Partnership Formation, Operation, Dissolution, and Liquidation by lump sum only.

Midterm –Examination

Multiple Choice: Encircle the best answer.

1. On March 1, 2019, Jose and Kiko decides to combine their businesses to form a
partnership. Statement of financial position on March 1 before the formation, showed the
following:
Jose Kiko

Cash P9,000 P3,750

Accounts receivable 18,500 13,500

Inventories 30,000 19,500

Furniture and fixture (net) 30,000 9,000

Office equipment (net) 11,500 2,750

Prepaid expenses ​ 6,375 3,000

Total P105,375 P51,500

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Accounts payable P 45,750 P 18,000

Capital ​ 59,625 33,500

Total P105,375 P 51,500

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They agreed to following adjustments before the formation:

a.​ ​Provide 2% allowance for doubtful accounts.
b. ​Jose’s furniture should be valued at P31,000, while Kiko’s office equipment is

under-depreciated by P250.
c. ​Rent expense incurred previously by Jose was not yet recorded amounting to

P1,000, while salary expense incurred by Kiko was not also recorded amounting to
P800.
d.​ ​The fair value of inventories amounted to P29,500 for Jose and P21,000 for Kiko.
 The net (debit) or credit adjustment to partner’s capital accounts are:
Jose Kiko
a. (P2,870) (P2,820)
b. P1,870 P2,820
c. P 870 (P 180)
d. (P 870) (P 180)

2. On June 1, 2019, May and Nora formed a partnership. May is to invest assets at fair
value which are yet to be agreed upon. She is to transfer her liabilities and is to contribute
sufficient cash to bring her total capital to P210,000 which is 70% of the total capital of the
partnership.

Details regarding the book values of May’s business assets and liabilities and their
corresponding valuations are:

Book values Agreed valuations

Accounts receivable P58,000 P58,000

Allowance for doubtful accounts 4,200 5,000

Merchandise inventory 98,400 107,000

Store equipment 32,000 32,000

Accumulated depreciation –store equipment 19,000 16,400

Office equipment 27,000 27,000

Accumulated depreciation –office equipment 14,200 8,600

Accounts payable 56,000 56,000

Nora agrees to invest cash of P42,000 and merchandise valued at current market price. The
value of the merchandise to be invested by Nora and the cash to be invested by May are:
a.​ ​P90,000 and P 62,000 respectively
b.​ ​P252,000 and P138,000 respectively
c.​ ​P 48,000 and P 138,000 respectively
d.​ ​P 48,000 and P 62,000 respectively
3. Carlos and Deo are partners who share profits and losses in the ratio of 7:3,
respectively. On October 5, 2019, their respective capital accounts were as follows:
Carlos P35,000
Deo 30,000
On that date they agreed to admit Sotto as a partner with a one-third interest in the
capital and profits and losses, and upon his investment of P25,000. The new
partnership will begin with a total capital of P90,000. Immediately after Sotto’s
admission, what are the capital balances of Carlos, Deo, and Sotto, respectively?

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

b. P31,500; P28,500; P30,000;

c. P31,667; P28,333; P30,000;

d. P35,000; P30,000; P25,000;

4. The capital account for the partnership of Lucas and Mateo at October 31, 2019 are as
follows:
Lucas, capital P80,000
Mateo, capital 40,000

The partners share profits and losses in the ratio of 6:4 respectively.

The partnership is in desperate need of cash, and the partners agree to admit Naron as a
partner with one-third in the capital and profits and losses upon his investment of P30,000.
Immediately after Naron’s admission, what should be the capital balance of Lucas, Mateo and
Naron respectively, assuming goodwill is not
a. P50,000; P50,000 P50,000.
b. P60,000; P60,000; P50,000.
c. P66,667; P33,333; P50,000.
d. P68,000; P32,000; P50,000.

5. Mitz, Marc and Mart are partners sharing earnings in the ratio of 5:3:2 respectively. As
of December 31, 2016, their capital balance showed P95,000 for Mitz P80,000 for Marc, and
P60,000 for Mart.

On January 1, 2019 the partnership admitted Vince as a new partner and according to the
partnership agreement, Vince will contribute P80,000 in cash to the partnership and will also
pay P10,000 for 15% of Marc’s share. Vince will share 20% in the earnings while the ratio of
the original partners will remain proportionately the same as before Vince admission. After
Vince’s admission, the total capital of the partnership will be P330,000 while Vince’ capital
account will be P70,000.

The balance of Marc’s capital account after the admission of Vince would be:
a.​ ​P81,100
b.​ ​P79,100
c.​ ​P74,600
d.​ ​P72,600

6. The partnership of Cat and Dog provides for 3:2 sharing in profits and losses. Prior to
the admission of a third partner Elf, the capital accounts are Cat, P120,000 and Dog, P80,000.
Elf invests P50,000 for a P75,000 interest and partners agreed that the net assets of the new
partnership would be P300,000.

How much is Dog’s capital in the new partnership?

a.​ ​P105,000
b.​ ​P90,000
c.​ ​P70,000
d.​ ​P136,000

7. Ace, Boy and Cid are partners sharing profits in the ratio of 3:3:2. On July 31, their
capital balances are as follows:
Ace P700,000
Boy 500,000
Cid 400,000

The partners agree to admit Deo on the following agreement:

1.​ ​Deo is to pay Ace P500,000 for ½ interest of Ace’s interest.
2.​ ​Deo is also to invest P400,000 in the partnership.
3. ​The total capital of the partnership is to be P2,400,000, of which

Deo’s interest is to be 25%.

What are the capital balances of the partners after the admission of Deo?
Ace Boy Cid
a. P206,250 P206,250 P137,500
b. 350,000 500,000 400,000
c. 556,250 706,250 537,500
d. 500,000 400,000 350,000
8. Mr. Zoom and his very close friend Mr. Boom formed a partnership on January 1, 2019
with Zoom contributing P16,000 cash and Boom contributing equipment with a book value of
P6,400 and a fair value of P8,000. During 2019 Boom made additional investments of P1,600
on April 1 and P1,600 on June 1, and on September 1, he withdrew P4,000. Zoom had no
additional investments nor withdrawals during the year. The average capital balance at the end
of 2019 for Mr. Boom is :
a.​ ​P9,600
b.​ ​P8,000
c.​ ​P8,800
d.​ ​P7,200

9. Garcia and Henson formed a partnership on January 2, 2019 and agreed to share profits
90%, 10%, respectively. Garcia contributed capital of P25,000. Henson contributed no capital
but has a specialized expense and manages the firm full time. There were no withdrawals
during the year. The partnership agreement provides for the following:

Capital accounts are to be credited annually with interest at 5% of beginning capital.

Henson is to be paid a salary of P1,000 a month.
Henson is to received a bonus of income calculated before deducting his salary
and interest on both capital accounts.
Bonus, interest, and Henson’s salary are to be considered partnership expenses.
The partnership 2017 income statement follows:

Revenues P96,450
Expenses (including salary, interest, and bonus) ​ 49,700

Net income P46,750

=========

What is Henson’s 2019 bonus?

a.​ ​P11,688
b.​ ​P12,000
c.​ ​P15,000
d.​ ​P15,738

10. ​On January 2, 2019, Bueno and Perez formed a partnership. Bueno contributed capital of
P175,000 and Perez, P25,000. They agreed to share profits and losses 80% and 20%,
respectively. Perez is the general manager and works in the partnership in full time. Perez is
given a salary of P5,000 a month; an interest of 5% of the starting capital (of both partners) and
a bonus of 15% of net profit before the salary, interest and the bonus.
The condensed statement of comprehensive income of the partnership for the year ended
December 31, 2019 is as follows:

Net sales P875,000

Cost of Sales ​ 700,000

Gross profits on sales P175,000

Expenses (including the salary, interest and the bonus) ​ 143,000

Total comprehensive income P 32,000

=========

The bonus of Perez in 2019 is:

a.​ ​P13,304.35
b.​ ​P18,000
c.​ ​P16,456
d.​ ​P20,700

11. ​On January 2, 2019 Phil, Art and Rey formed the PAR partnership contributing cash as
follows:
Phil P192,000
Art 288,000
Rey 432,000
The partnership contract provides the following provisions in respect with partner’s
remuneration:
1.​ ​Interest of 12% on average capital balances.
2.​ ​Annual salaries as follows:
Phil P28,800
Art P24,000
Rey P27,200

3. ​Remainder of the net income divided 40% to Phil, 30% to Art, and 30%

to Rey.
 Income before partner’s salaries and interest for the year ended December 31, 2019 was
P184,160. Phil invested additional cash of P48,000 to the partnership on July 1, 2019.
Rey withdrew P72,000 from the partnership on October 1, 2019. The partners also
withdrew P1,500 monthly against their share of net income for the year.

What is the capital balance of Phil on December 31, 2019?

a.​ ​P274,320
b.​ ​P286,992
c.​ ​P235,200
d.​ ​P257,280

12. ​On June 30, 2019 the balance sheet for the partnership of Cruz, Merced and Prieto,
together with their respective profit and loss ratio, were as follows:

Assets, at cost P180,000

========

Cruz, loan 9,000

Cruz, capital (20%) 42,000
Merced, capital (20%) 39,000
Prieto, capital (60%) 90,000
Total P180,000
========

Cruz had 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, 2019. It was agreed that the partnership
would pay Cruz P61,200 cash for Cruz’s partnership interest, including Cruz’s loan which is to
be repaid in full. No goodwill is to be recorded. After Cruz’s retirement, what is the balance of
Merced capital account?
a.​ ​P36,450
b.​ ​P39,000
c.​ ​P45,450
d.​ ​P46,200

13. ​On December 31, 2019 the condensed statement of financial position of ABC Partnership is
presented below:
Total assets
P180,000

========
Amy loan P10,000
Amy capital 45,000
Bea capital 40,000
Cat capital 85,000
Total P180,000
========
Amy, Bea and Cat share profits and losses in the ratio of 3:2:1 respectively. It was
agreed among the partners that Amy retires from the partnership and the partnership’s assets to
be adjusted to their fair value of P210,000. The partners further agreed to pay Amy P64,000
cash for her total interest in the partnership.

What is the capital balance of Cat after the retirement of Amy?

a.​ ​P35,000
b.​ ​P92,000
c.​ ​P27,000
d.​ ​P33,000

14. ​The condensed statement of financial position of the partnership of Edong, Fredo and Godo
with corresponding profit and loss sharing percentage as of June 30, 2019 was as follows:
Net assets P400,000
========
Edong, capital (50% ) P200,000
Fredo, capital (30%) 120,000
Godo, capital (20%) ​ 80,000
Total P400,000
========

As of said date, Edong retired from the partnership. By mutual agreement, he was paid
P225,000 for his interest in the partnership. The total implied goodwill was to be recorded.
After Edong’s retirement, the total net assets of the partnership was:
a.​ ​P250,000
b.​ ​P175,000
c.​ ​P200,000
d.​ ​P225,000

15. ​A, B and C are partners in a textile distribution business, sharing profits and losses equally.
On December 31, 2019, the partnership capital and the partners’ drawing were as follows:
A B C Total

Capital P100,000 P80,000 P300,000 P480,000

Drawing 60,000 40,000 20,000 120,000

The partnership was unable to collect on its trade receivables, and it was forced to liquidate.
The operating profits for 2019 amounted to P72,000, and was all exhausted including the
partnership assets. Unsettled creditors’ claim at December 31, 2019 amounted to P84,000. B
and C have substantial private resources, but A has no available free assets.

The final cash distribution to C was:

a.​ ​P162,000
b.​ ​P108,000
c.​ ​P84,000
d.​ ​P78,000

16. ​After operating for five years, the books of the partnership of Joe and Letty showed the
following balances:
Net assets P130,000
Joe, capital 85,000
Letty, capital 45,000
If liquidation takes place at this point and the net assets are realized at book value, the
partners are entitled to:
a.​ ​Joe to receive P90,000 & Letty to receive P40,000
b.​ ​Joe to receive P97,500 & Letty to receive P32,500
c.​ ​Joe to receive P65,000 & Letty to receive P65,000
d.​ ​Joe to receive P85,000 & Letty to receive P45,000

17. ​Gilbert, Joseph and Li are partners with capital balance of P350,000, P250,000 and
P350,000 and sharing profits 30%, 20% and 50% respectively. Partners agree to dissolve the
business and upon liquidation, all of the partnership assets are sold and sufficient cash is
realized to pay all the claims except one for P50,000. Li is personally insolvent, but the other
two partners are able to meet any indebtedness to the firm. On the remaining claim against the
partnership, Gilbert is to absorb.
a.​ ​P40,000
b.​ ​P15,000
c.​ ​P30,000
d.​ ​P25,000

18. ​Silverio, Domingo, Reyes, and Pastor are partners, sharing earnings in the ratio of 3/21,
4/21, 6/21, and 8/21, respectively. The balances of their capital accounts on December 31,
2017 are as follows:
Silverio P1,000
Domingo 25,000
Reyes 25,000
Pastor 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 P22,200 to
divide. Assume that a debit balance of any partner’s capital is uncollectible.

The share of Silverio in the loss upon conversion of the non-cash assets into cash was:
a.​ ​P4,972
b.​ ​P5,257
c.​ ​P5,400
d.​ ​P5,200

19. ​The partners Aiko, Bren, Cinia and Dior who share profits and losses at 30%, 30%, 20%
and 20% respectively decided to liquidate. All partnership assets are to be converted into cash.
Prior to the liquidation, the condensed statement of financial position is as follows:
Cash P 100,000 liabilities P 750,000
Other assets 1,800,000 Bren, loan 60,000
Dior, loan 50,000
Aiko, capital 420,000
Bren, capital 315,000
Cinia, capital 205,000
Dior, capital 100,000
---------------
-----------------
Total P1,900,000 P 1,900,000
========== ===========
The non-cash assets realize P800,000, resulting to a loss of P1,000,000. All the
partners are solvent, and can contribute any additional cash to cover any deficiency. In
the process of liquidation, deficiency (ies) will occur and will require additional
investment as follows:
a.​ ​Cinia at P7,500
b.​ ​Dior and Cinia for P50,000 and P7,500 respectively
c.​ ​Dior at P50,000
d.​ ​None

Good
Luck……………………………………………………………………………….