PARTNERSHIP FORMATION

CASE #1 FORMATION

On June 30, 2016, James, the sole proprietorship of James Company, decided to expand the company
and establish a partnership with Patrick and Paul. The partners and plan to share profits and losses as
follows: James, 50%; Patrick, 25%; Paul, 25%. They also agreed that the beginning capital balances of the
partnership will reflect this same relationship.

James asked Patrick to join the partnership because his many business contacts are expected to be
valuable during the expansion. Patrick is also contributing P28,000 cash, Paul is contributing P11,000 in
cash and marketable securities costing P42,000 to Paul but are currently worth P57,500.

James’s investment in the partnership is the James Company. He plans to pay off the notes with his
personal assets. The other partners have agreed that the partnership will assume the accounts payable.
The statement of financial position for the James Company is as follows:

James Company
Statement of Financial Position
June 30, 2016

Assets:
Cash P 10,000
Accounts receivable (net) 48,000
Inventory 72,000
Equipment (net of accumulated depreciation of P20,000) 70,000

Total assets P 200,000

Liabilities and Equity:

Accounts payable P 53,000
Notes payable 62,000
James, capital 85,000

Total liabilities and equity P 200,000

The partners agreed that the inventory is worth P85,000 and the equipment is worth half its original
cost, and the allowance established for doubtful accounts is correct.

Required:

Prepare the statement of financial position of the partnership on June 30, 2016 under each of the
following independent assumptions:

a) The partners agree to use the bonus method to record the formation.

b) The partners agree to use the goodwill approach to record the formatio

CASE #2 FORMATION

Limb and Mind form a partnership on June 1, 2015 with the following investments:

LIMB MIND
Cash P10,000 P35,000
Land 105,000
Furniture and Fixtures 35,000

Limb and Mind agree to divide profits and losses in the ratio of 70:30, respectively, and to assume the
P20,000 mortgage on the land of Mind.

a) If Limb is required to make his share in equity capital to 40%, how much must be his additional
investment?
 b) If the partners agree on each having 50% interest in the partnership and no intangible asset is to
be take up, how much should be the interest of each partner?

CASE #3 PESO AMOUNT OF INEQUITY

Carson and Lamb establish a partnership to operate a used-furniture business under the name of C&L
Furniture. Carson contributes furniture that cost P60,000 and has a fair value of P90,000. Lamb
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 Carson and 40% to Lamb.

Required: Calculate the peso amount of inequity that will result if the initial non-cash contribution of the
partners are recorded at cost rather than at fair market value.

DIVISION OF INCOME

CASE #4 SCHEDULE OF INCOME ALLOCATION

The partnership agreement of Alex, Carl and Erika provides that profits are to be divided as follows:

a) Alex is to receive a salary allowance of P10,000 for managing the business.

b) Partners are to receive 10% interest on average capital balances.

c) Remaining profits are to be divided 30%, 30% and 40% to Alex, Carl and Erika, respectively.

Alex had a capital balance of P60,000 at January 1, 2016 and had drawings of P8,000 during the year
ended December 31, 2016. Carl’s capital balance on January 1, 2016 was P90,000, and he invested an
additional P30,000 on September 1, 2016. Erika’s beginning capital balance was P110,000 and she
withdrew P10,000 on July 1, but invested an additional P20,000 on October 1, 2016.

The partnership has a net loss of P12,000 during 2016.

Required:

a) A schedule to show the allocation of partnership loss in 2016.

b) A statement of partnership capital for the year ended December 31, 2016.

CASE #5 SCHEDULE OF INCOME ALLOCATION

De Villa and De Ocampo are partners operating a small chain of grocery stores. Their business has grown
substantially over the last five year. They just amended their partnership agreement to provide for the
following distribution of profits and losses:

De Villa De Ocampo

Salaries P30,000 None

Commission on gross sales None 2%
Interest on average capital balance 8% 8%
Bonus 10% of net income after salary, commission, interest
and bonus for both Devilla and Ocampo
Remainder 50% 50%

Gross sales for 2015 were P1,000,000. Income before deducting salaries, commission, interest and
bonus was P222,000. Average capital balance was P410,000 and P390,000 for De Villa and De Ocampo.

Required: Prepare a schedule of income allocation for 2015.

CHANGES IN OWNERSHIP INTEREST

CASE #6 ADMISSION OF A NEW PARTNER

Gene and Nancy, partners in the G&N partnership, have capital balances of P100,000 and P40,000, and
share income in the ration of 4:1, respectively. Ellen is to be admitted into the partnership with a 20%
interest in the business.

Required:

Record the admission of Ellen for each of the following independent situations:

a. Ellen invests P60,000 and goodwill is to be recorded.

b. Ellen invests P60,000. Total capital is to be P200,000.
c. Ellen purchases the 20% interest by paying Gene P22,000 and Nancy P11,000. Ellen is assigned
20% of each of Gene’s and Nancy’s capital accounts.
d. Ellen invests P32,000. Total capital is to be P172,000.
e. Ellen invests P32,000 for a capital credit of P35,000. Goodwill is to be recorded.

CASE #7 ADMISSION OF A NEW PARTNER

The following condensed balance sheet is presented for the partnership of Diaz, Cruz, and Orbos, who
share profits and losses in the ratio of 4:3:3, respectively.

Cash P 40,000 Accounts payable P 150,000

Other assets 710,000 Diaz, Capital 260,000
Cruz, Capital 180,000
Orbos, Capital 160,000
Total P 750,000 Total P 750,000

Assume that the partnership decides to admit Santos as a new partner with one-fourth interest.

Required: For each of the following independent cases, determine the amount that Santos must
contribute in cash or other assets.

a. No goodwill or bonus is to be recorded.

b. Goodwill of P30,000 is to be recorded and allocated to old partners.
c. A bonus of P24,000 is to be paid by Santos and allocated to old partners.
d. The old partners agree to give Santos P10,000 of goodwill upon admission into the partnership
e. The partners agree that total resulting capital should be P820,000 and no goodwill should be
recognized.

CASE #8 RETIREMENT OF A PARTNER

Lina, Mina, and Nina are partners sharing profits on a 5:3:3 ration and have the following capital account
balances: P150,000, P90,000 and P60,000, respectively. On January 1, 2015, Olga was admitted into te
partnership by investing P40,000 with a 20% share in the profits. The old partners continue to
participate in profits proportionate to their original ratios.

For the year 2015, the partnership books showed a net profit of P50,000. It was disclosed, however, that
the following errors were made:

2014 2015
Unrecorded accrued expenses at year end 2,400
Inventory overstated 6,200
Unrecorded purchases, for which goods have been
received and inventoried 4,000
Income received in advance not adjusted 3,000
Unused supplies not taken up at year end 1,800
On January 1, 2016, Lina sold her interest to Mina for P100,000. After which Mia, Nina and Olga agreed
to share annual profits of P300,000 (already adjusted) equally among themselves. During 2016, Mina
withdrew P20,000; Nina withdrew P10,000 and Olga also withdrew P5,000.

At the end of 2017, Mina decided to retire from the partnership and was paid P425,360 cash. It was
agreed that the inventory with a book value of P50,000 would be adjusted to reflect its fair value of
P35,000 and that total goodwill is to be recognized. Net income for the year was P195,000.

Required: Compute the following:

1. a) Share of partner Lina in the 2015 corrected net income

b) Capital balance of Mina on December 31, 2015

c) Capital balance of Olga on December 31, 2016

d) Capital balance of Nina on December 31, 2017

2. If bonus is recognized upon retirement of Mina I 2017, what would be the capital balance of
Nina and Olga, respectively, on December 31, 2015?

PARTNERSHIP LIQUIDATION

CASE #9 SCHEDULE OF SAFE PAYMENTS

The condensed balance sheet of Demi and Company on January 31, 2016 follows:

ASSETS LIABILITY AND CAPITAL

Cash P66,880 Accounts payable P14,240

Non-cash assets 89,020 Darwin, loan 10,000
Goodwill 40,000 Darwin, capital 16,080
Ron, capital 64,320
Sandy, capital 72,680
Demie, capital 18,580
P195,900 P195,900

The partners agree to dissolve their partnership and began liquidation of the business on February 1,
2016. Ron was instructed to act as partner in charge of liquidation. It was agreed that distribution of
cash to the partners would be made on the last day of each month during the liquidation period,
provided that there was sufficient cash on hand for this purpose.

The partnership agreement provides that profits are to be shared: Darwin, 20%; Ron, 30%; Sandy, 30%;
and Demi, 20%.

The liquidating transactions for February, March, and April, other than cash distributions to partners,
were as follows:

Cash Accounts Liquidation

Book Value Collected Payable paid expenses paid
February P44,000 P32,800 P11,820 P5,480
March 29,900 32,220 2,420 4,920
April 55,120 12,000

Required:

Determine how much cash should be distributed to each partner in February, March, and April,
respectively, by preparing the Statement of Partnership Liquidation and the Safe Payment Schedules for
each month.
CASE #10 CASH PAYMENT PRIORITY PROGRAM

Fame, Mind and Games are partners with profit sharing ratio 6:3:1, respectively. Their balance sheets as
of July 31, 2015 contain the following:

Cash P 50,000 Liabilities P 170,000

Non-cash assets 250,000 Fame, loans 20,000
Mind, loans 40,000
Fame, capital 20,000
Mind, capital 15,000
Games, capital 35,000
P 300,000 P 300,000

Required:

Prepare a Cash Payment Priority Program to answer the following questions:

a. If the non-cash assets are sold for P180,000, how much cash should Fame, Mind, and Games be
entitled to?
b. If the non-cash assets are sold for P150,000, and creditors to whom the partnership owes P30,000
cannot be located yet, how much cash should Fame, Mind, and Games receive?
c. If cash available for distribution to the partners were P10,000, to whom should it be given?