PAMPANGA CPA REVIEW: “Excellence in All We Do” AF DANGA | PAMPANGA CPA REVIEW | Gy PANPANGA | . 2° Floor best Western Hotel (Former savers Mall Salbogo) Me Arthur —__ CPA REVIEW | Hl Way Ballbago Angeles City. PARTNERSHIP FORMATION AND OPERATION. Landline : (045) 625 8238 / (045) 436 0284 ; Globe: 09178035381 one Email: pampangacpareview@amail,com/moncoal4@amall,com Stages in the Life of the Partnership Formation -—> Operation ——-> Dissolution ——-> Liquidation I. FORMATION Accounting Procedures: ; 4. Valuation of assets and liabilities contributed Assets: Liabilities if assumed by the partnership a. Agreed values a. Agreed values b. Faic values », Present values/fair values Liabilities assumed by the pactnership will operate 10 decrease the contsibuted asset of the partner in computing the contributed capital 2, Re-alignment of capital balances 2. Goodwill method b, Bonus method ¢ Nom-revaluation and bonus method Capital contribution vs. Final Capital credit Capital contsbutions (lso called intial cpital endi) represent the net assets invested by a partner whereas final capital credit zepresents the agreed capital for a partner. Generally, capital contribution equals capital credit. However, this may be changed by agreement of the partners. When changed by agreement, the difference between capital contribution and agreed capital is accounted either as: 1. Bonus ~ transfer of capital among the partner. Total contributed capital = total agreed capital. 2. Goodwill - the difference is attributed to an unidentifiable intangible asset (outlawed by PFRS 3 for exteznal financial reports). Total contributed capital < total agreed capital. 3. Cash settlement PARTNERSHIP FORMATION Illustrative Problems: Basic ‘And B formed 2 partnership by contributing the following assets: ae eee Cash P 170000 P : Land - 220,000 Building = 320,000 Equipment 100,000 - ‘Te was agreed that the equipment shall be valued at P120,000. TThe land has an appraised value of P220,000 but is agreed to be taken at its zonal value of P200,000. The land and building is subject to a P100,000 ceal estate mortgage which is assumed by the partnership. The mortgage also has an accrued interest of P10,000 is to be assumed by B. Included in the cash balance are highly liquid investments booked at P40,000 but with current fair value of P50,000, A and B shall share in. profits 50:50. i Required: 4, Journalize the transactions and determine the capital balances of the partners 2. Journalize the adjustments if A and B agreed to share in the capital 40:60, respectively. a. Bors method 1b. Goodwill method ¢. No revaluation and bonus method 4d. Personal cash settlement ‘e. Settlement by cash investment £. Settlement by cash withdrawal Drill Exam Questions: 1, Hand I formed a partnership agreeing to share profits equally. H contributed P10,000 cash and P400,000 newly ‘purchased equipments. I contributed P15,000 cash and a parcel of land acquired 5 years ago for P100,000. Three hours after formation, the land was sold for P200,000. How much is the capital balance of I? a. P50,000 , P215,000 . P150,000 . P165,000 2. The following transactions and agreements relates to the formation of the ABC Partnership: © Andrea contributed a delivery truck with cost her P300,000 but now has a second hand value half of its cost. ‘© Brenda has P500,000 personal assets but sbe contsivuted only P80,000 cash. ‘AFAR - Batch October 2018 ~ Wency M. Giron Page 1 of 8PAMPANGA CPA REVIEW: “Excellence in All We Do” AFAR.OO4 "Carlene contributed P150,000 cash. P120,000 of these were borrowed money from Brenda. © The partners agreed to share in profit equally despite diffprences in capital contribution. What shoiild be the correct capital balances of partners Andrea, Bresida and Carlene? a P150,000; P80,000; P30,000 . P150,000; P80,000; P120,000 '. P150,000; P80,000; P150,000 4. P 300,000; P500,000; P150,000 3. Parmer ¥ and Z agreed to form ZY Partnership sharing profit 40% and 60%. The partnership also assumed the separate liabilities of the partners: Y, P200,000 and Z, P300,000. Cash of P150,000 and P250,000 were also contributed by Y and Z. Immediately after formation, the partners were credited with P500,000 and P400,000 capital. How much is the-agreed value of non-cash assets contributed by Z? a. P450,000 €. P1,000,000 BP 550,000 4. P700,000 4. Goodwill or bonus? Holand} eonrabuted P6800, 2380,000 and P6000 bu aged wo shar equal interest while mitainng thei total ‘capital balance. Which is incorrect? a. Hyill be debited for a P50,000 bonus. c. will be debited for P50,000 bonus. 1b. Lwill be credited for a P50,000 bonus. 4. J will not.receive any bonus. ‘Bonus and goodwill method (Outlawed) Helena and Indiana formed by contributing P250,000 and P350,000 cash. They agreed éo share profits equally but to share capital 40:60, respectively. Using bonus method, compute the capital balances of Helena and Indiana? ‘a. 200,000; P300,000 - P250,000; P350,000 : . P240,000; P360:000 4, P300,000; P300,000 Using goodwill method, compute the capital balances of Heletia and Indiana? a. P240,000; P360,000-. . P250,000; P250,000 'b. 250,000; P375,000 4, P350,000; P350,000 6. Bonus method ‘A, Qand W conteibuted 2 total of P 600,000 cash to form WAQ Partnership. Only W posses the technical expertise required by the business so.Aand Q agreed to provide 10% of their contributed capital as bonus to W. A and W contributed P240,000 and P120,000, respectively. How much is Q’s adjusted capital balance after formation? a. P200,000 _b. P240,000 120,000 d. Pi68,900 ‘The total bonus to W is a. P18,000 b. P24,000 ¢. P36,000 . P48,000 7. Goodwill method A, Band C formed a partnership and'conteibited 100,000, P50,000 and P80,000 cash, respectively. A and C further contributed non-cash assets with agrced values of P50,000 and P20,000, respectively. Owing to the business expertise of B and C, A coricucred that they will be credited with 20% goodwill based on their contributed capital. How much is the total ‘goodwill to be recognized upon formation? a P26,000 b. P60,000 . P30,000 . P50,000 ‘How much is the adjusted capital of C after formation? 2 PB0,000 ’b. P100,000 . P96,000 4. 120,000 8. A, Band C formed a partnership whereby A shall be credited for P120,000 by contributing P100,000. B and C shall contribute enough cash for theit 20% and 30% interest in the partnership, respectively and to cover their respective share in the bonus to A. What is B’s cash contribution? a P56,000 ¢. P48,000 b. P52,000 4. P40,000 9% Zeus and Raymund formed a partnership agrecing to shace profits 40:60, respectively. Zeus contributed a special equipments which cost him P200,000. Raymund contributed a parcel of land which he purchased for P300,000 three years ago. The equipment and the land have cureent fais market value of P150,000 and P400,000, respectively, but the partners agreed that the equipment and the land will booked at cost. The bonus method shall be used for whatever fai value adjustments. What is Zeus’ adjusted capital after the formation? a P200,000 €. P130,000 . P150,000 4. P110,000 10, Benson is a proprietor with adjusted capital balance of P120,000. In need of additional financing, he sold 40% of his capital to Candy for P60,000. Any goodwill implied by Candy's purchase is to be tecorded prior to Candy’s admission. ‘What is Benson’s capiral immediately after formation? a. P120,000 P84,000. b.. P99,000: 6. P72,000 ‘AFAR ~ Batch October 2018 - Wency M. Giron 7 : Page 2 of 8PAMPANGA CPA REVIEW: “Excellence in All We Do” AFAR.OO1 . = partnesthip by contributing the assets of their: ‘businesses. The partners ‘Partner Alex and Becky agreed to forma cs : assets of ‘separate ‘agreed to an equal capital credit on the total contributed capital. Cash settlements will be made among them to even out ‘the difference. The abridged balance sheets of Alex and Becky is are follows: dlex Becky Total assets P 120,000 = P_80,000 Total abilities 40,000 20,000 “The partnership formation results in : ‘10,000 bonus to Becky. «¢. P10,000 cash settlement to Becky. B. P 10,000 goodwill to Becky. <4. P10,000 cash setdement from Becky. 12, Denwings or Investments . : : Bob and Bitz contributed P10,000 and P20,000 cash, respectively. Bob further contributed a used equipment which cost ‘him P50,000. Bitz conteibuted his delivery truck which also cost him,P120,000. Bob and Bitz agreed to share profit equally. ‘but to share capital on the ratio of 40:60, respectively. A valuation report rendered by Pal Appraisal Company indicates that the truck and equipment has fair values of P70,000 and P40,000, respectively. If the partners agreed to adjust their capital by cash re-investmsent, which is true? : 2. Bob shall contribute P15,000. Bitz shall contibute P15,000. 1b, Bob shall contribute P10,000. . Bitz shall conteibute P10,000. 13, IF the partners agreed to adjust theit capital by cash withderwal, which is true? ‘2, Bob shall withdraw P15,000. ¢ Bitz shall withdraw P15,000. b._ Bob shall withdraw P10,000. Bits shall withdenw P10,000. 14, Helen has a proprietorship business with net assets of P500,000. In need of cash financing, Helen admitted Teddy and ‘Rod for a 30% and 20% interést in the business, respectively. The partners also agreed to secognize goodwill for Helen and to be credited with their capital contribution. Rod contubuted P220,000 for his capital interest. How much is the goodwill for Helen? P100,000 1b. P50,000 PO 4. P25,000 15, Chas P220,000 net assets in his business before formation. C admitted A, B into bis business. The partners agreed toa total partnership capital of P600,000 and that no intangibles will be recognized. A, B and C will have 20%, 40% and 40% capital interest. [Fin pursuant to their agreement, A and B contributed P100,000 and P280,000 for their respective cepital interest, which statement is correct? 2." Awill be credited for P20,000 bomas. b. Bwill be debited for a P32,000 goodwill. & - Cwillbe debited for a bonus of P8,000. 4. Aand Cwill be credited for a P24,000 and P8,000 bomus, respectively. 16. ZY Partnership was formed on March 1, 2010 with the following asset contributed by partners Zen and Yu Xu Zen Cash, P 262,500. P 187,500 Merchandise 412,500 Building 750,000 Furniture ind fixtures = 112,500 ‘The partnesship agreement provides for the following: 1. The ip assumed the P225,000 mortgage on the building. ‘ 2. Zen.and Yu shall share profits or losses 1:3, respectively. 3. Zenand Yu shall have initially equal capital. No intangible asset is to be recognized. ‘Yu's capital would be: . a P4,500,000 - P750,000 b. 862,500 d. P543,750 17. Cash investment ‘The December 31, 2010 balance sheet of Reynante’s proprietorship business showed the following: Cash P 20,000 : Accounts receivable 35,000 Inventory - 40,000 Equipment, net (10 year-useful life) 36,000 Accounts payable 42,000 ‘An siidit was required in pursuant to the partnesship agreement before the admission of Hetbo and Primo, ‘The audit disclosed the following: © The cash include equity investments with a fair value excess in excess of its recorded cost by P3,000. © The zeceivable inchides P5,000 uncollectible items. © A P10,000 prepayments and P8,000 accrued expense, were omitted from the records. ‘AFAR ~ Batch October 2018 - Wency M. Giron Page Sots. -