Page |1 NAME: Professor: Section: Date: Score: ACCOUNTING FOR SPECIAL TRANSACTIONS FIRST GRADING EXAMINATION 1. AAA and BBB are partners with capital of P60,000 and P20,000, respectively. Profits and losses are divided in the ratio of 60:40. AAA and BBB decided to form a new partnership with CCC, who invested land valued at P15,000 for a 20% capital interest in the new partnership. CCC’s cost of the land was P12,000 the partnership elected to use the bonus method to record the admission of CCC into the relationship. CCC’s capital account should be credited for a. P12,000 c. P16,000 b. P15,000 d. P19,000 60+20+15= 95 x 20%=19 2. AAA and BBB formed partnership in 2009. The partnership agreement provides for annual salary allowances of P55,000 for AAA and P45,000 for BBB. The partners share profits equally and losses in a 60:40 ratio. The partnership had earnings of P80,000 for 2009 before any allowance to partners. What amount of these earnings should be credited to each partner’s capital account? AAA BBB AAA BBB a. P40,000 P40,000 c. P 44,000 P 36,000 b. 43,000 37,000 d. 45,000 35,000 B 3. The partnership agreement of AAA and BBB provides that interest at 10% per year is to be credited to each partner on the basis of weighted-average capital balances. A summary of BBB’s capital account for the year ended December 31, 2009, is as follows: Balance, January 1 P 140,000 Additional investment, July 1 40,000 Withdrawal, August 1 15,000 What amount of interest should be credited to BBB’s capital account for 2009? a. P15,250 c. P16,500 b. P15,375 d. P17,250 4. AAA and BBB are partners who share profits and losses on the ratio of 6:4, respectively. On May 1, 2009, their respective capital accounts were as follows: AAA P 60,000 BBB 50,000 On the date, CCC was admitted as a partner with one-third interest in capital and profits for an investment of P40,000. The new partnership began with total capital of P150,000. Immediately after CCC’s admission, AAA’s capital should be Page |2 a. P50,000 b. P54,000 c. P56,667 d. P60,000 5. AA and BB formed a partnership in 20x1 and made the following investments and capital withdrawals during the year: AA Investments March 1………………P30, 000 June 1………………………… August 1………………20, 000 December 1……………………. Draws BB Investments P 20, 000 Draws P10, 000 P10,000 2,000 5, 000 The partnership’s profit and loss agreement provides for salary of which P30,000 was paid to each partner for 20x1. AA is to receive a bonus of 10% on net income after salaries and bonus. The partners are also to receive interest of 8% on average annual capital balances affected by both investments and drawings. Any remaining profits are to be allocated equally among the partners. Assuming the net income of P60, 000 before salaries and bonus, determine how the income would be allocated among the partners. a. AA, P31, 138; BB, P28, 862 b. AA, P33, 537; BB, P26, 463 D Interest Salaries A 2,000 (467) 667 (33) 2,167 30,000 (1,483) 30,683 c. AA, P30, 633; BB, P29, 376 d. AA, P30, 684; BB, P29, 316 B 1,333 (467) (67) 800 30,000 (1,483) 29,317 60,000 (2,967) (60,000) (2,967) Use the following information to answer the next two questions The following condensed balance sheet is presented for the partnership of AAA and BBB, who share profits and losses in the ratio of 60:40, respectively: Cash P 45,000 Accounts payable P 120,000 Other assets 625,000 AAA, capital 348,000 BBB, loan 30,000 BBB, capital 232,000 Total P 700,000 Total P 700,000 The assets and liabilities are fairly valued on the balance sheet. AAA and BBB decide to admit CCC as a new partner with 20% interest. Page |3 6. What amount should CCC contribute in cash or other assets? a. P110,000 c. P140,000 b. P116,000 d. P145,000 D 348,000 + 232,000 = 580 ÷ 80% x 20% = 145,000 7. Instead of admitting a new partner, AAA and BBB decide to liquidate the partnership. If other assets are sold for P500,000, what amount of the available cash should be distributed to AAA? a. P255,000 c. P327,000 b. P273,000 d. P348,000 B A B 45000 348,000 202,000 550,000 500,000 (75,000) (50,000) (125,000) (120,000) 273,000 152,000 425,000 425,000 Cash 8. The following condensed balance sheet is presented for the partnership of BBB and AAA, who share profits and losses on the ratio of 60:40, respectively: Other assets P 450,000 BBB loan 20,000 P 470,000 Accounts payable P 120,000 BBB, capital 195,000 AAA, capital 155,000 Total P 470,000 The partners have decided to liquidate the partnership. If the other assets are sold P385,000, what amount of the available cash should be distributed to BBB? a. P136,000 c. P159,000 b. P156,000 d. P195,000 A A 155,000 (26,000) 129,000 B 175,000 (39,000) 136,000 385,000 175,000 (65,000) 265,000 (120,000) 265,000 Cash 9. On December 31, 1998, the partners of MNP Partnership decided to liquidate their business. Immediately before liquidation, the following condensed balance sheet was prepared: Cash Noncash assets P 50,000 900,000 Liabilities P 375,000 Nieva, loan 80,000 Perez, loan 25,000 Munoz, capital (50%) 312,500 Nieva, capital (30%) 107,500 Page |4 ____ Total Perez, capital (20%) P 950,000 Total 50,000 P 950,000 The noncash assets were sold for P400,000. Assuming Perez is the only solvent partner, what amount of additional cash will be invested by Perez? (rounded to the nearest peso) a. P 37,143 b. 25,000 c. 5,250 d. 0 B Munoz 50% Loan Capital Totals Loss on realization (950 - 400) 312,500 312,500 (250,000) 62,500 Nieva 30% 80,000 107,500 187,500 (150,000) 37,500 Perez 20% 25,000 50,000 75,000 (100,000) (25,000) 10. The partners of the M & N Partnership started liquidating their business on July 1, 2004, at which time the partners were sharing profits and losses 40% to M and 60% to N. The balance sheet of the partnership appeared as follows: M & N Partnership Balance Sheet – July 1, 2004 Assets Cash……………………. P 8,800 Receivable……………… 22,400 Inventory…………...….. 39,400 Equipment…..P65, 200 Accumulated depreciation 30, 80034, 400 Total…………………… P105, 000 Liabilities & Capital Accounts payable………… P32, 400 M, capital………………… P31, 000 M, drawing………… 5,400 25, 600 N, capital………………… .P33, 200 N, drawing……………………. 200 33, 000 N, loan…………………………………… 14, 000 Total…………………………………… P105, 000 During the month of July, the partners collected P600 of the receivables with no loss. The partners also sold during the month the entire inventory on which they realized a total of P32,400. How much of the cash was paid to M’s capital on July 31, 2004? a. P -0c. P5, 400 b. 25, 600 d. 320 D Page |5 M 25,600 (2,800) (8,720) (13,760) 320 N Totals 47,000 72,600 (4,200) (7,000) Loss on inventory (13,080) (21,800) Possible loss on receivables (20,640) (34,400) Possible loss on PPE 9,080 11. After all noncash assets have been converted into cash in the liquidation of the AA and JJ partnership, the ledger contains the following account balances: Debit Credit Cash……………………………………………… P 34, 000 Accounts payable………………………………………………………… P25, 000 Loan payable to AA……………………………………………………….. 9,000 AA, capital…………………………………………… 8,000 JJ, capital……………………………………………………………… 8,000 Available cash should be distributed; P25,000 to accounts payable and; a. P9, 000 loan payable to AA b. P4, 500 each to AA and JJ c. P1,000 to AA and P8, 000 to JJ d. P8,000 to AA and P1, 000 to JJ C A 1,000 1,000 J 8,000 8,000 12. After incurring losses resulting from very unprofitable operation, the Alphabets Partnership decided to liquidate when the partners’ capital balances were: A, capital (40%) B, capital (40%) C, capital (20%) P 80,000 130,000 96,000 The non-cash assets were sold in installment. Available cash were distributed to partners in every sale of non-cash assets. After the second sale of non-cash assets, the partners received the same amount of cash in the distribution. And from the third sale of non-cash assets, cash available for distribution amounts to P 28,000, and non-cash assets has a book value of P 12,500. Using cash priority program, what amount did C received in the third installment of cash? a. P 11,600 b. 8,000 c. 5,600 d. 0 C 28,000 x 20% = 5,600 Page |6 A B 40% 80,000 200,000 40% 130,000 325,000 200,000 325,000 (125,000) 200,000 200,000 C 20% 96,000 480,000 (155,000) 325,000 (125,000) 200,000 (306,000) A 306,000 Payments B C (31,000) (80,000) (80,000) (50,000) (80,000) (130,000) (25,000) (40,000) (96,000) 13. The partnership of AA, BB, and CC was dissolved on June 30, 20x1 and account balances after non-cash assets were converted into cash on September 1, 2004 are: Cash……………………………P50, 000 Accounts payable P120, 000 AA, capital (30%) 90, 000 BB, capital (30%) (60, 000) CC, capital (40%) (100, 000) Personal assets and liabilities of the partners at September 1, 20x1 are: Personal Assets AA………………………………………………………….. P80, 000 BB………………………………………………………… 100, 000 CC………………………………………………………… 192, 000 Personal Liabilities P90, 000 61, 000 80, 000 If CC contributes P70, 000 to the partnership to provide cash to pay the creditors, what amount of AA’s P90, 000 partnership equity would appear to be recoverable? a. P90,000 b. 81,000 c. P79, 000 d. None B A 30% 90,000 B 40% (60,000) 90,000 (60,000) 39,000 (21,000) 90,000 (9,000) 81,000 C 40% (100,000) 70,000 (30,000) (70,000) (30,000) (12,000) (42,000) 14. Partners Able, Baker, and Chapman, who share profit and loss equally, have the following personal assets, personal liabilities, and partnership capital balances: Able Personal assets P 30,000 Personal Liabilities 25,000 Baker__ Chapman_ P 80,000 50,000 P 60,000 72,000 Page |7 Capital balances 50,000 (32,000) 70,000 After applying the doctrine of marshaling of assets, the capital balances of Able, Baker, and Chapman, respectively, would be a. P 50,000 P(2,000) P 58,000 b. 48,000 0 58,000 c. 49,000 0 57,000 d. 34,000 0 54,000 C A B C Interest 50,000 (32,000) 70,000 88,000 Personal 30,000 (12,000) 50,000 (2,000) 58,000 108,000 (925.93) 2,000 (1,074.07) (2,000) 49,074 56,926 15. A, B and C are partners in a textile distribution business, sharing profits and losses equally. On December 31, 2004, the partnership capital and the partners’ drawing were as follows: Capital Drawing A P100,000 60,000 B C Total P80,000 P300,000 P480,000 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 2005 amounted to P72,000, and was all exhausted including the partnership assets. Unsettled creditors’ claim at December 31, 2005 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. P 162,000 b. P 108,000 c. P 84,000 d. P 78,000 D A 40,000 24,000 64,000 (172,000) (108,000) 108,000 - B 40,000 24,000 64,000 (172,000) (108,000) (54,000) (162,000) C 280,000 24,000 304,000 (172,000) 132,000 (54,000) 78,000 A 0 72,000 Net loss L C (adjusted) 84,000 432,000 516,000 (516,000) (108,000) 16. A, B and C are partners with capital balance of P 350,000, P 250,000 and P 350,000 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 Page |8 claims except for P50,000. C is personally insolvent, but the other two partners are able to meet any indebtedness to the firm. On the remaining claim against the partnership, A is to absorb. a. P 40,000 b. P 15,000 c. P 30,000 d. P 25,000 A A B C 30% 20% 50% 350,000 250,000 350,000 (300,000) (200,000) (500,000) 50,000 50,000 (150,000) (90,000) (60,000) 150,000 (40,000) (10,000) - A 950,000 (1,000,000) Net loss L 50,000 1,000,000 C 950,000 17. A, B, and C are partners in ABC Partnership and share profits and losses, 5:3:2, respectively. The partners have agreed to liquidate the partnership. Prior to liquidation, the partnership balance sheet shows the following book values. Cash Non-cash Notes, payable to C Other liabilities A, capital B, capital C, capital P 25,200 297,600 38,400 184,800 72,000 (12,000) 39,600 Liquidation expenses of P 16,800 are paid. Non-cash assets with a book value of P 240,000 are sold for P 216,000. How much cash should C receive? a. P 74,571 b. P 46,458 c. P 39,600 d. P 37,600 C Page |9 A (50%) 72,000 B (30%) (12,000) Note 72,000 (8,400) (12,000) 51,600 (28,800) 22,800 (29,657) (6,857) 6,857 (0) (12,000) (5,040) (7,200) (24,240) (17,280) (41,520) 41,520 - C (20%) 39,600 38,400 78,000 (3,360) (4,800) 69,840 (11,520) 58,320 (11,863) 46,457 (6,857) 39,600 A L C - 138,000 (16,800) Liquidation expenses (24,000) Loss on sale (57,600) Possible loss on unsold assets 18. Partners Bee, Cee, Dee and Gee who share profits 5:3:1:1, respectively, decide to liquidate their partnership. Capital balances before liquidation are: Bee P 60,000 Cee 40,000 Dee 30,000 Gee 10,000 The partners agree to the following: (1) Partnership’s computer equipment with a book value of P12,000 is to be taken over by partner Bee at a price of P15,000. (2) Partnership’s liabilities are to be paid off and the balance of cash on hand, P30,000 is to be divided in a manner that will avoid the need for any possible recovery of cash from a partner. How much of the P30,000 cash be distributed to Partner Cee? a. P 10,000 b. P 0 c. P 20,000 d. P 15,000 A A Cash Equipment Others (squeeze) 30,000 12,000 98,000 140,000 L - C 140,000 140,000 P a g e | 10 B C 50% 60,000 1,500 (15,000) 46,500 (49,000) (2,500) 2,500 - D G 30% 40,000 900 10% 30,000 300 10% 10,000 300 140,000 3,000 40,900 (29,400) 11,500 (1,500) 10,000 30,300 (9,800) 20,500 (500) 20,000 10,300 (9,800) 500 (500) - 128,000 (98,000) Possible loss on unsold assets 30,000 30,000 19. A and B decided to liquidate their partnership business on June 1, 2005, under lump-sum liquidation. The partners had been sharing profits and losses on a 60:40 ratio. The balance sheet prepared on the day of liquidation began was as follows: Assets Cash P 18,000 Receivables 75,000 Inventory 90,000 Other 84,000 Total P267,000 Liabilities and Capital Accounts payable P 42,000 A, loan 24,000 A, capital 102,000 B, capital 99,000 Total P267,000 During June, one-third of the receivables was collected; P45,000 of inventory was sold at an average of 70% of book value; other assets were sold for P36,000. How much should A and B receive upon liquidation? A a. P32,100 b. P 8,100 c. P40,200 d. P59,100 B P36,400 P27,400 P41,800 P54,400 A Carrying amount of non-cash (75 + 90 + 84) 249 Amount realized from sale (1/3 x 75) + (70% x 45) + 36 (92.5) Loss on realization (156.5) Cash 18 + 92.5 = 110.5 – 42 = 68.5 cash available to partners less capital balance 225K = (156.5) A B 60% 40% 126,000 99,000 225,000 (93,900) (62,600) (156,500) 32,100 36,400 68,500 20. A, B, and C, who divide profits and losses 50%, 30%, and 20%, respectively, have the following December 31, 20x1 account balances: P a g e | 11 A, drawing (Dr.)………………………………………………………… P 12, 000 C, drawing (Cr.)………………………………………………………..… 4,800 Accounts receivable- A……………………………………………….… 7, 200 Loans payable- B…………………………………………………………... 14, 400 A, capital…………………………………………………………………. 59, 400 B, capital……………………………………………………………………. 44, 400 C, capital………………………………………………………………..… 39, 000 On this data, the partnership’s assets are P211,200 (including cash of P64, 200).The partnership is liquidated and C receives P33,000 in final settlement. How much is the total loss on realization? a.P10,800 b. 31,200 c. P54,000 d. 64,200 C C 20% 43,800 (10,800) 33,000 (54,000) 21. A and B share partnership profits and losses in a 7:3 ratio. Their post-closing trial balance on January 31 show before liquidation: Cash………………………………………P 30, 000 Accounts receivable, net………….……... 380, 000 Inventory……………………………… 260, 000 Furniture, net…………………………… 120, 000 Accounts payable…………………………………………………P165, 000 A, capital…………………………………………………………...350, 000 B, capital………………………………………………………. 275, 000 C offered to buy for P760,000 the partnership assets including liabilities but excluding cash and after certain assets are to be restated at their fair values as follows: Accounts receivable ……………………………………………….. P350,000 Inventory ……………………………………………………………… 250,000 Furniture ……………………………………………………………… 135,000 How much will A and B receive as final settlement of their partnership interest? a. P 570, 000 b. 760, 000 C c. P790, 000 d. 625, 000 P a g e | 12 A 70% 350,000 115,500 465,500 B 30% 275,000 49,500 324,500 165,000 790,000 22. AAA and BBB partnership’s balance sheet at December 31, 2009, reported the following: Total Assets P 100,000 Total liabilities 20,000 AAA, capital 40,000 BBB, capital 40,000 On January 2, 2010, AAA and BBB dissolved their partnership and transferred all assets and liabilities to a newly formed corporation. At the date of incorporation, the fair value of the net assets was P12,000 more than the carrying amount in the partnership’s books, which was assigned to tangible assets. AAA and BBB were each issued 5,000 shares of the corporation’s P1 par value common stock. Immediately following incorporation, additional paid-in capital in excess of par should be credited for a. P68,000 c. P77,000 b. P70,000 d. P82,000 D 80K + 12K = 92K – 10K = 82K 23. When property other than cash is invested in a partnership, at what amount should the noncash property be credited to the contributing partner’s capital account? a. Fair value at the date of contribution. b. Contributing partner’s original cost. c. Assessed valuation for property tax purposes. d. Contributing partner’s tax basis. 24. A and B formed a partnership. A contributed cash of ₱500,000 while B contributed land with carrying amount of ₱400,000 and fair value of ₱800,000. The land has an unpaid mortgage of ₱200,000 which is assumed by the partnership. How much is the correct valuation of B’s capital immediately after the partnership formation? a. 400,000 b. 500,000 c. 600,000 d. 800,000 Solution: Cash Land (at fair value) Total A 500,000 500,000 B 800,000 800,000 Partnership 500,000 800,000 1,300,000 P a g e | 13 Mortgage payable A, capital B, capital (800K – 200K) Total 500,000 500,000 200,000 600,000 800,000 200,000 500,000 600,000 1,300,000 25. Mr. A and Ms. B formed a partnership and agreed to divide the initial capital equally even though Mr. A contributed ₱100,000 and Ms. B contributed ₱84,000 in identifiable assets. The partners agree that the difference in the amount of contribution and the amount of credit to the partner’s capital shall be treated as compensation for the expertise that the partner will be bringing to the partnership. How much is the correct valuation of A’s capital immediately after the partnership formation? a. 84,000 b. 92,000 c. 100,000 d. 108,000 Solution: Cash 184,000 A, Capital (184,000 ÷ 2) B, Capital (184,000 ÷ 2) 92,000 92,000 26. A and B formed a partnership. The following are their contributions: Cash Accounts receivable Building Total A, capital B, capital Total A 500,000 100,000 600,000 B 700,000 700,000 600,000 600,000 700,000 700,000 Additional information: The accounts receivable includes a ₱20,000 account that is deemed uncollectible. The building is under-depreciated by ₱50,000. The building has an unpaid mortgage ₱100,000, but this is not assumed by the partnership. Partner B promised to pay for the mortgage himself. How much is the correct valuation of A’s capital immediately after the partnership formation? a. 460,000 b. 580,000 P a g e | 14 c. 650,000 d. 720,000 Solution: Cash Accounts receivable (100K – 20K) Building (700K – 50K) Total A, capital B, capital Total A 500,000 B - Partnership 500,000 80,000 - 80,000 650,000 580,000 650,000 650,000 1,230,000 650,000 650,000 580,000 650,000 1,230,000 580,000 580,000 27. Mr. A and Ms. B formed a partnership and agreed to divide the initial capital equally even though Mr. A contributed ₱100,000 and Ms. B contributed ₱84,000 in identifiable assets. The partners agree that the difference in the amount of contribution and the amount of credit to the partner’s capital shall be treated as cash settlement between the partners. The compound entry to record the partners’ contributions includes a credit to B’s capital account in the amount of a. 84,000 b. 92,000 c. 100,000 d. 108,000 Solution: Cash 184,000 A, Capital (184,000 ÷ 2) B, Capital (184,000 ÷ 2) 92,000 92,000 The cash settlement among the partners is not recorded in the partnership’s books because this is not a transaction of the partnership but rather a transaction among the partners themselves. 28. If the partnership agreement does not specify how income is to be allocated, profits and loss should be allocated a. Equally. b. In proportion to the weighted average of capital invested during the period. c. Equitably so that partners are compensated for the time and effort expended on behalf of the partnership. d. In accordance with their capital contributions. 29. A and B share in partnership profits and losses on a 40:60 ratio. During the year, A’s capital account has a net increase of ₱50,000. Partner A made contributions of ₱10,000 and capital P a g e | 15 withdrawals of ₱60,000 during the year. How much was the share of B in the partnership profit for the year? a. 100,000 b. 150,000 c. 200,000 d. 180,000 Solution: Step 1: Withdrawals end. A, Capital 60,000 10,000 ? 50,000 beg. Additional investment Share in profit A, Capital 60,000 10,000 100,000 50,000 beg. Additional investment Share in profit (squeeze) Step 2: Withdrawals end. Step 3: 100,000 ÷ 40% = 250,000 partnership profit Step 4: B’s share: 250,000 x 60% = 150,000 30. The partnership agreement of A, B and C stipulates the following: Partners A and C shall receive annual salaries of ₱12,000 and ₱8,000, respectively. A bonus of 10% of profit after salaries but before deduction of bonus shall be given to Partner A, the managing partner. Each partner shall receive 10% interest on average capital investments. Any remaining profit or loss shall be shared as follows: 40% to A and 30% each to B and C. The average capital investments of partners during the year are as follows: A ₱100,000 B 60,000 C 120,000 The partnership earns profit of ₱100,000. How much is the share of Partner C in the partnership profit? a. 47,600 b. 32,200 c. 19,200 d. 33,200 P a g e | 16 Solution: A Amount being allocated Allocation: 1. Salaries 2. Bonus (100K - 20K) x 10% 3. Interest on cap. (100K x 10%);(60K x 10%);(120K x 10%) 4. Allocation of remainder: (100K - 20K - 8K - 28K) = 44K; (44K x 40%); (44K x 30%); (44K x 30%) As allocated B C 12,000 8,000 Total 100,000 8,000 20,000 8,000 10,000 6,000 12,000 28,000 17,600 47,600 13,200 19,200 13,200 33,200 44,000 100,000 31. The partnership agreement of A and B provides that interest at 10% per year is to be credited to each partner on the basis of weighted-average capital balances. A summary of B’s capital account for the year ended December 31, 20x1 is as follows: Balance, Jan. 1, 20x1 Additional investment, July 1 Withdrawal, August 1 Balance, Dec. 31, 20x1 252,000 72,000 (27,000) 297,000 How much is the interest on B’s weighted average capital? a. 27,675 b. 33,633 c. 37,214 d. 23,322 Solution: Balance, Jan. 1, 20x1 Additional investment, July 1 Withdrawal, August 1 Weighted average capital Multiply by: Interest 252,000 72,000 (27,000) 12/12 6/12 5/12 252,000 36,000 (11,250) 276,750 10% 27,675 32. Red and White formed a partnership in 2003. The partnership agreement provides for annual salary allowances of ₱55,000 for Red and ₱45,000 for White. The partners share profits equally and losses in a 60/40 ratio. The partnership had earnings of ₱80,000 for 2003 before any allowance to partners. What amount of these earnings should be credited to each partner’s capital account? P a g e | 17 a. b. c. d. Red 40,000 43,000 44,000 45,000 White 40,000 37,000 36,000 35,000 Solution: Red Amount being allocated Allocation: 1. Salaries 2. Allocation of remaining profit (80K profit – 100K salaries) = -20K (-20 x 60%); (-20K x 40%) As allocated White Total 80,000 55,000 45,000 100,000 (12,000) 43,000 (8,000) 37,000 (20,000) 80,000 33. Fox, Greg, and Howe are partners with average capital balances during 2002 of ₱120,000, ₱60,000, and ₱40,000, respectively. Partners receive 10% interest on their average capital balances. After deducting salaries of ₱30,000 to Fox and ₱20,000 to Howe, the residual profit or loss is divided equally. In 2003 the partnership sustained a ₱33,000 loss before interest and salaries to partners. By what amount should Fox’s capital account change? a. 7,000 increase. b. 11,000 decrease. c. 35,000 decrease. d. 42,000 increase. Solution: Amount being allocated Allocation: 1. Salaries 2. Interest on capital 3. Allocation of balance (-33K – 50K - 22K) = -105K / 3 As allocated Fox Greg Howe Total (33,000) 30,000 12,000 6,000 20,000 4,000 50,000 22,000 (35,000) 7,000 (35,000) (29,000) (35,000) (11,000) (105,000) (33,000) 34. The partnership agreement of Axel, Berg & Cobb provides for the year-end allocation of net income in the following order: First, Axel is to receive 10% of net income up to ₱100,000 and 20% over ₱100,000. Second, Berg and Cobb each are to receive 5% of the remaining income over ₱150,000. The balance of income is to be allocated equally among the three partners. The partnership’s 2003 net income was ₱250,000 before any allocations to partners. What amount should be allocated to Axel? P a g e | 18 a. b. c. d. 101,000 103,000 108,000 110,000 Solution: Axel Amount being allocated Allocation: 1. Bonus to A First 100K (100K x 10%) Over 100K [(250K - 100K) x 20%] 2. Bonus to Berg and Cobb (250K - 10K - 30K - 150K) x 5% 3. Allocation of bal. (204K / 3) As allocated Berg Cobb 10,000 30,000 68,000 108,000 Total 250,000 10,000 30,000 3,000 68,000 71,000 3,000 68,000 71,000 6,000 204,000 250,000 35. The partnership agreement of Reid and Simm provides that interest at 10% per year is to be credited to each partner on the basis of weighted-average capital balances. A summary of Simm’s capital account for the year ended December 31, 2003, is as follows: Balance, January 1 Additional investment, July 1 Withdrawal, August 1 Balance, December 31 140,000 40,000 (15,000) 165,000 What amount of interest should be credited to Simm’s capital account for 2003? a. 15,250 b. 15,375 c. 16,500 d. 17,250 B [140K + (40K x 6/12) – (15K x 5/12) = 153.75K x 10% = 15,375 36. Blau and Rubi are partners who share profits and losses in the ratio of 6:4, respectively. On May 1, 2003, their respective capital accounts were as follows: Blau Rubi 60,000 50,000 On that date, Lind was admitted as a partner with a one-third interest in capital and profits for an investment of ₱40,000. The new partnership began with total capital of ₱150,000. Immediately after Lind’s admission, Blau’s capital should be a. 50,000 b. 54,000 P a g e | 19 c. 56,667 d. 60,000 Solution: Total capital after admission Multiply by: Interest of Lind Capital credit to Lind Contribution of Lind Bonus to Lind Multiply by: Old P/L ratio of Blau Deduction to Blau's capital 150,000 1/3 50,000 (40,000) 10,000 60% 6,000 Interest of Blau before admission of Lind Deduction to Blau's capital Adjusted capital of Blau after admission 60,000 (6,000) 54,000 37. Kern and Pate are partners with capital balances of ₱60,000 and ₱20,000, respectively. Profits and losses are divided in the ratio of 60:40. Kern and Pate decided to form a new partnership with Grant, who invested land valued at ₱15,000 for a 20% capital interest in the new partnership. Grant’s cost of the land was ₱12,000. The partnership elected to use the bonus method to record the admission of Grant into the partnership. Grant’s capital account should be credited for a. 12,000 b. 15,000 c. 16,000 d. 19,000 Solution: (60K + 20K + 15K) = 95K total capital after admission x 20% = 19,000 Use the following information for the next two questions: On June 30, 2003, the condensed balance sheet for the partnership of Eddy, Fox, and Grimm, together with their respective profit and loss sharing percentages were as follows: Assets, net of liabilities 320,000 Eddy, capital (50%) Fox, capital (30%) Grimm, capital (20%) 160,000 96,000 64,000 320,000 38. Eddy decided to retire from the partnership and by mutual agreement is to be paid ₱180,000 out of partnership funds for his interest. No goodwill is to be recorded. After Eddy’s retirement, what are the capital balances of the other partners? Fox Grimm a. 84,000 56,000 P a g e | 20 b. 102,000 c. 108,000 d. 120,000 68,000 72,000 80,000 Solution: Payment to Eddy Capital balance of Eddy Excess payment to Eddy Capital balances before retirement Share in excess payment to Eddy Capital balances after retirement 180,000 160,000 20,000 Fox 96,000 (12,000) 84,000 Grimm 64,000 (8,000) 56,000 39. Assume instead that Eddy remains in the partnership and that Hamm is admitted as a new partner with a 25% interest in the capital of the new partnership for a cash payment of ₱140,000. The bonus method shall be used to record the admission of Hamm. Immediately after admission of Hamm, Eddy’s capital account balance should be a. 280,000 b. 172,500 c. 160,000 d. 140,000 Solution: Eddy, capital Fox, capital Grimm, capital Investment of Hamm Total partnership capital after admission Multiply by: Interest of Hamm Capital credit to Hamm Investment of Hamm Bonus to old partners Eddy, capital (before admission) Share in bonus to old partners (25K x 50%) Eddy, capital (after admission) 160,000 96,000 64,000 140,000 460,000 25% 115,000 140,000 (25,000) 160,000 12,500 172,500 The next two items are based on the following information: The following condensed balance sheet is presented for the partnership of Alfa and Beda, who share profits and losses in the ratio of 60:40, respectively: Cash 45,000 Other assets 625,000 Beda, loan 30,000 P a g e | 21 700,000 Accounts payable Alfa, capital Beda, capital 120,000 348,000 232,000 700,000 40. The assets and liabilities are fairly valued on the balance sheet. Alfa and Beda decide to admit Capp as a new partner with 20% interest. No goodwill or bonus is to be recorded. What amount should Capp contribute in cash or other assets? a. 110,000 b. 116,000 c. 140,000 d. 145,000 D (348K + 232K) = 580K ÷ 80% = 725K capital after admission x 20% = 145,000 41. Instead of admitting a new partner, Alfa and Beda decide to liquidate the partnership. If the other assets are sold for ₱500,000, what amount of the available cash should be distributed to Alfa? a. 255,000 b. 273,000 c. 327,000 d. 348,000 Solution: The total loss on the sale is computed as follows: Sale of other assets Carrying amount of other assets Total loss on sale The partial settlement to partners is computed as follows: Alpha Capital balances before liquidation 348,000 Receivable from Beda Total 348,000 Allocation of loss [125K x (60% & 40%)] (75,000) Amounts received by the partners 273,000 500,000 (625,000) (125,000) Beda 232,000 (20,000) 212,000 Totals 580,000 (20,000) 560,000 (50,000) 162,000 (125,000) 435,000 42. The statement of financial position of the partnership of A, B and C shows the following information: Cash 22,400 P a g e | 22 Other assets Total assets 212,000 234,400 Liabilities A, capital (50%) B, capital (25%) C, capital (25%) Total liabilities and equity 38,400 76,000 64,000 56,000 234,400 The partners realized ₱56,000 from the first installment sale of non-cash assets with total carrying amount of ₱120,000. How much did B receive from the partial liquidation? a. 25,000 b. 24,000 c. 16,000 d. 0 Solution: A (50%) 76,000 (78,000) (2,000) 2,000 - Cap. bal. before liquidation Allocation of loss Total Allocation of deficiency Total B (25%) 64,000 (39,000) 25,000 (1,000) 24,000 C (25%) 56,000 (39,000) 17,000 (1,000) 16,000 Totals 196,000 (156,000) 40,000 - 43. The statement of financial position of the partnership of A, B and C shows the following information: Cash Other assets Total assets 40,000 720,000 760,000 Liabilities B, loan C, loan A, capital (50%) B, capital (30%) C, capital (20%) Total liabilities and equity 300,000 64,000 20,000 250,000 86,000 40,000 760,000 The non-cash assets are sold for ₱320,000. Partner C is the only solvent partner. In the settlement of the partners’ claims, how much additional contribution is required of Partner C? a. 50,000 b. 30,000 c. 20,000 d. None P a g e | 23 Solution: Net proceeds Carrying amount of all other assets Loss Cap. bal. before liquidation Payable to partners Total Allocation of loss Total Additional contribution Total 320,000 (720,000) (400,000) A (50%) 250,000 250,000 (200,000) 50,000 B (30%) 86,000 64,000 150,000 (120,000) 30,000 50,000 30,000 C (20%) 40,000 20,000 60,000 (80,000) (20,000) 20,000 - Totals 376,000 84,000 460,000 (400,000) 520,000 20,000 540,000 “It is the Lord who goes before you. He will be with you; he will not fail you or forsake you. Do not fear or be dismayed.”– (Deuteronomy 31:8) - END -