NATIONAL UNIVERSITY - MANILA Advanced Financial Accounting & Reporting Review

College of Business and Accountancy 1. Partnership Accounting

1. PARTNERSHIP ACCOUNTING
Problem 1 (Correction of Errors)

The partnership agreement of Espedilla, Eugenio, and Jalique written in 2010 specifies that profits
and losses are determined on the accrual basis and are to b divided as follows:

Espedilla Eugenio Jalique Total

Salary allowances 150,000 150,000 50,000 350,000
Bonus (% of profits in excess of
P900,000) 20% 20%
Residual profit or loss 40% 40% 20%

On January 1, 2018, the partnership agreement was revised to provide for the sharing of profits or
losses in the following manner:

Espedilla Eugenio Jalique Total

Salary allowances 200,000 200,000 150,000 550,000
Bonus (% of profits in excess of
P900,000) 20% 20% 10%
Residual profit or loss 35% 35% 30%

The partnership books showed a profit of P1,450,000 for 2018 before the following errors were
discovered:
a. Inventory at December 31, 2016 was overstated by P70,000.
b. Inventory at December 31, 2017 was understated by P80,000.
c. Inventory at December 31, 2018 was understated by P180,000.
d. Depreciation expense for 2018 was understated by P50,000.

Required:
1. Divide the profits among the partners in 2018 with the effects of prior years’ errors to be
treated as adjustments to beginning capital balances.
2. Assume that the reported profits for 2016 and 2017 were P850,000 and P1,100,000,
respectively, prepare the correcting entry on January 1, 2018.

Problem 2 (Incorporation of a Partnership)

Ayento and Bajade are partners sharing profits and losses in the ratio of 1:2, respectively. On July 1,
2018, the decided to form AB Corporation by transferring the assets and liabilities from the
partnership to the corporation in exchange for its shares of stock.

The following is the post-closing trial balance of the partnership:

1
NATIONAL UNIVERSITY - MANILA Advanced Financial Accounting & Reporting Review
College of Business and Accountancy 1. Partnership Accounting

Debit Credit
Cash 45,000.00
Accounts Receivable, net 60,000.00
Inventory 90,000.00
Property and Equipment, net 174,000.00
Liabilities 60,000.00
Ayento, Capital 94,800.00
Bajade, Capital 214,200.00
Total 369,000.00 369,000.00

It was agreed that adjustments be made to the following assets to be transferred to the corporation:

Accounts Receivable 40,000

Inventory 68,000
Property and Equipment 180,600

AB Corporation was authorized to issue P100 par preference share and P10 par ordinary share.
Ayento and Bajade agreed to receive for their equity in the partnership 720 shares of the preference
shares of stock each, plus multiples of 10 shares of ordinary shares for their remaining interest.

Required:
1. Compute for the total number of preference and ordinary shares to be issued by the
corporation in exchange for the assets and liabilities of the partnership.
2. Prepare entries to record the incorporation of the partnership.