PARTNERSHIP FORMATION 1

PROBLEM 1
On June 30, 20x8 PAANO, the sole proprietor of PAANO Inc, expands
the company and establishes a partnership with NGA and BA. The
partners plan to share profits and losses as follows: PAANO, 50%;
NGA, 25% and BA 25%. They also agree that the beginning capital
balances of partnership will reflect this same relationship.

PAANO asked NGA to join the partnership because his many business
contacts are expected to be valuable during the expansion. NGA is
contributing P40,000 and a building that has an original cost of
P520,000, book value of P420,000, tax assessment of P310,000 and
fair value of P370,000. The building is subject to a P242,000
mortgage that the partnership will assume. BA is contributing
P66,000 and marketable securities costing P252,000 but are
currently worth P345,000.

PAANO’s investment in the partnership is his business. He plans

to pay off the notes with his personal assets. The other partners
have agreed that the partnership will assume the accounts payable.
The balance sheet for the PAANO Inc follows:

Balance Sheet
June 30, 20x8
Assets Liabilities and Capital
Cash P60,000 Accounts payable P318,000
Accounts receivable (net) 288,000 Notes payable 372,000
Inventory 432,000 PAANO, Capital 510,000
Equipment-net (dept’n, 420,000
P120k)

The partners agree that the inventory is worth P510,000, and the
equipment is worth half its original cost, and the allowance
established for doubtful accounts is correct.

How much is the agreed capital of PAANO if the partners agree to

use the bonus method to record the formation and if the partners
agree to use the goodwill approach to record the formation?

PROBLEM 2
As of July 1, 20x8, UNA and HIRIT decided to form a partnership.
Their balance sheets on this date are:
UNA HIRIT
Cash P 24,000 P 60,000
Accounts Receivable 864,000 360,000
Merchandise Inventory - 324,000
Machinery and Equipment 240,000 432,000
Total P1,128,000 P1,176,000
 PARTNERSHIP FORMATION 2

Accounts Payable P 216,000 P 384,000

UNA, capital 912,000 -
HIRIT, capital - 792,000
Total P1,128,000 P1,176,000

The partners agreed that the machinery and equipment of UNA is

under depreciated by P24,000 and that of HIRIT, P72,000. Allowance
for doubtful accounts is to be set up amounting to P192,000 for
UNA and P72,000 for HIRIT. The partnership agreement provides for
a profit and loss ratio and capital interest of 60% to UNA and 40%
to HIRIT.

How much cash must UNA invest to bring the partners’ capital
balances proportionate to their profit and loss ratio?

PROBLEM 3
On August 1, JANE and JULIA pooled their assets to form a
partnership, with the firm to take over their business assets and
assume the liabilities. Partners’ capitals are to be based on net
assets transferred after the following adjustments. (Profit and
loss are allocated equally.)

JULIA’s inventory is to be increased by P8,000; an allowance for

doubtful accounts of P2,000 and P3,000 are to be set up in the
books of JANE and JULIA, respectively; and accounts payable of
P8,000 is to be recognized in JANE’s books. The individual trial
balances on August 1, before adjustments, follow:

JANE JULIA
Assets P150,000 P226,000
Liabilities 10,000 39,000

What is the capital of JANE and JULIA after the above adjustments?

PROBLEM 4
AM and CONFUSED formed a partnership with each partner contributing
the following items:

AM CONFUSED
Cash P120,000 P 60,000
Building – cost to AM 450,000
- fair value 600,000
Inventory – cost to CONFUSED 300,000
-fair value 420,000
Mortgage Payable 180,000
Accounts Payable 90,000
 PARTNERSHIP FORMATION 3

Assume that for tax purposes, AM and CONFUSED agree to share

equally in the liabilities assumed by the AM and CINFUSED
partnership. What is the balance in each partner’s capital
account for financial accounting purposes?

PROBLEM 5
On April 30, 20x8, WE, ARE, and BORED formed a partnership by
combining their separate business proprietorships. WE contributed
cash of P112,500. ARE contributed property with a P81,000 carrying
amount, a P90,000 original cost, and P180,000 fair value. The
partnership accepted responsibility for the P78,750 mortgage
attached to the property. BORED contributed equipment with a
P67,500 carrying amount, a P168,750 original cost, and P123,750
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 April 1, 20x8, capital balance?

PROBLEM 6
On January 1, 20x8, Al and Bert both sole proprietors decided to
form a partnership to expand both of their businesses. According
to their agreement they will split profits and losses 75:25 and
their initial capital will also reflect that ratio.

The following are Al and Bert’s Statement of financial Position:

Al Proprietor
Statement of Financial Position
December 31, 20x7
ASSETS LIABILITIES & EQUITY
Cash 50,000 Accounts Payable 65,000
Accounts Receivables 100,000 Accrued Expenses 55,000
Inventories 75,000 Notes Payable 80,000
Equipment 250,000 Al, Capital 90,000
Acc Dept’n-Equipment (185,000)
TOTAL 290,000 TOTAL 290,000

Bert Proprietor
Statement of Financial Position
December 31, 20x7
ASSETS LIABILITIES & EQUITY
Cash 30,000 Accounts Payable 75,000
Accounts Receivables 110,000 Accrued Expenses 90,00
Inventories 85,000 Notes Payable 100,000
Equipment 300,000 Bert, Capital 160,000
 PARTNERSHIP FORMATION 4

Acc Dept’n-Equipment (100,000)

TOTAL 425,000 TOTAL 425,000

The values reflected in the Statement of Financial Position are

already at Fair Values except for the following accounts:

Al’s Accounts Receivable is now 20,000 less than what is stated in

his Statement of Financial Position. Both inventories of Al and
Bert are now 90,000 and 70,000 respectively. Equipment for Bert
has an assessed value of 275,000, appraised value of 250,000 and
book value of 200,000. Additional accrued expenses are to be
established in the amount of 10,000 for Bert only while additional
accounts payable in the amount of P5,000 for Al. It is also agreed
that all liabilities will be assumed by the partnership, except
for the notes payable to Bert, which will be personally paid by
him.

1. How much is the adjusted capital balance of Bert upon

formation?
2. How much is the capital credit to Al upon formation?
3. How much should Al invest as additional cash to be in
conformity with their capital agreement?
4. How much is the total liabilities of the partnership
immediately after formation?

PROBLEM 7
On March 1, 20x8, X and Y formed a partnership. The partners
contributed the following:
X Y
Cash P500,000 P400,000
Accounts Receivable 300,000 200,000
Allowance for doubtful accounts 50,000 20,000
Inventory 150,000 100,000
Equipment 500,000 200,000
Accumulated depreciation 100,000 25,000
Accounts Payable 50,000 400,000
Note Payable 200,000

The partners agree on the following:

a. P10,000 of the accounts receivable of X is to be written-off.
b. An allowance for doubtful accounts of 15% is to be established
on the remaining receivables of X and Y.
c. The inventory of Y is to be valued at P140,000.
d. The equipment of X is under depreciated by P20,000 and the
equipment of Y has a fair value of P190,000.
 PARTNERSHIP FORMATION 5

e. The note of X is dated December 1, 20x7 and is subject to a

12% interest . Interest for the year had not yet been
accrued.
f. The partners agree on a 2:1 profit and loss ratio.
g. The partners agree to bring their capital balance
proportionate to their profit and loss ratio.

If Y's Capital is to be used as basis, how much is the adjusted

capital of X after the formation?

What is the total assets of the partnership immediately after

the formation?

If the goodwill method is to be used in determining the capital

of each partner, how much is the adjusted capital of Y after
the formation?

PROBLEM 8
On December 31, 20x7, Coke and Pepsi are combining their separate
businesses to form a partnership. Cash and noncash assets are to
be contributed. The noncash assets to be contributed and the
liabilities to be assumed are as follows:

Coke Pepsi
Book value Fair Value Book value Fair Value
Receivables P 500,000 P 525,000 P 400,000 P 390,000
Inventory 800,000 900,000 400,000 415,000
PPE 2,000000 1,825,000 1,725,000 1,660,000
Payables 300,000 300,000 225,000 225,000

Coke and Pepsi are to invest equal amounts of cash such that the
contribution of Coke would be 25% more than the investment of
Pepsi.

What is the amount of cash to be presented in the partnership’s

Statement of Financial Position on December 31, 20x7?

PROBLEM 9
A and B decided to form a partnership. The partners decide to
invest their business after reflecting the following adjustments
below:
A B
DR/(CR) DR/(CR)
Cash 100,000 50,000
Receivables 95,000 110,000
Inventory 125,000 75,000
PPE 250,000 300,000
 PARTNERSHIP FORMATION 6

Allowance for bad (20,000) (10,000)

debts
Accumulated (50,000)
depreciation
Liabilities (50,000) (125,000)
Capital (450,000) (400,000)
a. P10,000 of A’s inventory is proven to be worthless.
b. The remaining receivables of A and B are to have a net
realizable value of 90%.
c. The PPE of A has a fair value of P220,000 while the PPE of B
has never been depreciated and has a current condition
percentage of 80%. If purchased new, it would have a current
fair value of P225,000.
d. B has unrecorded liabilities of P5,000.
e. A will personally pay P10,000 of his liabilities.
1. Determine the adjusted capital of A and B.
2. Determine the capital of A and B in the partnership if they
agreed to have a 60:40 pnl ratio in the partnership.
3. Determine the capital of A and B in the partnership if they
agreed to have a 60:40 pnl ratio in the partnership and their
capital balances are to reflect this relationship in the
partnership.
4. Determine the capital of A and B in the partnership if they
agreed to have a 60:40 pnl ratio in the partnership with B’s
capital to be used as basis.

PROBLEM 10
The business assets of DAN and MOY appear below:
DAN MOY
Cash P 16,500 P 33,531
Accounts Receivable (net) 371,804 881,835
Inventories 180,053 390,153
Land 904,500 -
Building 692,400
Furniture and fixture 75,517 52,184
Other assets 3,000 5,400

Allowance for doubtful accounts 20,000 30,000

Accumulated Depreciation-Building 50,000
Accounts Payable 268,410 365,475
Notes Payable 300,000 517,500
DAN, capital 962,964
-
MOY, capital 1,092,528
DAN and MOY agreed to form a partnership by contributing their
respective assets and equities subject to the following
adjustments:
 PARTNERSHIP FORMATION 7

a) Accounts receivable of P10,000 in Moy’s books are to be

written-off.
b) Accounts receivable of P30,000 in DAN’s books and P52,500
in MOY’s books are uncollectible.
c) Inventories of P8,250 and P10,050 are worthless in DAN’s
and MOY’s respective books.
d) Other assets of P3,000 in DAN’s books are to be written
off.
e) The building in Moy’s books is to have a P637,000 fair
value.

1. Determine the capital account of the partners after the

adjustments.
2. Determine how much total assets does the partnership have
after formation.