cash, and other: such factors, the partners agreed that Elijah's
contribution was equal to 40 percent of the partnership's tangible assets, measured in terms of
the fair value of the assets to the partnership. However, since the marketing idea originated
with Elijah, it was agreed that he should receive credit for 50 percent of the recorded capital.
Recent sales of land similar to that contributed by Caleb suggest a market value of P40,000.
Likewise, recent sales of delivery equipment similar to that contributed by Caleb suggest
P40,000 as the market value of the equipment. These sales, of course, were not entirely
representative of the particular assets contributed by Caleb and therefore may be a better
indicator of their relative values than their absolute values. In reflecting on their venture,
the partners agree that it is a rather risky affair in respect to anticipated profits. Hopefully,
however, they will be able to build good customer relations over the long run and establish a
permanent business with an attractive long-term rate of return.

Under the most appropriate method, given the circumstances, the entry to
record the formation of partnership must be:
a. Cash 90,000 c. Cash 90,000
Delivery Equipment 40,000 Delivery equipment 40,000
Land 40,000 Land 40,000
Elijah, capital 60,000 Goodwill 50,000
Caleb, capital 110,000 Elijah, capital 110,000
Caleb, capital 110,000

b. Cash 90,000 d. Cash 90,000

Delivery Equipment 40,000 Delivery equipment 40,000
Land 40,000 Land 40,000
Elijah, capital 85,000 Elijah, capital 102,000
Caleb, capital 85,000 Caleb, capital 68,000
2. C. Cola and R. Crown formed a partnership and agree to divide initial partnership capital
equally, even though C. Cola contributed P50,000 in identifiable assets and R. Crown
contributed P42,000. Such an agreement implies that R. Crown is contributing an
unidentifiable asset such as individual talent, established clientele, or banking
connections to the partnership. The unidentifiable asset is not recorded on the partnership
books, the 'journal entry necessary to establish equal capital interest is:
a. Cash P92,000 c. C. Cola, capital P4,000
C. Cola, capital P50,000 R. Crown, capital P4,000
R. Crown, capital 42,000

b. Cash P92,000 d. R. Crown, capital P4,000

C. Cola, capital P46,000 C. Cola, capital P4,000
R. Crown, capital 46,000

3. The balance sheet as of July 31, 2016, for the business owned by Sunshine, shows the
following assets and liabilities:
Cash 50,000 Furniture and Fixtures P164,000
Accounts receivable 134,000 Accounts payable 28,800
Merchandise inventory 220,000

It is estimated that 5% of the receivables will prove uncollectible. The cash balance
includes 1,000 shares marketable equity securities recorded at its cost, P4,000. The stock
last sold on the market at P17.50 per share. Merchandise inventory includes obsolete items
costing·P18,000 that will probably realize only P4,000. Depreciation has never been
recorded; however, the furniture and fixtures are two years old, have an estimated total life
of 10 years, and would cost P240,000 if purchased new. Prepaid items amount to P5,000.
Paulo is to be admitted as a partner upon investing P200,000 cash and Pl00,000 merchandise.
How much capital is to be credited to Sunshine upon formation of partnership?

a. P539,200 b. P613,000 c. P565,000 d. P606,200

4. Darwin and Sanders are joining their separate businesses to form a partnership.
Property and cash are to be contributed for a total capital of P400,000. The
property to be contributed and liabilities to be assumed are:
Darwin Sanders
Book value Fair value Book value Fair value
Accounts receivable P 30,000 P 30,000

Inventories 30,000 45,000 P80,000 P90,000

Equipment 50,000 40,000 90,000 95,000

Accounts Payable 15,000 15,000 10,000 10,000

 The partners' capital accounts are to be equal after all contributions and the
assumptions of liabilities. Profit and loss ratio is 45% Darwin and 55% Sanders.
The amount of cash Darwin and Sanders must contribute:
a. P200,000; P200,000, respectively c. P5,000; P70,000, respectively
b. P80,000; P45,000, respectively d. P100,000; P25,000, respectively

5. Paul admits Timothy as a partner in business. Accounts in the ledger for Paul on November 30,
2016, just before the admission of Timothy, show the following balances:
Cash P 26,000 Accounts payable P 62,000
Accounts receivable 120,000 Paul, capital 264,000
Merchandise inventory 180,000
It is agreed that for purposes of establishing Paul's interest the following
adjustments should be made:
1. An allowance for doubtful accounts of 2% of accounts receivable is to be
established.
2. The merchandise inventory is to be valued at P202,000.
3. Prepaid expenses of P6,500 and accrued liabilities of P4,000 are to be
established. ·

Timothy is to invest sufficient funds in order to receive a 1/3 interest in the

partnership. How much must Timothy contribute?
a. P132,000 b. P143,050 c. P95,360 d. P88,000

6. Shane, Pat, and Andy are new CPAs and are to form an accounting partnership, Shane is to
contribute cash of P75,000 and his computer originally bought at P80,000 but has a second-
hand value of P50,000. Pat is to contribute cash of P100,000 and tables and chairs worth
P20,000 but acquired by Pat for only P18,000. Andy, whose family is selling computers, is to
contribute cash of P40,000 and a brand-new computer plus printer with regular price at
P80,000 but which cost their family's computer dealership P70,000. Partners agree to share profits
3:2:3. The capital balances of Shane, Pat, and Andy, respectively upon formation are:

a. Shine, P155,000; Pat, P118,000 and Andy, P110,000

b. Shine, P143,625; Pat, P95,750 and Andy, P143,625
c. Shine, P125,000; Pat, P120,000 and Andy, P120,000
d. Shine, Pl36,875; Pat, P91,250 and Andy, P136,875

Questions 7 and 8 are based on the following:

X and Y are partners sharing profits 60:40. A balance sheet prepared for the
partnership on April 1, 2016 shows the following:
Cash P 48,000 Accounts payable P 89,000
Accounts receivable 92,000 X, capital 133,000
Inventory 165,000 Y, capital 108,000
Equipment 70,000
Accumulated depreciation ( 45.000)
. P 330.000 P330.000
 On this date, the partners agree to admit Z as a partner. The terms of the agreement
are that assets and liabilities are to be restated as follows:
a. An allowance for possible uncollectible of P 4,500 is to be established.
b. Inventories are to be restated at their present replacement values of
P 170,000.
c. Equipment is to be restated at a value of P 35,000. .
d. Accrued expenses of P 4,000 are to be recognized.

X, Y, and Z will divide profits in the ratio of 5:3 :2. capital balances for the new partners
are to be in this ratio with X and Y making cash settlement outside of the partnership for
the required capital adjustment between themselves and z investing cash in the partnership
for his interest.

7. How much cash Z should contribute?

a. P 61,875 b. P 49,496 c. P 60,250 d. P 50,625

8. What capital adjustments should be made between X and Y?

a. X must pay Y, P17,785. c. X must invest cash of P17,785.
b. Y must pay X, P17,785. d. Y must invest cash of Pl7,785

9. Dianne and David created a partnership to own and operate a health food store. The
partnership agreement provided that Dianne receive a salary of P20,000 ad David a salary of
P10,000 to recognize their relative time spent in operating the store. Remaining profits and
losses were divided 60;40 to Dianne and David, respectively. Income for 2015, the first year
of operations, of P26,000 was allocated P17,600 to Dianne and P8,400 to David.
On January 1, 2016 the partnership agreement was changed to reflect the fact that David could
no longer devote any time to the store's operations. The new agreement allows Dianne a salary
of P36,000 and the remaining profits and losses are divided equally. In 2016 an error was
discovered such that the 2015 reported income was understated by P8,000. The partnership
income of P50,000 for 2016 included this P8,000 related to 2015.

By what amount should Dianne's capital change in 2016?

A. P 39,000 B. P46,200 C. P43,800 D. P43,000

10. L, M, and N are partners with capital balances on January 1, 2016 of P1,200,000, P480,000,
and P240,000, respectively. They agreed to share profitsand losses as follows:
a. Salary allowances of L, P192,000; M, P240,000, and N, P240,000.
b. 6% interest allowed on beginning of the year's capital balances.
c. The managing partner, L to be entitled to a 20% bonus after allowing as expenses
partners salaries, interest and bonus; and
d. Profits after partners' salaries, interest, and bonus to be divided equally.
 For the year 2016, the partnership reported profit before interest, salaries and bonus of
P1,176,000. For the year, the partners' drawings were L, P408 000, M, 80,000 and N, P424,000.
Each partner’s share in the profits after salaries interest and bonus was
a. 108,000 b. P 129,600 c. P 392,000 d. P 103,680

11. X, Y and Z formed a partnership on November 10 2015, known as XYZ Trading. X and Y
each contribute P60,000 cash. Z contribution consisted of 100 shares of A company stock
which had cost him P40,000. On November 10, 2015, market value of P60,000. The net profit
from operations after adjustment is P236,700 as of December 31, 2016, and after considering
the following information:
a. Personal consumption of partners and families is P4,000 for each
partner per month.
b. Each of the partners devote full time to the business an withdrew P3,000 per week
in 2016.
Ignoring result of operation for the prior year, the capital account of each partner
as of December 31, 2016 is:

a. X, P90,900; Y, P90,900; Z, P90,900

b. X, P138,900; Y, P138,900; Z, P138,900
c. X, P186,900; Y, P186,900; Z, P186,900
d. X, P330,900; Y, P330,900; Z, P330,900

12. Eddy and Freddy operate The Gourmet Restaurant as a partnership. Their partnership
agreement has the following provisions for sharing profits and losses:
a. Income is distributed only as far as it is available.
b. Available income is to be distributed in the following sequence:
i. Eddy, who is the chef, gets a salary of P50,000 a year; Freddy, who is
still learning, gets a salary of P20,000.
ii. Interest is imputed on the average capital balances at 15 percent.
iii. Any remaining profits and losses are to be shared equally.

The average capital balances during the year were P40,000 for Eddy and P100,000 for
Freddy. If the partnership income for the year is P35,000, it should be distributed to the
partners as follows:

a. Eddy P16,000; Freddy P19,000

b. Eddy P17,500; Freddy P17,500
c. Eddy P25,000; Freddy Pl0,000
d. Eddy P28,000; Freddy P7,000
13. X, Y and Z have been partners throughout the year 2014. Their average balances for the
year and their balances at the end of the year before closing the nominal accounts are as
follows:

Balances
Average Balances Dec. 31, 2014
X (Cr.) P900,000 (Cr.) P600,000
Y (Cr.) 30,000 {Dr.) 10,000
Z (Cr.) 70,000 (Cr.) 100,000
The profit for 2014 is P750,000 before charging partners' drawing allowances and
before interest on average balances at the agreed rate of 4% per annum. X is entitled to a
drawing account credit of Pl00,000, Y of P70,000, and Z of P50,000 per annum. The
balance of the profit is to be distributed at the rate of 60% to X, 30% to Y, and 10% to
Z.
The partners agreed that, after credits and distribution as indicated in the preceding
paragraph, it is intended to adjust the capital accounts of partners by investing the highest
amount of cash, so that, the balances in the partners accounts will be proportionate to their
profit-sharing ratios. None of the partners will withdrew cash from the partnership.

What amount of investment must be made by each partner?

a. X, none; Y, P578,000 and Z, none

b. X, P180,800, Y, P397,200; Z, none
c. X, none; Y, P296,800 and Z, none
d. X, none; Y, P296,800 and Z, (P30,133)

Items 14 and 15 are based on the following:

Partners E, F and G have capital balances in a partnership of P70,000, P30,000, and
P900,000, respectively. The losses for the year are P120,000.

14. What will be the capital balance of F if the three partners share profits and
losses at 2:2:6 ratio?
a. P6,000 credit balance. c. P24, 000 debit balance.
b. P10,000 debit balance. d. P40,000 debit balance.

15. What will F's capital be if E gets a P140,000 salary, F gets a P50,000 salary, and G gets a
10% interest on her beginning capital balance, with the remaining being divided at a
1:1:2 ratio?
a. Zero c. P10,000 debit balance.
b. P20,000 debit balance. d. P70,000 debit balance.
16. The Samuel Partnership shows the following profit and loss ratios and capital balances: Andrew
(60%), P252,000; Mila (30%), P126,000 and Philip (10%), P42,000. The partners decide to sell to
Violet 20 percent of their respective capital and profit and loss interests for a total payment of
P90,000. Violet will pay the money directly to the other partners. What are the capital balances
of the partners after Violet's admission to the partnership?
Andrew Mila Philip Violet
a. P198,000 P 99,000 P33,000 P90,000
b. P201,600 P 100,800 P33,600 P84,000
c. P216,000 P108,000 P36,000 P90,000
d. P255,699 P 127,800 P42,600 P84,000

17. Ruth and Jethro are partners who share income and loss in the ratio 2:3 respectively.
The partners agree to admit Samuel as a partner upon investing P150,000 cash for a
one-fifth interest. Assets of the partnership are fairly valued except for a parcel of land
that is overvalued by P150,000. Net assets of the partnership are to be revalued, and
Samuel is to be admitted. The capital accounts of Ruth and Jethro are P450,000 and
P300,000, respectively. Determine the capital to be credited to Samuel.
a. P150,000
b. P180,000
c. P210,000
d. P120,000

Questions 18 and 19 are based on the following:

Riley and Smith are partners with present capital balances of P500,000 and P400,000,
respectively. The partners share profit and losses according to thefollowing percentages: 60%
for Riley and 40% for Smith. Tyler is to join the original p a r t n e r s h i p upon
contribution of P250,000 to the partnership in exchange for a 20% interest in capital and
15% interest in profits and losses. Tyler's contribution consists of P170,000 of cash and
equipment having a fair value of P80,000. The assets of the original partnership have a book
value equal to their fair value except that the land has a book value of P15,000 and fair value of
P55,000.

18. Calculate the capital balance of Tyler in the new partnership, assuming use of
the bonus method.
a. P238,000 b. P250,000 c. P230,000 d. P178,500
19. Calculate the capital balance of Tyler in the new partnership, assuming use of
the goodwill method.
a. P 238,000 b. P250,000 c. P230,000 c. P178,500

Questions 20 and 22 are based on the following:

A, B, and C have capital balance of P112,000, P130,000 and P58,000 respectively, and share profits
in the ratio 3:2:1. D invest cash in the partnership for a one-fourth interest.

20. Assume D receives a one-fourth interest in the assets of the partnership, which includes
credit for P25,000 of goodwill that Is recognized upon admission. How much cash D
invest?
a. Pl00,000 b. P75,000 c. P125,000 d. P50,000
21. Assume D receives a one-fourth interest in the assets of the partnership and is
credited with P20,000 of the bonus from the old partners that is recognized upon
D’s admission. How much cash D invest?
a. P73,333 b. P100,000 c. P93,333 d. P80,000

22. Assume D receives a one-fourth interest in the assets of the partnership and B is credited with
P15,000 of the bonus from D, how much cash D invest?

a. P115,000 b. P105,000 c. P160,000 d. P120,000

23. Dick and Nick are partners who have capital balances of P900,000 and P720,000,
respectively, and s h a r e p r o f i t s and l o s s e s in the ra t i o of 3::2 respectively. Rick is
admitted as a partner upon investing P750,000 for a 20% interest in the firm, profits are to be
shared 3:3:2, to Dick, Nick, and Rick, respectively. Given the choice between goodwill and
bonus method, Rick will:

a. Prefer goodwill method due to Rick's gain of P276,000.

b. Prefer bonus method due to Rick's gain of P69,000.
c. Prefer goodwill method due to Rick's gain of P157,500.
d. Be indifferent for the goodwill and bonus method are the same

24. A and B have capital balances of P65,000 and P35,000 and share profits 3:2.C is admitted as
a partner and is given a 25% interest in the firm upon investing P40,000 cash. Profits are
to be shared 5:3:2 by A, B and C. D subsequently enters the partnership by investing
P25,000 for a 20% interest in assets and a 20% share of the firm's profits. Former partners
share the balance of profits in their original ratio. A has difficulty getting along with D and
withdraws from the partnership. The partnership pays P73,000 cash for A's interest. How
much are the capital balances of B, C and D, respectively a er A's withdrawal under the bonus
method?

a. P31,000; P31,000; P30,000

b. P34,600; P33,400; P33,000
c. P40,600; P38,400; P38,000
d. P43,000; P40,000; P40,000

Items 25 and 26 are based on the following:

The following balances as of the end of 2016 for the partnership of X, Y, and Z,
together with their respective profit and loss percentages, were as follows:
Assets P360,000 X, loan P 18,000
X, capital (20%) 84,000
Y, capital (20%) 78,000
Z, capital (60%) 180,000
P360,000 P360,000
 X decided to retire from the partnership. Parties agreed to adjust the assets to their fair
market value of P432,000 as of December 31, 2016. X will be paid P122,400 for X's
partnership interest inclusive of X loan which is to be repaid in full. No goodwill is to be
recorded. After X's retirement.

25. What will be the balance of Y's capital account?

a. P78,000 b. P72,900 c. P92,400 d. P90,900

26. Assuming that the P122,400 payment to X exclude his loan what will be the
balance of Y's capital account, after X's retirement? '
a. P78,000 b. P92,400 c. P90,900 d. P86,400

Questions 27 through 29 are based on the following:

The partners in t he K e n n e t h , Rhaian , and Marlon partnership have c a p i t a l
balances as follows:
Kenneth, capital P35.,000;
Rhaian, capital P35,000;
Marlon, capital P40,000

Profits and losses are shared 30%, 30%, and 40%, respectively. On this date, Marlon
withdraws and the partners agree to pay him P45,000 out of partnership cash. (Tangible
assets are already stated at values approximating their fair market values.)

27. Using bonus method, how much must be the ending capital of Kenneth
immediately after Marlon's withdrawal?
a. P35,000 b. P32,500 c. P33.500 d. P38,750

28. Using the partial goodwill method, how much must be the ending capital of Kenneth
immediately after Marlon's withdrawal?
a. P35,000 b. P32,500 c. P33,500 d. P38,750

29. Using the full goodwill method, how much must be the ending capital of Kenneth
immediately after Marlon's withdrawal?
a. P35,000 b. P32,500 c. P33,500 d. P38,750

30. Kris, Cristy and Dina are partners with capital balances on December 31, 2014 of P300,000,
P300,000, and P200,000, respectively. Profits are shared equally. Dina wishes to withdraw and it
is agreed that she is to take certain furniture and fixtures at their second-hand value of Pl2,000
and note for the balance of her interest. The furniture and fixtures are carried on the books as
fully depreciated. Brand new, furniture and fixtures may cost P20,000. Dina's acquisition
of the second-hand furniture will result to:
 a. Increase in the capital of P4,000 each for Kris, Cristy and Dina.
b. Increase in the capital of P6,000 each for Kris and Cristy.
c. Increase in the capital of P10,000 each for Kris and Cristy.
d. Increase in the capital of P8,000 for Dina.

31. Sharon, Manilyn, and Maricel, partners who share profits equally are to incorporate their
business. The capital accounts show Sharon, P200,000; Manilyn, P300,000, and Maricel
P500,000. Net assets of Pl million are to be revalued based on current market value of Pl.3
million. The capital stock of the company is to have a par value of P20. Upon incorporation,
partners are to receive shares of stock as follows:

a. 433,334.

32. F, G and H are partners who agree to form a corporation. Their capital balances are F,
P100,000; G, P100,000 and H, P200,000 and they share profits equally. All their
assets and liabilities are to become the corporation's. Net assets of P400,000 will be
revalued at P550,000. The substantial revaluation is only from the land which H
contributed to the partnership ten years ago at P100,000. At P1 par value per share,
partners are to receive shares of stock as follows:

a. F, 150 ,000; G, 150,000; and H, 250,000

b. F, 183,333; G, 183,333; ·and H, 183,333
c. F, 100,000; G, 100,000; and H, 300,000
d. F, 100,000; G, 100,000; and H, 350,00