MCQ Partnership Formation 1.On July 1,1997, Monuz and Pardo form a partnership, agreeing to share profits and losses in the ratio of 4:6,respectively. Monuz contributed a parcel of land that cost him P25,000. Pardo contributed P50,000 cash. The land was sold for P50,000 on July 1,1997 four hours after formation of the partnership. How much should be recorded in Munoz capital account on formation of the partnership? a) b) c) d) P10,000 P20,000 P25,000 P50,000 2.Moonbits partnership had a net income of P8,000.00 for the month ended September 30,1997. Sunshine purchased an interest in the Moonbits partnership of Liz and Dick by paying Liz P 32,000.00 for half of her capital and half of her 50 percent profit sharing interest on October 1,1997. At this time Liz capital balance was P24,000.00 and Dick capital balance was P56,000.00. Liz should receive a debit to her capital account of: a) b) c) d) P 12,000.00 P 20,000.00 P 16,000.00 P 26,667.00 3.On March 1,1997, Santos and Pablo formed a partnership with each contributing the following assets: Cash Machinery and Equipment Building Furniture & Fixtures Santos P 30,000 25,000 -010,000 Pablo P 70,000 75,000 225,000 -0- The building is subject to a mortgage loan of P80,000, which is to be assumed by the partnership. The partnership agreement provides that Santos and Pablo share profits and losses 30% and 70%, respectively. On March 1,1997 the balance in Pablo’s capital account should be: a) b) c) d) P 290,000.00 P 305,000.00 P 314,000.00 P 370,000.00 4. The business assets of John and Paul appear below: John P 11,000 234,536 120,035 603,000 Cash Accounts Receivable Inventories Land Building Furniture & Fixtures Other Assets Total 50,435 2,000 P 1,020,916 Accounts Payable Notes Payable John, Capital Paul, Capital Total 178,940 200,000 641,976 P 1,020,916 Paul P 22,354 567,890 260,102 428,267 34,789 3,600 P 1,317,002 243,650 345,000 728,352 P 1,317,002 John and Paul agreed to form a partnership contributing their respective assets and equities subject to the following adjustments: a. Accounts receivable of P 20,000 in John’s books and P 35,000 in Paul’s are uncollectible. b. Inventories of P 5,500 and P 6,700 are worthless in John’s and Paul’s respective books. c. Other assets of P 2,000 and P 3,600 in John’s and Paul’s respective books are to be written off. The capital account of the partners after the adjustment will be: a) John’s Paul’s b) John’s Paul’s c) John’s Paul’s d) John’s Paul’s P 614,476 P 683,052 P 615,942 P 717,894 P 649,876 P 712,345 P 613,576 P 683,350 5. The following is the condensed balance sheet of the partnership Jo, Li and Bi who share profits and losses in the ratio of 4:3:3. Cash Other Assets Jo, receivable Total P 180,000 1,660,000 40,000 P1,880,000 Accounts Payable Bi, Loan Jo, Capital Li, Capital Bi, Capital P 420,000 60,000 620,000 400,000 380,000 Total P1,880,000 Assume that the assets and liabilities are fairly valued on the balance sheet and the partnership decides to admit Mac as a new partner, with a 20% interest. No goodwill or bonus is to be recorded. How much Mac contributes to cash or other assets? a) b) c) d) P 350,000 P 280,000 P 355,000 P 284,000 Solution and Explanation 1. D. The requirement is Munoz’ capital account balance upon formulation of the partnership. As in the case with all entities, investment in the capital of a partnership should be measured at the fair market value of the assets contributed. In this case, the FMV of the land would be measured at the fair market value by its sales price on the date of sale (P50,000) which is also the date of the partnership formation. Recording the land of Munoz’ cost would result in the partners sharing the gain from the sale in accordance with their profit and loss ratio. This is not equitable since the gain accrued while the land was held by Monuz. 2. A. Under the admission by purchase only the transfer of the capital purchase by the selling partner (Liz) to the buying partner (Sunshine) is recorded. Therefore 50% of the capital of Liz (P24,000) or P 12,000 is to be debited to her capital account. 3. A. P 290,000.00 Assets contributed by Pablo Less: Mortgage assumed by partnership Capital balance of Pablo P 370,000 (80,000) P 290,000 Note that the profit and loss sharing ratio is irrelevant to the solution of this problem. 4. A. John’s P 614,476 Paul’s P 683,052 Capital balance before adjustments Adjustments: Uncollectible accounts Inventories Written Off Other Assets written off Capital balances after adjustments John P641,976 Paul P 728,352 (20,000) (5,500) (2,000) P 614,476 (35,000) 6,700 (3,600) P 683,052 5. A. P 350,000 Total agreed capital of the new partnership ( 1,400,000 ÷ 80% ) 1,750,000 Total contributed capital of the old partners Mac’s contribution P ( 1,400,000) P 350,000 1. Partnership capital and drawing accounts are similar to the corporate A. Paid-in capital, retained earnings, and dividend accounts B. Retained earnings account. C. Paid-in capital and retained earnings accounts. D. Preferred and common stock accounts 2. For individuals who were previously sole proprietors form a partnership. Each partner contributes inventory and equipment for use by the partnership. What basis should the partnership use to record the contributed assets? A. Inventory at the lower of FIFO cost or market. B. Inventory at the lower of weighted-average cost or market. C. Equipment at each proprietor’s carrying amount. D. Equipment at fair value. 3. Meca and Came formed a partnership on January 1,2015 with each contributing the following assets: Meca Came Cash P30,000 P70,000 Machinery 25,000 75,000 Inventory 10,000 Building 225,000 The building is subject to a mortgage loan of P90,000 which is to be assumed by the partnership. On January 1,2015, the capital account of Came would show a balance of: A. P280,000 B. P305,000 C. P314,000 D. P370,000 4. Alma and Becca have just formed a partnership. Alma contributed cash of P176,400 and office equipment that cost P75,600. The equipment had been used in his sole proprietorship and had been 70% depreciated, the current value of the equipment is P50,400. Alma also contributed a note payable of P16,800 to be assumed by the partnership. Alma is to have a 30% interest in the partnership. Becca contributed P256,000 land at fair market value. Becca should make additional investment of a. P234,000 b. P490,000 c. P256,000 d. P210,000 5. The business assets of LL and MM appears below: LL MM Cash P11,000 P22,354 Accounts Receivable 234,536 567,890 Inventories 120,035 260,102 Land 603,000 ---------- Building ---------- 428,267 Furniture and Fixtures Other Assets 50,345 2,000 P1,020,916 34,789 3,600 P1,317,002 Accounts Payable Notes Payable P178,940 P 243,650 200,000 LL,Capital 641,976 MM, Capital ---------- 345,000 ------------728,352 P1,020,916 P1,317,002 LL and MM agreed to form a partnership contributing their respective assets and equities subject to the following adjustments: a. Accounts receivable of P20,000 in LL’s books and P35,000 in MM’s are uncollectible. b. Inventories of P5,500 and P6,700 are worthless in LL’s and MM’s respective books. c. Other assets of P2,000 and P3,600 in LL’s and MM’s respective books are to be written off. The capital account of the partners after the adjustments will be: a. LL, P615,942; MM, P717,894 c. LL, P640,876; MM, P683,050 b. LL, P640,876; MM, P712,345 d. LL, P614,476; MM, P683,052 6. Langley invests his delivery van in a computer repair partnership with McCurdy. What amount should the van be credited to Langley’s partnership capital? A. The tax basis. B. The fair value at the date of contribution. C. Langley’s original cost. D. The assessed valuation for property tax purposes. 7. On April 30, 1993, Algee, Belger, and Ceda formed a partnership by combining their separate business proprietorships. Algee contributed cash of $50,000, Belger contributed property with a $36,000 carrying amount, a $40,000 original cost, and $80,000 fair value. The partnership accepted responsibility for the $35,000 mortgage attached to the property. Ceda contributed equipment with a $30,000 carrying amount, a $75,000 original cost, and $55,000 fair value. The partnership agreement specifies that profits and losses are to be shared equally but is silent regarding capital contributions. Which partner has the largest April 30, 1993, capital account balance? A. Algee. c. Ceda. B. Belger. d. All capital account balance are equal. 8. Jamby and Minam just formed a partnership. Jamby contributed cash of P2,205,000 and office equipment that cost P945,000. The equipment had been used in her sole proprietorship and had been 70% depreciated, the appraised value of the equipment is P630,000. Jamby also contributed a note payable of P210,000 to be assumed by the partnership. Jamby is to have 60% interest in the partnership. Miriam contributed only P1,575,000 merchandise inventory at fair market value. Assume the use of bonus method, the partners’ capital must be in conformity with their profit and loss ratio upon formation. In the formation of a partnership, which of the following is true? A. B. C. D. 9. a. b. c. d. The agreed capital of Jamby upon formation is P2,625,000 The total agreed capital of the partnership is P4,375,000 The capital of Miriam will increase by P105,000 as a result of the transfer of capital There is either an investment or withdrawal of asset under the bonus method Alley and Barvey established a partnership on December 1, 20x4. They agreed that Alley will contribute cash of P20,000; Land of P15,000 and Building of P50,000. Alley’s accounts payable of P10,000 is to be assumed by the partnership. Barvey will contribute cash of P30,000 and furniture and fixtures of P25,000. Assume that each partner initially should have an equal interest in partnership capital with no contribution of intangible asset (bonus method). How much are the capital balances of each partner? P85,000 for Alley and P55,000 for Barvey P65,000 for Alley and P65,000 for Barvey. P75,000 for Alley and P55,000 for Barvey P75,000 for Alley and P75,000 for Barvey. 10. The partnership agreement is an express contract among the partners (the owners of the business). Such an agreement generally does not include a. A limitation on a partner’s liability to creditors. b. The rights and duties of the partners. c. The allocation of income between the partners. d. The rights and duties of the partners in the event of partnership dissolution. 1. The partnership form of business is: a. An economic entity. b. A separate legal entity, just as a corporation is a legal entity. c. A taxable entity. d. A fiscal entity. 2. A distinct and major advantage of the professional corporation form of organization in comparison with the partnership form of organization is: a. Limited liability with respect to damages arising from professional services. b. Greater allowable tax deductions for retirement plans. c. Ease of formation d. Book value e. Historical cost 3. Which of the following is not a characteristic of a partnership? a. The partnership itself pays no income taxes. b. It is easy to form a partnership. c. Any partner can be held personally liable for all debts of the business. d. A partnership requires written Articles of Partnership. e. Each partner has the power to obligate the partnership for liabilities. 4. The advantages of the partnership form of business organization, compared to corporations, include a. Single taxation b. Ease of raising capital c. Mutual Agency d. Limited Liability e. Difficulty of formation 5. Which of the following is NOT a characteristic of the proprietary theory that influences accounting for partnerships? a. Partners’ salaries are viewed as a distribution of income rather than a component of net income. b. A partnership is not viewed as a separate, distinct, taxable entity. c. A partnership is characterized by limited liability. d. Changes in the ownership structure of a partnership result in the dissolution of the partnership. PROBLEMS 6. Albert, Claude, and Jamie form a partnership by contributing P25,000, P70,000, and P80,000, respectively. In addition, the partners agree that Albert should receive P20,000 of goodwill because of his special skills relevant to this business. What amount of capital will exist for Claude when the partnership is formed? a. P60,000 b. P65,000 c. P70,000 d. Some other amount 7. Bill and Ken enter into a partnership agreement in which Bill is to have a 60% interest in capital and profits and Ken is to have a 40% interest in capital and profits. Bill contributes the following: Cost Fair value Land P10,000 P20,000 Building P100,000 P60,000 Equipment P20,000 P15,000 There is a P30,000 mortgage on the building that the partnership agrees to assume. Ken contributes P50,000 cash to the partnership. Bill and Ken agree that Ken’s capital account should equal Ken’s P50,000 cash contribution and that goodwill (revaluation of asset) should be recorded. Goodwill (revaluation of asset) should be recorded in the amount of: a. P10,000 b. P15,000 c. P16,667 d. P20,000 8. Paul, Jeremy, and Juan are forming a partnership. Juan contributes a building having an historical cost, accumulated depreciation, and market value of P290,000, P100,000, and P400,000, respectively. The building is initially recorded on the partnership’s books at Juan’s book value (P190,000). Two years later the building is sold for a P270,000 gain. What portion of the profit or loss should be allocated to Juan? a. P20,000 b. P90,000 c. P210,000 d. P230,000 9. Jones and Smith formed a partnership with each partner contributing the following items: Jones Smith Cash P80,000 P40,000 Building-Cost to Jones 300,000 -Fair Value 400,000 Inventory- Cost Smith 200,000 -Fair Value 280,000 Mortgage Payable Account Payable 120,000 60,000 Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed by the Jones and Smith partnership. What is the balance in each partner’s capital account for financial accounting purposes? a. Jones- P350,000 and Smith- P270,000 b. Jones- P260,000 and Smith- P180,000 c. Jones- P360,000 and Smith- P260,000 d. Jones- P500,000 and Smith- P300,000 10. On July 1, ML and PP formed a partnership, agreeing to share profits and losses in the ratio of 4:6, respectively. ML contributed a parcel of land that cost her P25,000. PP contributed P50,000 cash. The land was sold for P50,000 on July 1, four hours after formation of the partnership. How much should be recorded in ML’s capital Chapter 1 1. B. 2. A. 3. D. 4. A. 5. C. 6. C. 7. A. 8. B. 9. C. 10. D. account on the partnership formation? a. P10,000 b. P20,000 c. P25,000 d. P50,000 1.1 A partnership is formed by two individuals who were previously sole proprietors. Property other than cash which is part of the initial investment in the partnership would be recorded for financial accounting purposes at the: a. Proprietors’ book values or the fair value of the property at the date of the investment, whichever is higher b. Proprietors’ book values or the fair value of the property at the date of the investment, whichever is lower. c. Proprietors’ book values of the property at the date of the investment. d. Fair value of the property at the date of the investment. 1.2. When property other than cash is invested in a partnership, at what amount should the non-cash property be credited to the contributing partner’s capital account? a. Contributing partner’s tax basis. b. Contributing partner’s original cost. c. Assessed valuation for property tax purposes. d. Fair value at the date of contribution. 1.3. An advantage of the partnership as a form of business organization would be a. b. c. d. Partners do not pay income taxes on their share in partnership income. A partnership is bound by the act of the partners A partnership is created by mere agreements of the partners A partnership may be terminated by the death or withdrawal of a partner. 1.4. When property other than cash i invested in a partnership, at what amount should the noncash property be credited to the contributing partner’s capital account? a. b. c. d. Fair value at the date of contribution Contributing partner’s original cost Assessed valuation for property tax purposes Contributing partner’s tax basis 1.5. Partnership capital and drawings are similar to the corporate a. b. c. d. Paid in capital, retained earnings and dividends accounts Retained earnings account Paid in capital and retained earnings accounts Preferred and common stock accounts PROBLEMS 1.6. Abena and Buendia establish a partnership to operate a used-furniture business under the name of A and B Furniture. Abena contributes furniture that cost P60,000 and has a fair value of P90,000. Buendia contributes P30,000 cash and delivery equipment that cost P40,000 and has a fair value of P30,000. The partners agree to share profits and losses 60% to Abena and 40% to Buendia. The peso amount of gain (loss) that will result if the initial noncash contributions of the partners are recorded at cost rather than fair market value will be a. b. c. d. P30,000 and (P10,000) to Abena and Buendia, respectively P12,000 and P8,000 to Abena and Buendia, respectively (P18,000) and P18,000 to Abena and Buendia, respectively P 18,000 and (P18,000) to Abena and Buendia, respectively 1.7. On April 30, 2003, Bautista, Jimenez and Laxamana formed a partnership by combining their separate business proprietorships. Bautista contributed cash of P100,000. Jimenez contributed property with a carrying amount of P72,000, original cost of P80,000, and fair value of P160,000. The partnership accepted responsibility for the P70,000 mortgage attached to the property. Laxamana contributed equipment with a carrying amount of P60,000, original cost of P150,000, and fair value of 110,000. The partnership agreement specifies that profits and losses are to be shared equally but is silent regarding capital contributions. Which partner has the largest capital account balance as of April 30, 2003? a. Bautista b. Jimenez c. Laxamana d. All capital account balances are equal 1.8. G. Macalino and W. Nolasco form a partnership and agree to divide initial capital equally, even though Macalino contributed P100,000 and Nolasco gave P84,000 in identifiable assets. Under the bonus approach to adjust capital accounts, Nolasco’s unidentifiable assets should be debited for a . P8,000 c. P-0- b . P16,000 d . P46,000 1.9. L. Molina and R. Nepomuceno enter into a partnership agreement in which Molina is to have a 60% interest in capital and profits and Nepomuceno is to have a 40% interest in capital and profits. Molina contributes the following: Cost Fair Value Land P 20,000 P 40,000 Building 200,000 120,000 Equipment 40,000 30,000 There is a P60,000 mortgage on the building that the partnership agrees to assume. Nepomuceno contributes P100,000 cash to the partnership. Molina and Nepomuceno agree that Nepomuceno’s capital account should equal Nepomuceno’s P100,000 cash contribution and that goodwill should be recorded. Goodwill should be recorded in the amount of a. P20,000 c. P33,333 b. P30,000 d. P40,000 1.10. On March 1, 2003, Z Roxas and B. Poe decided to combine their business and form a partnership. The balance sheet of Roxas and Poe on March 1, before adjustment is presented below. Cash Accounts Receivable Roxas Poe P 9,000 P 3,750 18,500 13,500 Inventories 30,000 19,500 Furniture and fixtures (net) 30,000 9,000 Office Equipment (net) 11,500 2,750 6,375 3,000 P105,375 P51,500 Accounts Payable P 45,750 P 18,000 Z. Roxas, Capital 59,625 Prepaid Expenses B. Poe, Capital 33,500 P105,375 P 51,500 They agreed to provide 3% for doubtful accounts on their accounts receivable and found Poe’s furniture to be under depreciated by P900. If each partner’s share in equity is to be equal to the net assets invested, the capital accounts of Roxas and Poe would be: a. P58,170 and P33,095 respectively b. P58,320 and P32,945 respectively c. P59,070 and P32,195 respectively d. P104,820 and P50,195 respectively 1. Which of the following is not a characteristic of a partnership? a. The partnership itself pays no income taxes b. It is easy to form a partnership c. Any partner can be held personally liable for all debts of the business d. A partnership requires written Article of Partnership 2. The partnership form of business is: a. An economic entity b. A taxable entity c. A fiscal entity d. A separate legal entity, just as a corporation is a legal entity 3. Which of the following is not an advantage of partnership over a corporation? a. Ease of formation b. Unlimited liability c. The elimination of taxes at the entity level d. All of the above 4. A partner’s withdrawal of assets from a limited liability partnership that is considered a permanent reduction of in that partner’s equity is debited to the partner’s: a. Drawing account b. Retained earnings account c. Capital account d. Loan receivable account 5. For financial accounting purposes, assets of an individual partner contributed to partnership are recorded by the partnership at: a. Historical cost b. Book value c. Fair market value d. Lower of cost or market 6. On December 1, 2009, DD and EE formed a partnership with each contributing the following asset at fair market values: DD 9,000 13,500 EE 18,000 Cash Machinery and Equipment 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 DD and EE share profits and losses, 40% and 60%, respectively and partners agreed to bring their capital balances in proportion to the profit and loss ratio and using the capital balance of EE as the basis. The additional cash investment made by DD should be: a. 18,000 b. 85,500 c. 134,100 d. 166, 250 DD, Capital= 9+13.5+13.5=36 EE, Capital= 18+90+27-54=81 81/.60=135 135*.40=56-36=18 A 7. JJ and KK are joining their separate business to form a partnership. Cash and noncash asset are to be contributed for a total capital of 300,000. The noncash assets to be contributed and liabilities to be assumed are: JJ KK Book Value Fair Value Book Value Fair Value Accounts Receivable 22,500 22,500 Inventories 22,500 33,750 60,000 67,500 Equipment 37,500 30,000 67,500 71,250 Accounts Payable 11,250 11,250 7,500 7,500 The partner’s capital are to be equal after all contributions of assets and assumptions of liabilities. The total assets of the partnership. a. 318,750 b. 300,000 c. 281,250 d. 225,000 Equity=Assets-Liabilities 300,000=X-(11,250+7,500) Assets=X=318,750 A 8. Refer to number 8, the amount of cash that each partner must contribute. a. JJ=75,000; KK=18750 b. JJ=75,000; KK=11,250 c. JJ=161,250; KK= 157,500 d. JJ= 127,500; KK= 11,250 For JJ; 150,000=Cash to be contrubuted+22,500+33,750+30,000+(-11250) Cash to be contributed=75,000 For KK; 150,000=Cash to be contributed+67,500+71,250+(-7500) Cash to be contributed=18,750 A 9. Jones and Smith formed a partnership with each partner contributing the following items: Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed by the Jones and Smith partnership. Refer to the above information. What is the balance in each partner’s capital account for financial accounting purposes? C Jones Assets at fair value Jones: 80,000+400,000 Smith: 40,000+280,000 Less: Liabilities assumed Capital Smith 480,000 120,000 360,000 320,000 60,000 260,000 10. MM, NN, and OO are partners with capital balances on December 31, 2012 of P300,000, P300,000 and P200,000, respectively. Profits are shared equally. OO wishes to withdraw and it is agreed that OO is taken certain equipment with second-hand value of P50,000 and a note for the balance of OO’s interest. The equipment are carried on the books at P65,000. Brand new equipment may cost P80,000. Compute for: (1) OO’s acquisition of the secondhand equipment will result to reduction in capital; (2) the value of the note that will OO get from the partnership’s liquidation, a. (1) 15,000 each for MM and NN (2) 150,000 b. (1) 5,000 each for MM, NN, and OO (2) 145,000 c. (1) 5,000 each for MM, NN, and OO (2) 195,000 d. (1) 7,500 each for MM and NN (2) 145,000 B 1. Reduction in Capital: Equipment at carrying value Equipment at secondhand value (fair value) 65,000 50,000 Decrease in equipment Multiply by: Profit & Loss Ratio of MM, NN,and OO Reduction in capital 2. Notes Payable to OO Unadjusted Capital of OO Less: Share in the decrease of equipment Adjusted capital of OO Less: Equipment receive at secondhand value Value of notes payable Incidentally, the juournal entry would be: OO, Capital NN, Capital MM, Capital Eqipment, carrying value 15,000 1/3 5,000 200,000 5,000 195,000 50,000 145,000 200,000 5,000 5,000 65,000 1. Cat and Dog formed a partnership, each contributing assets to the business. Cat contributed inventory with a current market value in excess of its carrying amount. Dog contributed real estate with a carrying amount in excess of its current market value. At what amount should the partnership record each of the following assets? a. b. c. Inventory Market value Market value Carrying amount Real estate Market value Carrying amount Market value d. Carrying amount Carrying amount 2. Recording of Cash Investment a. Face Value b. Agreed value c. memorandum entry d. none of these c. memorandum entry d. none of these c. memorandum entry d. none of these 3. Recording of Property Investment a. Face Value b. Agreed value 4. Recording of the investment(industry) a. Face Value b. Agreed value 5. Which of the following statements are true when comparing corporations and partnerships? a. b. c. d. Partnership entities provide for taxes at the same rates used by corporations In theory, partnerships are more able to attract capital Like corporations, partnerships have an infinite life Unlike shareholders, general partners may have liability beyond their capital balances Problems 1. On May 1, 2015, Cat and Meow formed a partnership and agreed to share profits and losses in the ratio of 3:7, respectively. Cat contributed a parcel of land that cost her P10,000. Meow contributed P40,000 cash. The land has a fair value of P15,000. Cat insisted that the value of the land should be P18,000. The partners agreed to value the land at P18,000. What amount should be recorded in Cat’s capital account on formation of the new partnership? a. P18,000 b. P17,400 c. P15,000 d. P10,000 2. On July 1, Manny and Floyd formed a partnership, agreeing to the profit and loss in the ratio of 4:6, respectively. Manny contributed a parcel of land that cost him P25,000. Floyd contributed P50,000 cash. The land was sold for P50,000 on July 1, for hours after formation of the partnership. How much should be recorded in Manny’s capital account on the partnership formation? a. P10,000 b. P20,000 c. P25,000 d. P50,000 3. Bill and Ken enter into a partnership agreement in which Bill is to have a 60% interest in capital and profits and Ken is to have a 40% interest in capital and profits. Bill contributes the ff: Cost Fair Value Land Building Equipment P10,000 P100,000 P20,000 P20,000 P60,000 P15,000 There is a P30,000 mortgage on the building that the partnership agrees to assume. Ken contributes P50,000 cash to the partnership. Bill and Ken agree that Ken’s capital account should equal Ken’s P50,000 cash contribution and that goodwill should be recorded. Goodwill should be recorded in the amount of: a. P10,000 b. P15,000 c. P16,667 d. P20,000 Solution: Cash contribution of Ken P50,000 Divided by Ken capital interest ÷ 40% Total agreed capital P125,000 Less: Bill’s Contribution 65,000 Ken’s agreed capital P 60,000 Less: Ken’s contribution 50,000 Goodwill P 10,000 For 4 and 5 Cat admits Dog as partner in business. Accounts in the ledger for Cat on November 30, 2015, just before the admission of Dog, show the following balances: Cash P6,800 Accounts Receivable P14,200 Merchandise Inventory P20,000 Accounts Payable P8,000 Cat, capital P33,000 It is agreed that or the purposes of establishing Cat’s interest the following adjustments shall be made: a. An allowance for doubtful accounts of 3% of accounts receivable is to be established b. The merchandise inventory is to be valued at P23,000 c. Prepaid salary expenses of P600 and accrued rent expense of P800 are to be recognized. 4. Dog is to invest sufficient cash to obtain a 1/3 interest in the partnership. Cat’s adjusted capital before the admission of Dog a. P28,174 b. P35,347 c. P35,374 d. P36,374 5. The amount of cash investment by Dog a. P11,971 b. P35,347 c. P17,687 Solution: Cat, capital P33,000 Less: Allowance for doubtful accounts 426 Accrued rent expense 800 Total P 31,774 Add: Inventory 3,000 Prepaid rent 600 Cat’s adjusted capital P 35,374 d. P18,790 Cat’s capital contribution P35,347 Divided by Cat’s capital interest ÷ 2/3 Total agreed capital P53,061 Multiply by Dog’s capital interest x 1/3 Dog’s cash contribution P17,687