Chapter 19

True-False Statements
1. 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.

2. The dissolution of a partnership occurs only when the partnership is terminating

operations and going out of business.

3. 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.

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

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

6. 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.

7. 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.

8. 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.

9. 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.

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

11. 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.

12. 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.
13. 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.

14. 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.

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

16. 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.

17. 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.

18. 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.

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

20. 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.

21. 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

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

23. 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.

24. 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.

25. 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.

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

27. 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.

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

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

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

31. 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.

32. 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.

33. Partnerships may have both a revaluation of assets and liabilities as well as goodwill
recognition at the date a partner withdraws from a partnership.
Multiple Choice Questions
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 profit 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 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
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 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
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 profit 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

Answers:
1. T
2. 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.
3. T
4. F, A new partner's liability for actions that occurred before joining the partnership is
limited to the amount invested in the partnership.
5. T
6. 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.
7. 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.
8. 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.
9. T
10. 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.
11. 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.
12. T
13. T
14. T
15. 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.
16. T
17. T
18. T
19. F, Goodwill may be recognized with regard to the existing partners but it may also be
recognized with regard to the new partner.
20. 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.
21. T
22. 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.
23. T
24. 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.
25. T
26. F, Partnership assets may be revalued but they may also remain at their carrying value.
27. F, The revaluation of the partnership’s assets is unrelated to the purchase of the
withdrawing partners ownership interest in the partnership.
28 T
29. 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.
30. T
31. 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.
32. T
33. T
Multiple Choice
1. a
2. d
3. a
4. b
5. c
6. d
7. c
8. a
9. d
 Problems
1. Kern and Pate are partners with capital balances of P60,000 and P20,000, respectively.
Profits 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:
2. At December 31, RR and SH 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, PP invests
P17,000 in cash for a one-fifth interest in the capital and profit 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 profits 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 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 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 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 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 profits 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 reflect agreed profit 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 profit 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 profit 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 profits and losses immediately before the sale
to Pink follow
Capital % Interests in
Accounts Profits 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?
9. Donkey desires to purchase a one-fourth capital and profit and loss interest in the
partnership of Shrek, Fiona, and Muffin. The three partners agree to sell Donkey one-
fourth of their respective capital and profit 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 profits and losses
immediately before the sale to Donkey follow
Capital % Interests in
Accounts Profits and Losses
Shrek P210,000 60%
Fiona 130,000 25
Muffin 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 Muffin,
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
Profit 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 profits 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 profits, 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 profits 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
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 reflect either a bonus or goodwill
15. Michelle and Steve are partners in a local business. They currently share profits 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 profits 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
 Profits 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
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 profits 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 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?
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 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
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 profits 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 profits in
the ratio of 3:2. ZZ is admitted as a partner upon investing P500,000 for 25% interests in
the firm, profits 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
indifferent.
31. XX and YY are partners who have capital of P600,000 and P480,000 sharing profits in
the ratio of 3:2. ZZ is admitted as a partner upon investing P500,000 for 25% interests in
the firm, while the other partners continue to participate profits and losses in their
original ratio. Given the choice between goodwill and bonus method, ZZ will prefer
bonus or goodwill with a gain amounting to or be indifferent. :
32. Neal, Palmer, and Ruppe are partners in a real estate company. Their respective capital
balances and profit-sharing ratios are as follows:
Partners Capital Balance Profit-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 profit 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
indifferent, Palmer will choose:
33. Using the same information in No. 32, except that the profit 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 reflected by this new profit and loss ratio. Given
the choice between goodwill and bonus method or indifferent, 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 8,700 Notes payable P10,000

Trade accounts receivable 13,250 Trade accounts payable 9,800
Inventories 21,760 Sade, Capital 25,110
Equipment 32,400 Tipp, Capital 20,000
Less: Accumulated
depreciation (11,200) ______
Total P 64,910 Total 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.

Immediately following incorporation, additional paid-in capital in excess of par should be

credited for:

Answers:
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)
Difference (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 profit 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; Muffin, 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

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 profits
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 profits 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 profits 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
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
profit 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:
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-off as a loss:

XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Less: Write-off 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
influenced 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 offer the same ultimate results only:
1. When the incoming partner’s percentage share of profit and loss and percentage interest in
assets upon admission are equal, and
2. When the former partners continue to share profits and losses between themselves in the
original ratio.

If these conditions are not fully met, however, results will be different.

31. Be indifferent 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%
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-off as a loss:
XX YY ZZ
 Goodwill Method is used P 852,000 P 648,000 P 500,000
Less: Write-off 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 indifferent 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-off 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-off Impaired Goodwill
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 reflect 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 reflect 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