Partnership Formation

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PROBLEMS

PROBLEM 1: TRUE OR FALSSE

1 The accounting for the assets and liabilities of a
business is different from that of a sole
partnership
corporation.
proprietorship or a
2. A partnership is relatively easy to form but also easy to
dissolve.
3 Mr. A contributed land with historical cost of PIM and fair
value of P2M to a
partnership business. Mr. A's contribution
shall be valued at P1M in the
A bonus
partnership
books.
4. given to a partner is treated as a reduction to the
capital account(s) of the other partner(s).
5. Ms. B contributed equipment with
carrying amount of P100
and fair value of P200 to a
partnership. No bonus is to given
any partner. In the partnership's books, equipment is debited
for P200 but B's capital account is credited for P100.
6. Mr. C contributed land with fair value of PIM
to a
partnership. The land has an unpaid mortgage of P.2M which
the partnership agreed to assume. The valuation of Mr. C's net
contribution is P1.2M.

Fact pattern
Mr. D and Ms. E formed a partnership. D contributed P200, while
E contributed P100. The
partners' respective interests in the
partnership are 60% and 40%. The initial credits to the partners'
capital accounts are to be adjusted using the bonus method to
reflect the partners' respective interests.

7. The balance of D's capital account after the formation is P180.

8. The bonus given to E is P40.

Fact pattern:
w and Pie agreed to form a partnership. Piw contributed cash of
200 while Pie will be contributing her expertise. The partnership
8reement stipulates that Piw and Pie shall have equal interests in
 16
Chapter
both the initial capital of the partnership and in subsequent
subseos.

losses.
partnership profits and
shall be debited for P200 ht
9. The cash contribution of Piw t the
account shall be P100.
net credit to Piw's capital
10. Immediately after partnership formation,
the balance of D..

capital account is zero.

THEORY
PROBLEM 2: MULTIPLE CHOICE
-

1. The asset contributions of partners to a partnership ar

are
initially measured at
a. fair value. c. tax basis.
b. original cost to the partner d. any of these

2. Mr.I and Mr. M formed a partnership business. Mr. I

contributed equipment with fair value of P2M. However, the
partners agreed that Mr. I's capital account should be credited
for P2.2M. Which of the following statements is correct?
a. The P.2M excess credit is treated as a bonus to Mr. M.
b. Mr. M is probably bringing in expertise or special skill to
the business.
C. Mr. M's capital account will be debited for P.2M.
d. This is unacceptable. Mr. I's capital credit should be P2M.

3. Under the bonus method, any increase or decrease in the

capital credit of a partner is
a. deducted from or added to the capital credits of the other
partners.
b. recognized as goodwill.
c.
recognized as expense.
d. deferred and amortized to profit or loss.
4 Under the bonus method, the asset contributed by a pa
receivinga bonus is
a. debited at an amount greater than the asset's fair
b. debited at an vaue
amount less than the asset's fair value.
 Partnership Formation
w.wwwwwmew 17
C. debited at an amount equal to the asset's fair value.
d. either a or b

5 Mr. X and Mr. Y agreed to form a partnership. The fair values

of the partners' net contributions vary; however, the partners
agreed to have equal capital credits. Cash settlement shall be
made between them for the difference. Which of the following
statements is correct?
a. The asset contributions of the partners shall be debited for
equal amounts.
b. The cash settlement between the partners will either
increase or decrease the total partnership capital.
C. The cash settlement between the partners will not be
recorded in the partnership books.
d. Mr. X shall pay Mr. Y to have their capital balances equal.

PROBLEM 3: EXERCISES
1. Sunny and Gloomy contributed the following in the formation
of a partnership business:
Sunny Gloomy
Cash 180,000
Accounts receivable 100,000
Inventory 160,000
Land (at historical cost) 340,000
Total 440,000 340,000

Additional information:
Only 60% of the accounts receivable is recoverable.
The net realizable value of the inventory is P120,000. Sunny

acquired the inventory on account; the partnership will

assume the unpaid balance of P60,000.
The land has a fair value of P600,000.

Requirement: Provide the journal entry.

 18 Chapter
****

2. Use the information

in problem 1.
Gloomy agreedd tn
Sunny and Gloomy
on a 30:70 ratio
and losses based partloss
forprofits
share in
order
with deficient
his capital
contribution
balance
shall
to provide
reflect hisadditional
profit and
eca
h in

sharing ratio.

to record the additional invect.

Requirement: Provide the entry stment
deficient contribution.
of the partner with

3. Use the information in problem 1. Sunny and Gloomy agreed to

3 have equal credits to their capital accounts. The bonus method

shall be used.

Requirements:
a. Provide the compound journal entry.
b. Provide the simple journal entries.

4 Use the information in problem 1. Sunny and Gloomy agreed to

have equal credits to their capital accounts. Cash settlement is
to be made between the partners for the adjustments on their
capital balances.

Requirement: Describe how the cash settlement should be made

and how it would be accounted for in the partnership b0oks.

5. Use the information in problem 1.

Sunny and Gloomy agreea
have equal credits to their capital accounts. Additional
investment orpartial withdrawal shall be madè by a partne
from the
partnership for any adjustment to his capital balan
Requirement: Which partner should make an additional inves nent
and which partner should
make a withdrawal?
Partnership Formation 19

PROBLEM 4: MULTIPLE CHOICE-cOMPUTATIONAL

1. Twinkle, Sheep and Bus formed a partnership.
Twinkle
contributed cash of P80,000. Sheep contributed equipment
with historical cost of P700,000, carrying amount of P180,000,
and fair value of P90,000. Bus contributed building with
historical cost of P1,000,000, carrying amount of P480,000, and
fair value of P690,000. The partnership will assume the unpaid
mortgage of P580,000 onthe building. Which partner has the
largest capital account balance on partnership formation?
a. Twinkle c. Bus
b. Sheep d. None, all are equal

2. Hammer and Nail formed a partnership. Hammer contributed

equipment with original of P370,000 and fair vallue of
cost
P300,000 while Nail contributed cash of P180,000. Hammer
and Nail agreed to have a 60:40 interest in the partnership and
that their initial capital credits should reflect this fact. A
partner's capital account should be increased accordingly by
way of additional cash investment. Which of the partners
should make an additional investment and by how much?
a. Hammer, P20,000 C. Hammer, P70,000
b. Nail, P20,000 d. Nail, P70,000

3. Mike and Mario agreed to form a partnership. Mike

contributed equipment with carrying amount of P100,000 and
fair value of P70,000, while Mario contributed cash of
P200,000. The partners agreed to have a profit sharing ratio of
2:1, respectively. The initial credits to the partners' capital
accounts shall reflect this fact. Under the bonus method, how
much is the balance of the capital account of Mario
immediately after the partnership formation?
a. 90,000 c. 135,000
b. 200,000 d. 70,000

4 Abel and Carr formed a partnership and agreed to divide

initial capital equally, even though Abel contributed P100,000
20
Chapter \
and Carr contributed P84,000 in identifiable assets. Unde
bonus approach to adjust the capital accountsS, the
should be debited for
Carrs
unidentifiable asset
c. 8,000
a. 46,000
d.0
b. 16,000
(AICPA)

partnershiP. The partnersh:

5. A and B agreed to form a
ership
agreement stipulates the following:
Initial capital of P300,000.
of the partnership.
A 25:75 interest in the equity

while B contributed P200,000 cash

A contributed P100,000 cash,
Which partner should provide additional investment (0r
in order to the partners
bring
withdraw part of his investment)
to their respective interests
in the equity of
capital credits equal
the partnership?
a. A shall provide additional capital of P25,000.
b. B shall withdraw capital of P25,000.
C. B shall make an additional investment of P25,000.
made.
d. No additional contribution or withdrawal shall be

PROBLEM 5: CLASSROOM ACTIVITY

INSTRUCTIONS:
1. Find a study partner.
2. Imagine that you and your study partner are entreprerneud
and have agreed to form a business partnership.
3. Read the facts below and answer the succeeding requiremen

Your contributions are as follows:

Partner2
Partner 1 1,800,000

Cash 250,000 1,000,000

Accounts receivable 430,000

Land 1,250,000
Partnership Formation 21

Building 2,000,000
Accounts payable 330,000 400,000
Notes payable
500,000
Capital 3,600,000 1,900,000

Additional information:
The cash contribution of Partner 1 as listed above is the
peso
equivalent of 6,250 foreign currency units (FCU). The current
exchange rate is P45: FCU1.
Partner 2's account receivable should be written down by
P200,000.
The land has an appraised value of P1,500,000.
The building has an appraised value of P1,400,000.
Attached to the building is an unpaid mortgage of P800,000.
Partner 1 agrees to settle this mortgage immediately using
his/her personal funds.
There is a pending lawsuit over Partner 1's contributed
properties -

a claim by third party. A discussion with

a

Partner 1's legal counsel reveals that it is probable that the

plaintiff will accept an out of court settlement of not less than
P300,000. The partnership shall assume the obligation of
paying the plaintiff.
There are' unpaid real property taxes on the properties
contributed by Partner 1 amounting to P40,000. The partmers

agreed that the partnership shall assume those obligations.

T h e notes payable is stated at face amount. An inspection of
the related promissory note reveals that the note is a 5-year

non-interest bearing note issued 2 years ago and requires a

date. The currernt rate is 10%.

lump sum paymernt at maturity

Requirements:
a. Compute for adjusted
balances of your capital accounts.
b. Provide the entry to record your contributions in the

partnership books. You may or may not use a valuation accountfor the notes payable.)
 22 wwwaa

Chapter
Variation #1:
You and your partner agree that
one
icantly cuter
you is significantly
of

that that cuteness will bringg

than the other. You determined good
Accordingly, you decided to haveu
feng shui to the business. your
No cash settlements
capital accounts credited
at equal amounts. or
additional investments will
be made.

Requirements: omit centavos)

How much is the bonus?
(do not
a.
bonus (1.e., the cuter partner)?
b. Which partner receives the
C. Explain brieflyhow the bonus will be accounted for in tho
partnership books.
record your contributions in the
the
d. Provide the entry to
partnership books.

Variation #2:
You and your partner agreed that one of you is significantly hotter
than the other. However, you determined that that hotness will
not bring any good to the business. Accordingly, you decided to
equalize your interest and make cash settlement for the difference
among yourselves. No additional investment or withdrawal of
investment shall be made.

Requirements:
a. Which partner shall receive cash payment from the otner
partner? (do not omit centavos)
b. Explain briefly how the cash receipt/ cash payment will be
accounted for in the partnership books.
C. Provide the entry to record your contributions in the
partnership books.

Variation #3:
You and your
partner agreed that both of you are etally
.
beautiful and that your respective interests in the rtnership
must be
equal. You agreed that a partner's capital Shal be
 Partnership Formation 23

increased accordingly by contributing additional cash to bring

both your capital balances proportionate to your equity interests.

Requirement: Which partner shall make the additional cash

contribution and by how much?

Variation #4:
You and your partner agreed that both of you are equally
gorgeous and that your respective interests in the partnership
must be equal. You agreed that the initial capital of the business
should be equal to the fair value of your net asset contributions.
You further agreed that a partner should provide additional
investment (or withdraw part of his investment) in order to bring8
both of your capital credits equal to your respective interests in
the equity of the partnership.

Requirement: Which partner(s) should provide additional

investment (or withdraw part of his/her investment) in order to
bring both your capital credits equal to your respective interests in
the equity of the partnership? (do not omit centavos)
.

PROBLEM 6: FOR CLASSROOM DISCUSSION

Valuation of contributions of partners

1. Mr. Sun and Ms. Moon formed a partnership. Their
contributions are as follows:
Mr. Sun Ms. Moon
Cash 400,000
Accounts receivable 250,000
Land 750,000
Equipment 180,000
Total 650,000 **
1,130,000

Additional information:
is deemed collectible.
Only 80% of the accounts receivable
 24 Chapter 1

original cost. The tair value is P1,000,0oo.

The land is stated at
assumes a P250,000 unpaid mortgage on the
The partnership
land.
on a long-term financine
Ms. Moon acquired the equipment ng
basis. Ms. Moon promised to pay the unpaid principal balanc e
funds. The equipment is under.
of P80,000 using her personal
depreciated by P30,000.

to record the partner's

Requirement: Provide the journal entry
contributions.

Use the information in problem 1. The partners agreed to share

2.
in profits and losses equally. A partner should make an
additional contribution in order for the partners' capital
balances to reflect the partners' equal interests in the

partnership.

Requirement: Which partner should make an additional

contribution and by how much?

Bonus on initial investments

3. Use the information in problem 1'. However, assume that the
partners agreed to have egual interests in the partnership's
equity and profit and losses. The partners' initial capital
credits should reflect this agreement using the bonus method..

Requirement: Provide the journal entry to record the partner s

contributions.

Variation to bonus method cash -

settlement between partners

4. Use the
information in problem '1'. However, assume that tne
partners agreed to have their capital accounts initially credited
at equal amounts. Cash
settlement shall be made between tne
partners.
 Partnership Formation 25

Requirements:

a. Provide the compound journal entry to record the partner's

contributions.
b. Provide the simple journal entries to record the partner s
contributions.

Variation to bonus method - additional investment/withdrawal

5. Use the information in problem '1'. However, assume that the

partners agreed to have their capital accounts initially credited

at equal amounts. A partner shall provide additional
investment (or withdraw part of his investment) in order to
equalize the balances of the partners' capital accounts.

Requirement:Which partner shall make an additional investment

and which partner shall withdraw part of his/her investment?