ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY
CPA Review Batch 41 Ÿ May 2021 CPA Licensure Examination Ÿ Weeks 1-2
ADVANCED FINANCIAL ACCOUNTING & REPORTING
A. Dayag Ÿ G. Caiga Ÿ M. Ngina
AFAR-01: PARTNERSHIP FORMATION & OPERATIONS
I
On July 1, 2019, AA and BB decided to form a partnership. The firm is to take over business
assets and assume liabilities and assume liabilities, and capitals are to be based on net assets
transferred after the following adjustments:
a. AA and BB’s inventory is to be valued at P31,000 and P22,000, respectively.
b. Accounts receivable of P2,000 in AA’s books and P1,000
in BB’s books are
uncollectible.
c. Accrued salaries of P4,000 for AA and P5,000 for BB are still to be recognized in the
books.
d. Unused office supplies of AA amounted to P5,000, while that of BB amounted to P1,500.
e. Unrecorded patent of P7,000 and prepaid rent of P4,500 are to be recognized in the
books AA and BB, respectively.
f. AA is to invest or withdrew cash necessary to have a 40% interest in the firm.
Balance sheets for AA and BB on July 1 before adjustments are given below:
AA
BB
Cash
P 31,000
P 50,000
Accounts Receivable
26,000
20,000
Inventory
32,000
24,000
Office Supplies
5,000
Equipment
20,000
24,000
Accumulated depreciation – equipment
(9,000)
(3,000)
Total Assets
P100,000
P120,000
Accounts Payable
Capitals
Total Liabilities and Capital
P 28,000
72,000
P100,000
P 20,000
100,000
P120,000
Determine:
1. The net adjustments – capital in the books of:
a. AA, P7,000 net debit; BB, P2,000 net credit
b. AA, P5,000 net debit; BB, P7,000 net credit
c. AA, P7,000 net credit; BB, P2,000 net debit
d. AA, P5,000 net credit; BB, P7,000 net debit
2. The adjusted capital of AA and BB in their respective books.
a. AA – P65,000; BB – P102,000
c. AA – P77,000; BB – P98,000
b. AA – P63,000; BB – P107,000
d. AA – P77,000; BB – P93,000
3. The additional investment (withdrawal) made by AA:
a. P(15,000.00)
c. P3,000.00
b. P( 6,666.50)
d. P8,377.50
4. The total assets of the partnership after formation:
a. P235,333.50
c. P220,333.50
b. P230,000.00
d. P212,000.00
5. The total liabilities of the partnership after formation:
a. P57,000.00
c. P54,000.00
b. P48,000.00
d. P51,000.00
6. The total capital of the partnership after formation:
a. P180,000.00
c. P163,333.50
b. P178,333.50
d. P155,000.00
7. The capital balances of XX and YY in the combined balance sheet:
a. XX, P81,250; YY, P72,000
c. XX, P100,000; YY, P75,000
b. XX, P81,250; YY, P75,000
d. XX, P62,000; YY, P93,000
II
On December 1, 2019, AA and BB formed a partnership with contributing the following assets
at fair market values:
AA
BB
Cash …………………………………
P 9,000
P18,000
Machinery and equipment……..
13,500
Land ………………………………...
90,000
Building ……………………………..
27,000
Office Furniture …………………....
13,500
The land and building are subject to a mortgage loan of P54,000 that the partnership will
assume. The partnership agreement provides that AA and BB share profits and losses, 40% and
Page 1 of 6
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AFAR-01
Weeks 1-2: PARTNERSHIP FORMATION & OPERATIONS
60%, respectively and partners agreed to bring their capital balances in proportion to the
profit and loss ratio and using the capital balance of BB as the basis. The additional cash
investment made by AA should be:
a. P18,000.00
c. P134,100.00
b. P85,500.00
d. P166,250.00
III
CC and DD are joining their separate business to form a partnership. Cash and non-cash assets
are to be contributed for a total capital of P150,000. The non-cash assets to be contributed
and liabilities to be assumed are:
CC
DD
Book Value
Fair Value
Book Value
Fair Value
Accounts Receivable…..
P11,250.00
P11,250.00
Inventories………………..
11,250.00
16,875.00
P30,000.00
P33,750.00
Equipment………………..
18,750.00
15,000.00
33,750.00
35,625.00
Accounts Payable………
5,637.50
5,625.00
3,750.00
3,750.00
The partner’s capital accounts are to be equal after all contributions of assets and
assumptions of liabilities.
Determine:
1. The total assets of the partnership.
a. P159,375.00
c. P140,625.00
b. P150,000.00
d. P112,500.00
2. The amount of cash that each partner must contribute:
a. CC – P37,500; DD – P9,375
c. CC – P80,625; DD – P78,750
b. CC – P37,500; DD – P5,625
d. CC – P63,750; DD – P5,625
IV – With Solution
OO and PP are partners sharing profits in this proportion – 60:40. A balance sheet prepared for
the partners on April 1, 20x4 shows the following:
Cash . . . . . . . . . . . . . . . . . . . .
P48,000
Accounts Receivable . . . . . . .
92,000
Inventories . . . . . . . . . . . . . . . .
165,000
Equipment . . . . . . . . . . . .
70,000
Less: Acc. depreciation . . . . . . . 45,000 25,000
Total Assets . . . . . . . . . . . . . . . .
P330,000
Accounts payable . . . . . . . . .
OO, capital . . . . . . . . . . . . . .
PP, capital. . . . . . . . . . . . . . .
P
89,000
133,000
108,000
Total Liabilities & Capital . . . .
P 330,000
On this date, the partners agree to admit RR as a partner. The terms of the agreement are summarized
below. Assets and liabilities are to be restated as follows:
• An allowance for possible uncollectible of P4,500 is to be established.
• Inventories are to be restated at their present replacement value of P170,000.
• Accrued expenses of P4,000 are to be Recognized.
OO, PP and RR will divide profits in the ratio of 5:3:2. Capital balances of the partners after the formation
of the new partnership are to be in the aforementioned ratio, with OO and PP making cash settlement
between them outside of the partnership to adjust their capitals, and RR investing cash in the partnership
for his interest.
1. The cash to be invested by RR is:
a.
P60,250
c.
P50,000
b.
P47,500
d.
P59,375
2. The total capital of the partnership after the admission of RR is:
a.
P296,875
c.
P237,500
b.
P301,250
d.
P286,850
3. Cash settlement between OO and PP is:
a.
OO will pay PP P17,537.50
c.
OO will invest P17,537.50
b.
PP will pay OO P17,537.50
d.
PP will withdraw P17,537.50
Answers/Solutions:
1. (d)
2. (a)
Total capital of the new partnership (refer to No. 2)
P 296,875
Multiply by RR’s interest
20%
Cash to be invested by RR
P 59,375
OO
PP
Total
(60%)
(40%)
Unadjusted capital balances
P133,000
P108,000
P241,000
Adjustments:
Allowance for bad debts
( 2,700)
( 1,800)
( 4,500)
Inventories
3,000
2,000
5,000
Accrued expenses
( 2,400)
( 1,600)
( 4,000)
Adjusted capital balances
P130,900
P106,600
P237,500
Total capital before the formation of the new partnership (see above)
P 237,500
Divide by the total percentage share of OO and PP (50% + 30%)
80%
Total capital of the partnership after the admission of RR
P 296,875
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AFAR-01
Weeks 1-2: PARTNERSHIP FORMATION & OPERATIONS
3. (a)
Contributed Capital
OO
P 130,900
PP
106,600
Therefore, OO will pay PP P17,537.50
Contributed Capital
Settlement
P148,437.50 (50% x P296,875)
P 17,537.50
89,062.50 (30% x P296,875)
(17,537.50)
Partnership Operations
V
Left and Right are partners. Their capital accounts during 2019 were as follows:
Left, Capital
Right, Capital
8/23
P3,000
1/1
P15,000
3/5
P4,500
1/1
P25,000
4/3
4,000
7/6
3,500
10/31
3,000
10/7
2,500
Partnership net income is P25,000 for the year. The partnership agreement provides for the
division of net income as follows:
• Each partner is credited 10 percent interest on his or her average capital (rounded to
the nearest month).
• Because of prior work experience, Left is entitled to an annual salary of P6,000 and
Right is credited with P4,000
• Any remainder income or loss is to be allocated based on beginning capital
How much of the partnership net income for 2019 should be assigned to Left and Right?
a. Left, P11,833; Right, P13,167
c. Left, P13,194; Right, P11,806
b. Left, P9,375; Right, P15,625
d. Left, P12,500; Right, P12,500
VI
Hunt, Rob, Turman and Kelly own a publishing company that they operate as a partnership.
The partnership agreement includes the following:
• Hunt receives a salary of P10,000 and a bonus of 3% of income after all bonuses.
• Rob receives a salary of P5,000 and a bonus of 2% of income after all bonuses.
• All partners are to receive 10% interest on their average capital balances.
The average capital balances are Hunt, P25,000; Rob, P22,500; Turman, P10,000 and Kelly,
P23,500. Any remaining profits and losses are to be allocated equally among the partners.
Determine how a profit of P52,500 would be allocated among the partners.
a. Hunt, P20,725; Rob, P14,975; Turman, P7,725; Kelly, P9,075
b. Hunt, P14,000; Rob, P8,250; Turman, P1,000; Kelly, P2,350
c. Hunt, P19,850; Rob, P14,600; Turman, P8,350; Kelly, P9,700
d. Cannot be determined.
VII
PP and QQ are partners operating a chain of retail stores. The partnership agreement provides
for the following:
PP
QQ
Salaries…………………………………………….
P5,000
P2,500
Interest on average capital balances………
10%
10%
Bonus………………………..................................
20% of net income
before interest but
after bonus & salaries
Remainder………………………………………..
30%
70%
The income summary account for year 2019 shows a credit balance of P25,500 before any
deductions. Average capital balances for PP and QQ are P25,000 and P37,500, respectively.
The share of PP and QQ in the P25,500 net income would be:
a. PP, P12,031.25; QQ, P13,468.75
c. PP, P11,750; QQ, P13,750
b. PP, P13,270.75; QQ, P12,229.25
d. PP, P13,125; QQ, P12,375
VIII – Bonus as a distribution of profit
XX and YY formed a partnership on January 2, 2019 and agreed to share profits and loss in the
ratio of 90% and 10%, respectively. XX contributed capital of P6,250. YY contributed no capital
but has a specialized expertise 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 the beginning
capital
• YY is to be paid a salary of P250 a month
• YY is to receive a bonus of 20% of net income calculated before deducting his salary
and interest on both capital accounts.
• Bonus, interest, and YY’s salary are to be considered as partnership expenses
Page 3 of 6
AFAR-01
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Weeks 1-2: PARTNERSHIP FORMATION & OPERATIONS
The partnership’s income statement for 2019 follows:
Revenues……………………………………………………….
Less: Expenses (including salary, interest, and bonus)…
Net income…………………………………………………….
1. What is YY’s 2019 bonus?
a. P2,922.00
c. P3,750.00
b. P3,000.00
d. P3,934.50
P24,112.50
12,425.00
P11,687.50
2. How much is the total share of Y on the 2019 partnership net income?
a. P7,084.50
c. P7,918.75
b. P7,162.50
d. P8,097.00
IX – Profit Allocation
The Trading Company, a partnership, was formed on January 1, 2019, with four partners, DD,
EE, FF, and GG. Capital contributions were as follows: DD, P25,000; EE, P12,500; FF, P12,500; GG,
P10,000. The partnership agreement provides that partners shall receive 5% interest in the
amounts of their capital contributions. In addition, DD is to receive a salary of P2,500 and EE a
salary of P1,500. The agreement further provides that FF shall receive a minimum of P1,250 per
annum from the partnership and GG a minimum of P3,000 per annum, both including amounts
allowed as interest on capital and their respective shares of profits. The balance of the profit is
to be shared in the following proportions: DD, 30%; EE, 30%; FF, 20% and GG, 20%. Calculate
the amount that must be earned by the partnership during 2019, before any charges for
interest on capital or partners’ salaries, in order that DD may receive an aggregate of P6,250
including interest, salary and share of profits.
a. P 8,333.33
c. P15,333,33
b. P15,000.00
d. P16,166.67
Statement of Partners’ Capital
X – With Solution
The AA, BB, and CC Partnership was formed on January 2, 2019. The original cash investments
were as follows:
AA …………………………………………………….. P 48,000
BB ……………………………………………………..
72,000
CC ………………………………………………… ...
108,000
According to the general partnership contract, the partners were to be remunerated as
follows:
a. Salaries of P7,200 for AA, P6,000 for BB, and P6,800 for CC.
b. Interest at 12% on the average capital account balances during the year.
c. Remainder divided 40% to AA, 30% to BB, and 30% for CC.
Income before partners’ salaries for the year ended December 31, 2019, was P46,040. AA
invested an additional P12,000, in the partnership on July 1; CC withdrew P18,000 from the
partnership on October 1, and, as authorized by the partnership contract, AA, BB, and CC
each withdrew P375 monthly against their shares of net income for the year.
Determine:
1. The share of partner AA in the net income
a. P18,416.00
c. P13,080.00
b. P17,616.00
d. P 5,880.00
2. The capital balance of partner CC on December 31, 2019:
a. P108,770.00
c. P100,112.00
b. P104,270.00
d. P 99,312.00
3. If the salaries to partners’ are to be recognized as operating expenses by the partnership,
the share of partner BB in the net income?
a. P18,416.00
c. P8,190.00
b. P14,190.00
d. P7,812.00
4. Using the same information in No. 3, the capital balance of partner CC on December 31,
2019?
a. P108,770.00
c. P100,112.00
b. P104,270.00
d. P 99,312.00
Don’t do nothing because you feel you can only do little, do what you can.
Courage isn’t having the strength to go on; it’s going on when you don’t have the strength.
When all else is lost, the future still remains.
Page 4 of 6
AFAR-01
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Weeks 1-2: PARTNERSHIP FORMATION & OPERATIONS
Solution to Problem X: 1. c; 2. b; 3. c; 4. b
Allocation/Distribution of Net Income – Requirement 1
Salaries
Interest-12% of Ave. Cap
Balance/Remainder (4:3:3)
Share in Net Income
AA
P 7,200
6,480
(600)
P13,080
BB
P 6,000
8,640
(450)
P14,190
CC
P 6,800
12,420
(450)
P18,770
TOTAL
P 20,000
27,540
(1,500)
P46,040
BB
P72,000
14,190
(4,500)
P81,690
CC
P108,000
(18,000)
18,770
(4,500)
P104,270
TOTAL
P228,000
( 6,000)
46,040
( 13,500)
P254,540
BB
P8,640
( 450)
P8,190
CC
P12,420
( 450)
P11,970
TOTAL
P 27,540
( 1,500)
P26,040*
Statement of Partners’ Capital – Requirement 2
Capital, January 2, 2019
Additional Investments (withdrawals)
Net Income
Personal Withdrawals
Capital, December 31, 2019
AA
P48,000
12,000
13,080
(4,500)
P68,580
Allocation/Distribution of Net Income – Requirement 3
Interest-12% of Ave. Cap
Balance/Remainder (4:3:3)
Share in Net Income
AA
P6,480
( 600)
P5,880
*Net income before partners’ salaries and interests…………………………P 46,040
Less: Operating expenses (including salaries)…………………………
20,000
Net Income after partners’ salaries but before interests…………… .P 26,040
Incidentally, the entry to record the salaries would be:
Operating expenses (for salaries) ……………………............ 20,000
AA, Capital ……………………………………………..
BB, Capital ………………………………………………
CC, Capital …………………………………………… .
Statement of Partners’ Capital – Requirement 4
Capital, January 2, 2019
Addit’l. Inv. (Withdrawals)
Net Income
Sal. (refer to entry above)
Personal Withdrawals
Capital. December 31, 2019
AA
P48,000
12,000
5,880
7,200
(4,500)
P68,580
7,200
6,000
6,800
BB
P72,000
8,190
6,000
(4,500)
P81,690
CC
P108,000
(18,000)
11,970
6,800
(4,500)
P104,270
TOTAL
P228,000
( 6,000)
26,040
20,000
( 13,500)
P 254,540
XI – With Solution
DD and EE was organized and began operations of March 1, 2019. On that date, DD invested
P75,000 and EE invested land and building with current fair value of P40,000 and P50,000,
respectively. EE also invested P30,000 in the partnership on November 1, 2019 because of its
shortage of cash. The partnership contract includes the following remuneration plan:
Annual Salary ……………………………………………………...
Annual interest on average capital account balances…..
Remainder …………………………………………………………
DD
P9,000
10%
60%
EE
P12,000
10%
40%
The annual salary was to be withdrawn by each partner in 12 monthly installments. During the
fiscal year ended, February 28, 2020, DD and EE had net sales of P250,000, cost of goods sold
of P140,000 and total operating expenses of P50,000 (excluding partners’ salaries and interest
on average capital account balances). Each partner made monthly cash drawings in
accordance with partnership contract.
Determine:
1. The share of partner DD in the net income:
a. P29,400.00
c. P36,000.00
b. P33,000.00
d. P23,400.00
2. The capital balance of each partner on March 1, 2020 should be:
a. DD, P95,400; EE, P138,600
c. DD, P108,000; EE, P147,000
b. DD, P66,000; EE, P82,000
d. DD, P99,000; EE, P135,000
3. Assuming that the annual salary are to recognized as operating expenses and the total
operating expenses of P50,000 includes the partners’ salaries expenses but excluding
interest on partners’ average capital account balances. The share of partner DD in the net
income in 2020?
a. P29,400.00
c. P36,000.00
b. P33,000.00
d. P23,400.00
4. Using the same information in No. 3, the capital balance of each partner on March 1,
2020:
a. DD, P95,400; EE, P138,600
c. DD, P108,000; EE, P147,000
b. DD, P66,000; EE, P82,000
d. DD, P99,000; EE, P135,000
***Great passions, can elevate us to the things that we want to deliver.***
***Nothing great was ever achieved without determination.***
***Don’t be discouraged; everyone who got where he is, started where he was.***
Page 5 of 6
AFAR-01
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Weeks 1-2: PARTNERSHIP FORMATION & OPERATIONS
Solution to Problem XI: 1. a; 2. a; 3. b; 4. c
Allocation/Distribution of Net Income – Requirement 1
Salaries
Interest (10% of Ave. Cap.)
Balance/Remainder (60%:40%)
Share in Net Income
DD
P 9,000
7,500
12,900
P29,400
EE
P12,000
10,000
8,600
P30,600
Total
P 21,000
17,500
21,500
P60,000*
29,400
(9,000)
P95,400
EE
P90,000
30,000
30,600
(12,000)
P138,600
Total
P165,000
30,000
60,000
(21,000)
P234,000
DD
P 7,500
P25,500
P33,000
EE
P10,000
P17,000
P27,000
Total
P17,500
P42,500
P60,000
DD
P75,000
EE
P 90,000
30,000
27,000
12,000
(12,000)
P147,000
Total
P 165,000
30,000
60,000
21,000
( 21,000)
P 255,000
*P 250,000 – P50,000 (excluding salaries and int. – P50,000)
Statement of Partners’ Capital – Requirement 2
Capital, March 1, 2019
Additional Investments
Net Income
Personal Withdrawals
Capital, March 1, 2020
DD
P75,000
Allocation/Distribution of Net Income – Requirement 3
Interest on Average Capital – 10%
Balance/Remainder – 60%:40%
Share in Net Income
Statement of Partners’ Capital – Requirement 4
Capital balance, March 1, 2019
Additional Investment
Share in Net Income
Salaries
Salary withdrawals
Capital balance, March 1, 2020
33,000
9,000
(9,000)
P108,000
XII
FF and GG are partners in merchandising business. During 2019, the withdrew their salary
allowances of P40,000 and P60,000, respectively. Profits and losses are shared in the ratio of 3:2.
The income summary account has a credit balance of P120,000 before any income
allocation. Their capital accounts reflect the following:
FF
GG
Beginning balance……………………………………….
P50,000
P30,000
Additional investments…………………………………..
P30,000
P40,000
Withdrawals other than for salary allowances……...
(P10,000)
(P15,000)
Ending Capital…………………………………………….
P70,000
P55,000
Determine:
1. The share of partner FF in the net income:
a. P72,000.00
c. P40,000.00
b. P52,000.00
d. P12,000.00
2. The capital balance of each partner on December 31, 2018 after closing the income
summary and withdrawals accounts.
a. FF, P82,000; GG, P63,000
c. FF, P70,000; GG, P55,000
b FF, P122,000; GG, P123,000
d. FF, P82,000; GG, P123,000
XIII – With Solution (with Correction of Error)
NN and OO created a partnership to own and operate a health-food store. The partnership agreement
provided that NN receive a salary of P100,000 and OO a salary of P50,000 to recognize their relative time
spent in operating the store. Remaining profits and losses were divided 60:40 to NN and OO, respectively.
Income for 20x4, the first year of operations, P130,000 was allocated P88,000 to NN and P42,000 to OO.
On January 1, 20x5, the partnership agreement was changed to reflect the fact that OO could no longer
devote any time to the store’s operations. The new agreement allows NN a salary of P180,000, and the
remaining profits and losses are allocated equally. In 20x5, an error was discovered such that the 20x4
reported income was understated by P40,000. The partnership income of P250,000 for 20x5 including the
P40,000 related to 20x4. The P250,000 should be allocated between NN and OO as follows:
a.
NN, P219,000; OO, P 31,000
d.
NN, P -0- ; OO, P -0b.
NN, P171,000; OO, P171,000
e.
NN, P125,000; OO, P125,000
Answer: a - Any adjustments related to a particular year, the profit and loss ratio existing on that year
should be used as a basis for allocating the required adjustments.
Salary allowances
Balance/Remainder: Equally
Net Income for 20x5
Adjustment of net income for 20x4 – 60% : 40%
Total
Page 6 of 6
NN
P180,000
15,000
P195,000
24,000
P219,000
OO
P
15,000
P 15,000
16,000
P31,000
Total
P180,000
30,000
P 210,000
40,000
P250,000