Chapter 1

Partnership Formation

NAME: Date:
Professor: Section: Score:

QUIZ:

1. A and B formed a partnership. The following are their contributions:

  A B
Cash 200,000 -
Accounts receivable 100,000 -
Inventory 160,000 -
Land 100,000
Building 240,000
Total 460,000 340,000
Note payable 120,000
A, capital 340,000
B, capital 340,000
Total 460,000 340,000

Additional information:
 Included in accounts receivable is an account amounting to ₱40,000 which is deemed
uncollectible.
 The inventory has an estimated selling price of ₱200,000 and estimated costs to sell of ₱20,000.
 An unpaid mortgage of ₱20,000 on the land is assumed by the partnership.
 The building is under-depreciated by ₱50,000.
 The building also has an unpaid mortgage amounting to ₱30,000, but the mortgage is not
assumed by the partnership. B agreed to settle the mortgage using his personal funds.
 The note payable is stated at face amount. A proper valuation requires the recognition of a
₱30,000 discount on note payable.
 A and B shall share in profits and losses 60% and 40%, respectively.

Requirements:
a. Compute for the adjusted balances in the partners’ capital accounts.
b. Assume that a partner’s capital shall be increased accordingly by contributing additional cash to
bring the partners’ capital balances proportionate to their profit or loss ratio. Which partner
should provide additional cash and how much is the additional cash contribution?
2. A and B agreed to form a partnership. A shall contribute ₱80,000 cash while B shall contribute
₱200,000 cash. However due to the expertise that A will be bringing to the partnership, the
partners agreed that they should initially have an equal interest in the partnership capital.

Requirement: Using the bonus method, provide the journal entry to record the initial investments of
the partners.

3. A, B and C formed a partnership. Their contributions are as follows:

A B C
Cash 80,000 20,000 200,000
Equipment 160,000
Totals 80,000 180,000 200,000

Additional information:
 Although C has contributed the most cash to the partnership, he did not have the full amount of
₱200,000 available and was forced to borrow ₱80,000.
 The equipment contributed by B has an unpaid mortgage of ₱40,000, the repayment of which, is
assumed by the partnership.
 The partners agreed to equalize their interest. Cash settlements among the partners are to be
made outside the partnership.

Requirements:
a. Which partner(s) shall receive cash payment from the other partner(s)?
b. Provide the entry to record the contributions of the partners.

4. A and B agreed to form a partnership. The partnership agreement stipulates the following:
 Initial capital of ₱280,000.
 A 60:40 interest in the equity of the partnership.

A contributed ₱200,000 cash while B contributed ₱80,000 cash.

Requirement: Which partner should provide additional investment (or withdraw part of his
investment) in order to bring the partners’ capital credits equal to their respective interests in the
equity of the partnership?

“A wise man will hear and increase learning, and a man of understanding will attain wise counsel.” (Proverbs 1:5)

- END –
SOLUTIONS:

1. Solutions:
Requirement (a):
  A B Partnership
Cash 200,000 - 200,000
Accounts receivable (100K - 40K) 60,000 - 60,000
Inventory 160,000 - 160,000
Land
Building (240K - 50K)
Total 420,000 290,000 710,000

Note payable, net (120K - 30K) 90,000 90,000

Mortgage payable – land 20,000 20,000
A, capital 330,000 330,000
B, capital 270,000 270,000
Total 420,000 290,000 710,000

Requirement (b):
Using first A’s capital, let us determine if B’s capital contribution has any deficiency.
A, capital 330,000
Divide by: Profit (loss) sharing ratio
60%
of A
Total 550,000
Multiply by: B's profit (loss) sharing
40%
ratio
Minimum capital required of B 220,000
B's capital 270,000
Deficiency on B's capital
-
contribution

It can be shown above that B’s contribution has no deficiency.

Now using B’s capital, let us determine if A’s capital contribution has any deficiency.
B, capital 270,000
Divide by: Profit (loss) sharing ratio
40%
of A
Total 675,000
Multiply by: A's profit (loss)
60%
sharing ratio
Minimum capital required of A 405,000
 A's capital 330,000
Deficiency on A's capital
75,000
contribution

From the above computations, Partner A should provide additional cash contribution of P75,000 to
make his contribution proportionate to its profit or loss ratio.

2. Solution:
Actual Bonus
  contributions   method
A 80,000 (280,000 x 50%) 140,000
B 200,000 (280,000 x 50%) 140,000
Total 280,000 280,000

Date Cash 280,000

A, Capital 140,000
B, Capital 140,000

3. Solutions:
Requirement (a):
  A B C Partnership
Cash 80,000 20,000 200,000 300,000
Equipment 160,000 160,000
Mortgage payable (40,000) (40,000)
80,000 140,000 200,000 420,000
Equal interest (420 ÷ 3) 140,000 140,000 140,000 420,000
Cash receipt (payment) (60,000) - 60,000 -

Answer: C shall receive P60,000 from A.

Requirement (b):
Date Cash 300,000
Equipment 160,000
Mortgage payable 40,000
A, Capital 140,000
B, Capital 140,000
C, Capital 140,000

4. Solution:
Agreed initial capital 280,000

A's required capital balance (280K x 60%) 168,000

B's required capital balance (280K x 40%) 112,000
  A B Totals
Actual contributions 200,000 80,000 280,000
Required capital balance 168,000 112,000 280,000
Additional (Withdrawal) (32,000) 32,000 -

Answer: A shall withdraw P32,000 from his initial contribution while B shall make an additional
investment of P32,000.