Self Test Chapter 3
Multiple Choice Theories
1. If existing partners acquire the equity of a withdrawing partner, in what manner do they divide the
equity?
a. In any manner they choose
b. Equally
c. Proportionate to their residual profit and loss ratios
d. Existing partners are not permitted to acquire the equity of a withdrawing partner
2. Which of the following must exist to create the potential for a retiring partner to have a bonus
recognized at the date of withdrawal?
a. The retiring partner must be paid more than the book value of his equity
b. The existing partners must decide to not admit a new partner to the partnership
c. The retiring partner’s equity must be acquired by the partnership
d. All of the above are necessary for a bonus to be recognized
3. In what manner do the remaining partners share in the bonus paid to a withdrawing partner?
a. In proportion to their residual profit and loss ratios
b. Equally
c. In proportion to their capital account balances
d. The partner with the greatest capital account is assigned the bonus
4. Which of the following statements is true with regard to a withdrawing partner?
a. A bonus must be paid to the retiring partner
b. A bonus may be paid to the retiring partner
c. A bonus must be paid to the retiring partner or to the remaining partners
d. Recognizing a bonus is not appropriate when a partner retires
5. What change occurs to continuing partners’ capital accounts when a withdrawing partner is
assigned goodwill at the date of withdrawal?
a. Continuing partners’ capital accounts decease by their profit and loss ratio proportion of the
goodwill assigned to the withdrawing partner
b. Continuing partners’ capital accounts increase
c. Continuing partners’ capital accounts do not change
d. Goodwill cannot be recognized with regard to withdrawing partners
6. What amount of goodwill can be recognized at the date a partner withdraws from a partnership?
a. The withdrawing partner’s portion of goodwill
b. The continuing partners’ portion of goodwill
c. Goodwill may not be recognized at the date a partner withdraws
d. Either the withdrawing partner’s portion of goodwill or the goodwill attributable to the entire
partnership
7. What portion of the partnership’s assets must be revalued when a partner withdraws from the
partnership?
a. The withdrawing partner’s share must be revalued
b. All of the partnership’s assets must be revalued
c. Any or all of the partnership’s assets may be revalued but none have to be revalued
d. Partnership assets may not be revalued when a partner withdraws
8. If existing partners acquire the equity of a withdrawing partner, in what manner do they divide the
equity?
a. In any manner they choose
b. Equally
c. Proportionate to their residual profit and loss ratios
d. Existing partners are not permitted to acquire the equity of a withdrawing partner
9. Which of the following must exist to create the potential for a retiring partner to have a bonus
recognized at the date of withdrawal?
a. The retiring partner must be paid more than the book value of his equity
b. The existing partners must decide to not admit a new partner to the partnership
c. The retiring partner’s equity must be acquired by the partnership
d. All of the above are necessary for a bonus to be recognized
Problems
1. Kern and Pate are partners with capital balances of P60,000 and P20,000, respectively.
Profits and losses are divided in the ratio of 60:40. Kern and Pate decide to admit Grant,
who invested land valued at P15,000 for a 20% capital interest in the partnership.
Grant’s capital account should be credited for:
2.
At December 31, RR and SH are partners with capital balances of P40,000 and P20,000,
and they share profits and losses in the ratio of 2:1, respectively. On this date, PP invests
P17,000 in cash for a one-fifth interest in the capital and profit of the new partnership.
Assuming that the bonus method is used, how much should be credited to PP’s capital
account on December 31?
3.
The capital balance for Messalina is P210,000 and for Romulus is P140,000. These two
partners share profits and losses 60 percent (Messalina) and 40 percent (Romulus).
Claudius invests P100,000 in cash in the partnership for a 20 percent ownership. The
bonus method will be used. What are the capital balances for Messalina, Romulus, and
Claudius after this investment is recorded?
4. Jesse, Joseph, and Leslie are partners with capital accounts of P70,000, P120,000, and
P90,000, respectively. The partnership share profits and losses 45%, 30%, and 25%,
respectively. They are considering allowing Hans to join the partnership by investing
directly into the partnership. The partners intend to revalue the assets before Hans’
admission. Neither bonus nor goodwill are required. If the asset’s market value exceeds
book value P150,000, how much will Hans invest to acquire a 20% equity interest in the
partnership?
5. Sandra and Joshua are partners. They have capital account balances of P250,000 and
P200,000, respectively, and they share profits and losses 70/30. The partners are
considering admitting Judy as a new partner with a 25 percent equity interest for an
investment in the partnership of P180,000. Before admission, Sandra and Joshua will
revalue the partnership’s assets. If the net increase in the partnership’s assets is
P125,000, what will be the balance in Sandra’s capital account immediately before Judy’s
admission?
6. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of P170,000 and P260,000, respectively at the date they admit Frank
into the partnership. Frank invests P120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the peso amount of the reduction to
Kris’ capital account at the date of admission?
7. The following balance sheet information is for the partnership of Abel, Boule, and
Cayman:
Cash
Other assets
P 210,000
1,500,000
Liabilities
Abele, Capital (40%)
Boule, Capital (40%)
Cayman, Capital (20%)
P1,710,000
P 510,000
300,000
480,000
420,000
P1,710,000
Figures shown parenthetically reflect agreed profit and loss sharing percentages. If
assets on the initial balance sheet are fairly valued, Abele and Boule consent and Dann
pays Cayman P225,000 for his interest; the revised capital balances of the partners
would be:
8. Pink desires to purchase a one-fourth capital and profit and loss interest in the
partnership of Brown, Greene, and Red. The three partners agree to sell Pink one-fourth
of their respective capital and profit and loss interests in exchange for a total payment of
P100,000. The payment is made directly to the individual partners. The capital accounts
and the respective percentage interests in profits and losses immediately before the sale
to Pink follow
Brown
Greene
Red
Total
Capital
Accounts
P168,000
104,000
48,000
P320,000
% Interests in
Profits and Losses
50%
35
15
All other assets and liabilities are fairly valued and implied goodwill is to be recorded
prior to the acquisition by Pink. Immediately after Pink’s acquisition, what should be the
capital balances of Brown, Greene, and Red, respectively?
9. Donkey desires to purchase a one-fourth capital and profit and loss interest in the
partnership of Shrek, Fiona, and Muffin. The three partners agree to sell Donkey onefourth of their respective capital and profit and loss interests in exchange for a total
payment of P125,000. The payment is made directly to the individual partners. The
capital accounts and the respective percentage interests in profits and losses
immediately before the sale to Donkey follow
Shrek
Fiona
Muffin
Total
Capital
Accounts
P210,000
130,000
60,000
P400,000
% Interests in
Profits and Losses
60%
25
15
All other assets and liabilities are fairly valued by Donkey. Immediately after Donkey’s
acquisition, what should be the capital balances of Shrek, Fiona, and Muffin,
respectively?
10. The partnership of Gilligan, Skipper, and Ginger had total capital of P570,000 on
December 31, 20x4 as follows:
Gilligan, Capital (30%)
Skipper, Capital (45%)
Ginger, Capital (25%)
Total
P180,000
255,000
135,000
P570,000
Profit and loss sharing percentages are shown in parentheses. The partnership has no
liabilities. If Mary Ann purchases a 25 percent interest from each of the old partners for a
total payment of P270,000 directly to the old partners:
a. total partnership net assets can logically be revalued to P1,080,000 on the basis of
the price paid by Mary Ann.
b. the payment of Mary Ann does not constitute a basis for revaluation of partnership
net assets because the capital and income interests of the old partnership were not
aligned.
c. total capital of the new partnership should be P760,000.
d. total capital of the new partnership will be P840,000 assuming no revaluation.
11. Assume the same data in No. 10, except that Mary Ann became a partner by investing
P150,000 in the Gilligan, Skipper, and Ginger partnership for a 25 percent interest in
capital and profits and that partnership net assets are not revalued. Mary Ann’s capital
credit using the bonus method should be
12. Assume the same data in No. 10, except that Professor became a partner by investing
P190,000 in the Gilligan, Skipper, and Ginger partnership for a 25 percent interest in the
capital and profits, and the partnership assets are revalued. Under this assumption
a. Professor’s capital credit will be P150,000.
b. Gilligan’s capital will be increased to P147,000.
c. total partnership capital after Professor’s admission to the partnership will be
P600,000.
d. net assets of the partnership will increase by P190,000, including Professor’s interest.
13. The balance sheet for the partnership of Nina, Pinta, and Santa Maria at January 1, 20x4
follows. The partners share profits and losses in the ratio of 3:2:5, respectively.
Assets at cost
Liabilities
Nina, capital
Pinta, capital
Santa Maria, capital
P480,000
P135,000
75,000
120,000
150,000
P480,000
Nina is retiring from the partnership. By mutual agreement, the assets are to be adjusted
to their fair value of P540,000 at January 1, 20x4. Pinta and Santa Maria agree that the
partnership will pay Nina P135,000 cash for hers her partnership interest. There is no
goodwill is to be recorded. What is the balance of Pinta’s capital account after Nina’s
retirement?
14. Alf and Ben, partners in Alf & Ben Partnership who share net income and losses equally,
had capital account balances of P40,000 and P60,000, respectively, on September 25,
20x4, on which date the following journal entry was prepared for the partnership:
Cash
Goodwill [(P62,000 x 3)  (P100,000 + P62,000)]
Alf, Capital (P24,000 x 0.50)
Ben, Capital (P24,000 x 0.50)
Cam, Capital
62,000
24,000
12,000
12,000
62,000
To record investment by Cam for a one-third interest in capital,
with goodwill of P24,000 divided equally between Alf and Ben.
The foregoing journal entry:
a. Is acceptable
b. Should be replaced by an entry allocating an P8,000 bonus equally to Alf and to Ben
c. Should be replaced by an entry allocating a P24,000 bonus equally to Alf and to Ben
d. Should not reflect either a bonus or goodwill
15. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of P150,000 and P200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a P120,000 investment. Assuming that goodwill is
to be recognized, which partner(s) are contributing the goodwill?
a. Both new and existing partners are contributing goodwill
b. New partner is contributing goodwill
c. Existing partners are contributing goodwill
d. There is not enough information to answer this question
16. Assuming the same data in No. 15, what amount of goodwill would be disclosed on the
partnership balance sheet immediately after Jacob is admitted?
17. Susan and David are partners in a local business. They currently share profits and
losses 45/55 and have capital account balances of P250,000 and P300,000, respectively.
They are considering admitting Jane to the partnership. She will receive a 25 percent
equity interest in the partnership for a P225,000 investment. Assuming that goodwill
(revaluation) is to be recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
d. There is not enough information to answer this question
18. Assuming the same information in No. 17, what amount of goodwill would be disclosed
on the partnership balance sheet immediately after Jane is admitted?
19 At year-end, the Cisco partnership has the following capital balances:
Montana,
P 130,000
.
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rice, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
..
Craig,
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taylor,
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
110,000
80,000
70,000
Profits and losses are split on a 3:3:2:2 basis, respectively. Craig decides to leave the
partnership and is paid P90,000 from the business based on the original contractual
agreement. If the goodwill (revaluation) method is to be applied, what is the balance of
Montana’s capital account after Craig withdraws?
20. When Elsa Martin withdrew from Lewis, Martin, Noll & Ordway Partnership on January
31, 20x4, she was paid P80,000, although her capital account balance was only P60,000.
The four partners shared net income and losses equally. The journal entry of the
partnership to record Martin's withdrawal on January 31, 20x4, preferably should include
a debit of:
a. P6,667 to Lewis, Capital
c.
P80,000 to Goodwill
b. P20,000 to Goodwill
d.
P80,000 to Martin, Drawing
21. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. The partners have capital account balances of P80,000, P110,000,
and P55,000, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing all of the partnership’s assets, an increase of
P200,000. If Susan and Walter acquire Harry’s equity, what will be the amount of
Susan’s capital on the partnership’s balance sheet immediately after Harry’s withdrawal,
rounded to the nearest peso?
22. Assuming the same information in No. 21, what will be the amount of total capital on the
partnership’s balance sheet immediately after Harry’s withdrawal?
23. Frank, George, and Scott are partners with capital accounts of P160,000, P120,000, and
P210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Scott’s ownership interest for P250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
Frank’s capital account be reduced if the bonus method is applied for the withdrawal?
24. Assuming the same information in No. 23, what will be the balance in Frank’s capital
account if the bonus method is applied for the withdrawal?
25. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
P150,000, P135,000, and P225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is P22,500. Assuming that Bob’s equity
is purchased by a new partner (Deborah) approved by Claire and Jack, what is the
amount of Deborah’s initial capital account?
26. Using the same information in No. 25, except that Bob’s equity is purchased by Claire
(60 percent) and Jack (40 percent), what is the amount of Claire’s capital account at the
date of Bob’s withdrawal?
Use the following information for questions 27 to 29:
Donald, Anne and Todd have the following capital balances; P40,000, P50,000 and P30,000
respectively. The partners share profits and losses 20%, 40% and 40% respectively.
27. Anne retires and is paid P80,000 based on the terms of the original partnership
agreement. If the goodwill (revaluation of asset) method is used, what is the capital of
the remaining partners?
28. Anne retires and is paid P80,000 based on the terms of the original partnership
agreement. If the bonus method is used, what is the capital of the remaining partners?
29. What is the total partnership capital after Anne retires receiving P80,000 and using the
bonus method?
30. XX and YY are partners who have capital of P600,000 and P480,000 sharing profits in
the ratio of 3:2. ZZ is admitted as a partner upon investing P500,000 for 25% interests in
the firm, profits are to be allocated equally. Given the choice between goodwill and
bonus method, ZZ will prefer bonus or goodwill with a gain amounting to or be
indifferent.
31. XX and YY are partners who have capital of P600,000 and P480,000 sharing profits in
the ratio of 3:2. ZZ is admitted as a partner upon investing P500,000 for 25% interests in
the firm, while the other partners continue to participate profits and losses in their
original ratio.
Given the choice between goodwill and bonus method, ZZ will prefer
bonus or goodwill with a gain amounting to or be indifferent. :
32. Neal, Palmer, and Ruppe are partners in a real estate company. Their respective capital
balances and profit-sharing ratios are as follows:
Partners
Capital Balance
Neal . . . . . . . . . . . . . . . . . . . . . . . . .
P 250,000
.
Palmer . . . . . . . . . . . . . . . . . . . . . . .
150,000
.
Ruppe . . . . . . . . . . . . . . . . . . . . . . .
100,000
.
Profit-sharing ratio
4
3
3
Neal wishes to withdraw from the partnership on January 1, 2009, Palmer and Ruppe
have agreed to pay Neal P300,000 from the partnership assets for his 50% capital
interest. This settlement price was based on such factors as capital investments, sales
performance, and earning capacity. Palmer and Ruppe must decide whether to use the
bonus method or the goodwill method (recognize total goodwill implied by the payment)
to record the withdrawal, and they wish to compare the results of using the two
methods. The new profit and loss ratio is in the same relative ratio as that existing before
Neal’s withdrawal. Given the choice between goodwill and bonus method or indifferent,
Palmer will choose:
33. Using the same information in No. 32, except that the profit and loss ratio is changed to
3:2. Palmer is particularly interested in these results, because he feels that his present
contribution of time and capital is better reflected by this new profit and loss ratio. Given
the choice between goodwill and bonus method or indifferent, Palmer will choose:
34. JJ & KK partnership’s balance sheet at December 31, 20x4, reported the following:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 100,000
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,000
JJ, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40,000
KK, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40,000
On January 2, 20x4, JJ and KK dissolved their partnership and transferred all assets and
liabilities to a newly-formed corporation. At the date of incorporation, the fair value of the
new assets was P12,000 more than the carrying amount on the partnership’s book, of
which P7,000 was assigned to intangible assets and P5,000 was assigned to goodwill. JJ
and KK were each issued P5,000 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:
35.The balance sheet of Sade & Tipp LLP on April 30, 2006, was as follows:
Cash
Trade accounts receivable
Inventories
Equipment
Less: Accumulated
depreciation
Total
P 8,700Notes payable
13,250Trade accounts payable
21,760Sade, Capital
32,400Tipp, Capital
P10,000
9,800
25,110
20,000
(11,200)
______
P 64,910 Total
P64,910
The partnership was converted to S & T Corporation, with new accounting records. Sade
and Tipp received a total of 10,000 shares of P1 par common stock in exchange for the
net assets of the partnership. The accounting records of the partnership had been
maintained in accordance with generally accepted accounting principles, except that an
allowance for doubtful accounts of P800 had not been provided. The current fair values
of the inventories and equipment were P28,000 and P35,000, respectively. Sade and Tipp
shared net income and losses in a 3:2 ratio, respectively.
Immediately following incorporation, additional paid-in capital in excess of par should be
credited for:
Solutions
Multiple Choice Theories
1.
2.
3.
4.
5.
6.
7.
8.
9.
a
d
a
b
c
d
c
a
d
Problems
1. P19,000
2.
PP invests P17,000; no goodwill/revaluation recorded:
Investment in partnership
New partner's proportionate book value
[(P60,000 + P17,000) x 1/5]
Difference (investment > book value)
P 17,000
P
(15,400)
1,600
Method: Bonus to prior/old partners
PP's capital credit = P77,000 x 1/5
= P15,400
3. Messalina, P216,000; Romulus, P144,000 and Claudius, P90,000
Total capital is P450,000 (P210,000 + P140,000 + P100,000) after the new investment.
As Claudius's portion is to be 20 percent, the new capital balance would be P90,000
(P450,000 × 20%). Since P100,000 was paid, a bonus of P10,000 is being given to the
two original partners based on their profit and loss ratio: Messalina – P6,000 (60%) and
Romulus – P4,000 (40%). The increase raises Messalina's capital balance from P210,000
to P216,000 and Romulus's capital balance from P140,000 to P144,000.
4. P107,500 = [(P70,000 + P120,000 + P90,000 + P150,000)/.80](.20)
5. P337,500 = P250,000 + (P125,000 x .70)
6. P121,250 = [P120,000 - (P170,000 + P260,000 + P120,000)(.25)](.70)
7. Abele, P300,000; Boule, P480,000; Dann, P420,000
8. Brown, P156,000; Green, P99,000; Red, P45,000
9. Shrek, P195,000; Fiona, P123,750; Muffin, P56,250
10. Total partnership net assets can logically be revalued to P1,080,000 on the basis of the
price paid by Mary Ann.
11. P180,000
12. Net assets of the partnership will increase by P190,000, including Professor’s interest.
13. P120,000
14. b
15. c - (P150,000 + P200,000 + P120,000)(.20) = P94,000
16. P130,000
(P150,000 + P200,000 + P120,000)(.20) = P94,000, goodwill to existing partners
P120,000 + P0 = .2(P150,000 + $200,000 + P120,000 + goodwill)
P120,000 = P94,000 + .2 goodwill
P26,000 = .2 goodwill
Goodwill = P130,000
17. b
(P250,000 + P300,000 + P225,000)(.25) = P193,750
18. P125,000
(P250,000 + P300,000 + P225,000)(.25) = P193,750, goodwill to existing partners
P225,000 + P0 = .25 (P250,000 + P300,000 + P225,000 + goodwill)
P225,000 = P193,750 + .25 goodwill
P31,250 = .25 goodwill
Goodwill = P125,000
19.P145,000
Craig receives an additional P10,000. Since Craig is assigned 20 percent of all profits
and losses, this allocation indicates total goodwill of P50,000.
20% of Goodwill = P10,000
.20 G = P10,000
G = P10,000/.20
G = P50,000
Montana is assigned 30% of all profits and losses and would, therefore, record P15,000 of
this goodwill, an entry that raises this partner's capital balance from P130,000 to
P145,000.
20.
21.
22.
23.
24.
25.
26.
a – [(P80,000  P60,000)  3 + P6,667]
Susan’s capital account balance cannot be determined from the information given
P445,000 = P80,000 + P110,000 + P55,000 + P200,000
P24,000 = (P250,000 - P210,000)(45/75)
P136,000 = P160,000 - (P250,000 - 210,000)(45/75)
P172,500 = P150,000 + (P75,000 x .3)
P257,250 = P135,000 + (P75,000 x .25) + [P150,000 + (P75,000 x .30)](.60)
27. Donald, P55,000; Todd, P60,000
Anne receives an additional P30,000 above her capital balance. Since she is assigned
40 percent of all profits and losses, this extra allocation indicates total goodwill of
P75,000, which must be split among all partners. 40% of Goodwill = P30,000
Amount paid
Less: Book value of Anne (40%)
Partial goodwill/revaluation adjustment
Capitalized at
Goodwill/revaluation
P 80,000
50,000
P 30,000
40%
P 75,000
Goodwill/assets
Donald (20%)
Anne (40%)
Todd (40%)
Anne (P50,000 + P30,000)
Cash
75,000
15,000
30,000
30,000
80,000
80,000
Donald: P40,000 + P15,000 = P55,000
Todd: PP30,000 + P30,000 = P60,000
28. Donald, P30,000; Todd, P10,000
The P30,000 bonus is deducted from the remaining partners according to their relative
profit and loss ratio. Donald = 20% and Todd = 40% which is a 1/3, 2/3 split.
Anne
Donald (P30,000 x 2/6)
Todd (P30,000 x 4/6)
Cash
50,000
10,000
20,000
80,000
Therefore: Donald: P40,000 – P10,000 = P30,000; Todd: P30,000 – P20,000 = P10,000
29. P40,000 - refer to No. 28 (P30,000 + P10,000 = P40,000)
30. Prefer bonus method due to ZZ’s gain of P35,000
Goodwill method: Using the capital of new partner as a basis for computing total agreed
capital.
Total agreed capital (P500,000 ÷ 25%)
Less: Total contributed capital (P600,000 + P480,000 + P500,000)
Goodwill to old partners
P2,000,000
1,580,000
P 420,000
Therefore, the capital balances after admission of ZZ:
XX: [P600,000 + (P420,000 x 3/5)]
YY: [P480,000 + (P420,000 x 2/5)]
ZZ:
Total agreed capital
P852,000
648,000
500,000
P2,000,000
Bonus Method:
Total agreed capital (P600,000 + P480,000)( P500,000)
Multiplied by; ZZ’s capital interest
Agreed capital to be credited to ZZ
Contributed / invested capital of ZZ
Bonus to XX and YY (old partners)
P 1,580,000
25%
P 395,000
500,000
P 105,000
The bonus would be added to XX and YY:
XX: [P600,000 + (P105,000 x 3/5)]
YY: [P480,000 + (P105,000 x 2/5)]
ZZ
Total agreed capital
P 663,000
522,000
395,000
P 1,580,000
For the purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: if goodwill is found to exist:
Goodwill Method is used
Bonus Method is used
Add: Goodwill (allocated equally)
(Gain) Loss – Bonus method
XX
P 852,000
P 663,000
140,000
P803,000
P 49,000
YY
P 648,000
P 522,000
140,000
P 662,000
P (140,000)
Alternative 2: If goodwill is not realized and written-off as a loss:
XX
YY
Goodwill Method is used
P 852,000
P 648,000
140,000
140,000
Less:
Write-off of
goodwill
(equally)
P 712,000
P 508,000
Bonus Method is used
663,000
522,000
(Gain) Loss – Bonus method
P 49,000
P (140,000)
ZZ
P 500,000
P 395,000
140,000
P 535,000
P 35,000
ZZ
P 500,000
140,000
P 360,000
395,000
P 35,000
Note: The bonus method adheres to the historical cost concept and it is often used in
accounting practice. It is objective that is establishes total capital of the new partnership at
an amount based on actual consideration received from the new partner. The bonus method
indirectly acknowledges the existence of goodwill by giving a bonus to either old or new
partners.
The goodwill method results in the recognition of an asset implied by a transaction rather
than recognizing an asset actually purchased. Historically, goodwill has been recognized
only when purchased so that a more objective measure of its value is established. Therefore,
opponents of the goodwill method contend that goodwill is not determined objectively and
other factors may have influenced the amount of investment required from the new
partners.
Although either method can be used in achieving the required interest for the new partner,
the two methods offer the same ultimate results only:
1. When the incoming partner’s percentage share of profit and loss and percentage
interest in assets upon admission are equal, and
2. When the former partners continue to share profits and losses between themselves in
the original ratio.
If these conditions are not fully met, however, results will be different.
31. Be indifferent for the goodwill (revaluation) or bonus methods are the same.
Goodwill method: Using the capital of new partner as a basis for computing total agreed
capital.
Total agreed capital (P500,000 ÷ 25%)
P2,000,000
Less: Total contributed capital (P600,000 + P480,000 + P500,000)
1,580,000
Goodwill to old partners
P 420,000
Therefore, the capital balances after admission of ZZ:
XX: [P600,000 + (P420,000 x 3/5)]
YY: [P480,000 + (P420,000 x 2/5)]
ZZ:
Total agreed capital
P852,000
648,000
500,000
P2,000,000
Bonus Method:
Total agreed capital (P600,000 + P480,000)( P500,000)
Multiplied by; ZZ’s capital interest
P 1,580,000
25%
Agreed capital to be credited to ZZ
Contributed / invested capital of ZZ
Bonus to XX and YY (old partners)
The bonus would be added to XX and YY:
XX: [P600,000 + (P105,000 x 3/5)]
YY: [P480,000 + (P105,000 x 2/5)]
ZZ
Total agreed capital
P 395,000
500,000
P 105,000
P 663,000
522,000
395,000
P 1,580,000
For the purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: if goodwill is found to exist:
XX
YY
ZZ
Goodwill Method is used
P 852,000
P 648,000
P 500,000
Bonus Method is used
P 663,000
P 522,000
P 395,000
Add: Goodwill* (45%: 30%:25%)
189,000
126,000
105,000
P852,000
P 648,000
P 500,000
(Gain) Loss – Bonus method
P
0
P
0
P
0
*XX: 75% x 3/5 = 45%; YY: 75% x 2/5 = 30%
Alternative 2: If goodwill is not realized and written-off as a loss:
XX
YY
Goodwill Method is used
P 852,000
P 648,000
Less: Write-off of goodwill*
189,000
126,000
P 633,000
P 522,000
Bonus Method is used
663,000
522,000
(Gain) Loss – Bonus method
P
0
P
0
ZZ
P 500,000
105,000
P 395,000
395,000
P
0
32. Be indifferent for the goodwill (revaluation) or bonus methods are the same.
*Goodwill (revaluation) method:
Amount paid
P300,000
Less: Book value of interest – Neal (40%))
250,000
Partial goodwill/revaluation adjustment
P 50,000
Capitalized at
40%
Goodwill/revaluation
P125,000
Capital balances before withdrawal
Allocate goodwill*
Withdrawal of Neal
Write-off Impaired Goodwill (125,000  0.50)
Capital balances using the bonus method**
Neal
Palmer
Ruppe
250,000
150,000
100,000
50,000
37,500
37,500
300,000 187,500
137,500
(300,000)
_______
_______
187,500
137,500
_______
(62,500)
(62,500)
0
125,000
75,000
125,000
75,000
33. Prefer bonus method due to Palmer’s gain of P12,500
Neal
Capital balances before withdrawal
250,000
Allocation of goodwill*
50,000
300,000
Withdrawal of Neal
(300,000)
-0Write-off Impaired Goodwill
Palmer
150,000
37,500
187,500
_______
187,500
Ruppe
100,000
37,500
137,500
_______
137,500
125,000  0.60
125,000  0.40
Capital balances using the bonus method**
(Gain) Loss – Bonus method
________
-00
(75,000)
_______
(50,000)
112,500
87,500
125,000
75,000
12,500
12,500
**The excess paid to Neal of P50,000 would have been divided equally between Palmer
and Ruppe as follows:
Palmer
Ruppe
Capital balance before withdraw
Allocation of excess paid to Neal
Capital balance using bonus method
150,000
(25,000)
125,000
100,000
(25,000)
75,000
34. P82,000
Carrying value of net assets (P100,000 – P20,000)………………………P 80,000
Add: Adjustments to reflect fair value…………………………………… 12,000
Fair value of net assets………………………………………………………. P 92,000
Less: Common stock, P1 par (5,000 shares x 2 x P1……………………... 10,000
Additional paid-in capital…………………………………………………… P82,000
35. P54,350
Carrying value of net assets (P25,110 + P20,000))……………………… P 45,110
Add: Adjustments to reflect fair value
(P28,000 – P21,760) – P800 + [(P35,000 – (P32,400 – P11,200)]…
19,240
Fair value of net assets………………………………………………………. P
64,350
Less: Common stock, P1 par (10,000 shares x P1)……………………...
10,000
Additional paid-in capital…………………………………………………… P 54,350
Note: Refer to Problem XII for journal entries for further analysis