Chapter 1Problem IRequirement 1: Assuming that A and B agree
that each partner is to receive a capital credit equal to the
agreed values of the net assets each partner invested: To record
adjustments: nothing to adjust since both of them have no set of
books. To close the books: nothing to close since both of them have
no set of books. To record investments: Partnership books:Cash.
120,000Inventory. 120,000Equipment.. 240,000A, capital...
480,000Initial
investment.Cash..120,000Lan..240,000!uilin".480,000#ort"a"e
paya$le.240,000 !, capital..%00,000Initial investment.Requirement
2: Assuming that A and B agree that each partner is to receive an
equal capital interest. To record adjustments: nothing to adjust
since both of them have no set of books. To close the books:
nothing to close since both of them have no set of books. To record
investments:Partnership books: Bonus
Approach:Cash120,000Inventory120,000Equipment.... 240,000A,
capital..480,000Cash. 120,000Lan. . 240,000!uilin" .
480,000#ort"a"e paya$le240,000 !, capital.. %00,000!,
capital....%0,000A, capital%0,000Total agreed capital (P4!"!!! #
P$!!"!!!%&.P '"!!"!!!(ultiplied b): *apital interest
(equal%&&&.......'+,Partner-s individual capital
interest&&&&&.P .4!"!!!/ess: A-s capital
interest&&&&&&&&&..&.4!"!!!Bonus
to
A&&.&&&&&&&&&&&&&&..P$!"!!!
Revaluation !ood"ill#
Approach:Cash120,000Inventory120,000Equipment.240,000A,
capital..480,000Cash 120,000Lan.240,000!uilin"... .480,000#ort"a"e
paya$le240,000 !, capital.. %00,000 Assets &or "oo'ill or
intan"i$le asset(... 120,000A, capital.... 120,000)otal a"ree
capital &*%00,000 + 1+2(...*1,200,000Less, )otal contri$ute
capital &*480,000 -* %00,000(....1,080,000.oo'ill to A...*
120,000Problem IIAgreed 0air 1alues 2nvested b) 3ohn2nvestedb) 3e4
2nvested b) 3ane *ashP'!!"!!! 5 5 5 5 5 56quipmentP ''!"!!!5 5
5Total assets'!!"!!! P''!"!!!!7ote pa)able assumed b) partnership 5
5 5 8!"!!!5 5 57et assets invested P'!!"!!! P!"!!! P !1$ Bonus
%ethod 2$ !ood"ill %ethod Revaluation o& Asset#*ash '!!"!!!*ash
'!!"!! 6quipment ''!"!!!6quipment ''!"!! 9ood:ill ;!"!!!7ote
Pa)able 7ote Pa)able 8!"!!3ohn" *apital 3ohn" *apital ;!"!! 3e4"
*apital 3e4" *apital ;!"!!3ane" *apital 3ane" *apital ;!"!! ,. The
bonus method is used :hen 3ohn and 3e4 recognis capital account.The
good:ill method is used :hen the partners recogni *apital0or the
Gear 6nded Eecember 8'" ,!H4Tom3ulieTotal *apital balances" 3an. '
P! P! P !Add: Additional investments .'"!!! ,."!!!F$"!!!7et income
allocation88"..8 '$"44F.!"!!!Totals P 4"..8 P 4'"44F P',$"!!!/ess:
Iithdra:als'."!!!',"!!! ,F"!!!*apital balances" Eec. 8' P $;"..8P
,;"44FP;;"!!!Problem I'Book o& ( is to be retained b) the ne"
partnership. The follo:ing procedures are to be follo:ed:2ndividual
versus Dole ProprietorBooks of2ndividualJBooks of
DoleProprietorAdjusting entries 7+AGes*losing entries (real
accounts% 7+A7o2nvestmentsGesJJBalance DheetGes J Books of ?K
Partnership books JJ 2nvestments of individualK additional
investments or :ithdra:als of sole proprietor.1. Books of Sole
Proprietor (H):
a$ To record adjustments: a. /, capital 1,800Allo'ance 0or
ou$t0ul accounts.1,800 Aitional provision compute as 0ollo's,
1equire allo'ance, 102 3 *48,000 4 * 4,800Less, *revious $alance
5,000Aitional provision * 1,800$. Interest receiva$le or accrue
interest income.5,%00/, capital5,%00 Interest income 0or nine
months compute as 0ollo's,*%0,000 3 82 3 6+12 4 *5,000.c. /,
capital.. %,000#erchanise inventory..%,000 7ecline in the value o0
merchanise.*28,000 9 *21,000 4 *%,000.. /, capital.4,800Accumulate
epreciation.4,800 :ner epreciation.e. *repai e3penses...2,400/,
capital2,400E3penses pai in avance.
/, capital 8,200Accrue e3penses.8,200:nrecore e3penses.*ote: All
adjustment that reLects nominal accounts should be coursed through
the capital account" since all nominal accounts are alread) closed
atthe time of formation. b$ To close the books: nothing to close
since the books of ? :ill be retained.c$To record investment:Cash.
11%,100 I, capital11%,100 Initial investment compute as
0ollo's,:na;uste capital o0 /* 24%,000A &euct(, a;ustments,a.
7ou$t0ul accounts......&1,800($. Interest income.. 5,%00c.
7ecline in the value o0 merchanise.&%,000(. :nerAs capital
account.)he "oo'ill metho is use 'hen the partners reco"ni?e the
intan"i$le nature o0 the sBills =ane is $rin"in" to the
partnership. /o'ever, the capital accounts are equali?e $y
reco"ni?in" an intan"i$le asset an a corresponin" increase in the
capital accounts o0 the partners. :nless the intan"i$le asset can
$e speci@cally ienti@e, such as a patent $ein" investe, it shoul
not $e reco"ni?e, $ecause o0 a lacB o0 ;usti@cation 0or "oo'ill in
a ne' $usiness.'$.c O refer to 7o. '. for computation.'F.a 00"
capital: @nadjusted balance P.F"!!! Adjustments:Accumulated
depreciation ('".!!%Allo:ance for doubtful account(',"!!!%Adjusted
balanceP 48".!!
99" capital: @nadjusted balance P4;".!!Adjustments:Accumulated
depreciation (4".!!%Allo:ance for doubtful account(4".!!%Adjusted
balanceP 4!".!!'.c 99-s adjusted capital (see no. 'F% P
4!".!!Eivide b) 99-s P T / share percentage4!NTotal partnership
capital P '!'",.!(ultipl) b) 00-s P T / share percentage$!N00-s
capital credit$!"F.!00-s contributed capital (see no.
'%48".!!Additional cash to be invested b) 00 P 'F",.!';.dTotal
capital of the ne: partnership (see no. ,!%P ,;$"F.(ultipl) b) AA-s
interest,!N*ash to be invested b) AA P .;"8F.,!. (a% BB PP Total
($!N%(4!N% @nadjusted capital
balancesP'88"!!!P'!"!!!P,4'"!!!Adjustments:Allo:ance for bad debts
( ,"F!!%( '"!!% ( 4".!!%2nventories 8"!!!,"!!! ."!!!Accrued
eHpenses ( ,"4!!% ( '"$!!% ( 4"!!!%Adjusted capital
balancesP'8!";!!P'!$"$!! P,8F".!!Total capital before the formation
of the ne: partnership (see above% P ,8F".!!Eivide b) the total
percentage share of BB and PP (.!N # 8!N%!NTotal capital of the
partnership after the admission of AA P ,;$"F.,'.aAgreed *apital
*ontributed *apitalDettlementBB P'4"48F..! (.!N H P,;$"F.%P
'8!";!!P 'F".8F..!PP ;"!$,..! (8!N H P,;$"F.%
'!$"$!!('F".8F..!%Therefore" BB :ill pa) PP P'F".8F..!,,.cTotal
partnership capital (P''8"$4!+'+8% P 84!";,!/ess EE-s
capital''8"$4!**-s capital after adjustments P ,,F",!Adjustments
made:Allo:ance for doubtful account (,N H P;$"!!!%'";,!(erchandise
inventor)( '$"!!!%Prepaid eHpenses( .",!!%Accrued eHpenses
8",!!**-s capital before adjustmentsP ,''",!!,8.aAssets invested b)
**: *ash:*apitalP,''",!!Add Accounts pa)able 4;"$!!Total assets
(eHcluding cash% ,$!"!!/ess 7oncash assets (;$"!!! # P'44"!!!%
,4!"!!!P,!"!! Accounts receivable (;$"!!! O P'";,!% ;4"!!
(erchandise inventor) '$!"!!! Prepaid eHpenses .",!! P ,!"!!*ash
invested b) EE''8"$4!Total assets of the partnership P
8;8"F,!,4.dTotal partnership capital (P'!"!!!+$!N% P 8!!"!!!99-s
*apital (P8!!"!!! H 4!N% P ',!"!!!/ess *ash
investment8!"!!!(erchandise to be invested b) 99 P
;!"!!!,..aAdjusted capital of 33:Total assets (at agreed
valuations% P '!"!!!/ess Accounts pa)able4"!!! P '8,"!!!Aequired
capital of 33'!"!!!*ash to be invested b) 33 P
4"!!!0ui1.I'.P,F$"!!! S (P4!"!!! O P,,"!!!% # QP8,4"!!! 5 (P4!"!!!
O P,,"!!!%R+8 ,.Philip" P'!!"!!!K Aa)" P'!!"!!! and Darah" P;!"!!!
(P8!!"!!! O P,'!"!!!%8. P88!"!!!P88!"!!! S P.!"!!! # (P8'!"!!! 5
P8!"!!!%4.c The capital balances of each partner are determined as
follo:s:Apple Blue *ro:n*ash P.!"!!!Propert) P !"!!!(ortgage
assumed (8."!!!%6quipment P .."!!!Amount credited tocapital
accounts P.!"!!!P 4."!!! P .."!!!.. P'."!!!(P';!"!!! O P'$!"!!!% H
'+, S P'."!!!$. P'"!!! O the prevailing selling price :hich is also
the fair market value.F.. P'."!!! P8!"!!! # P.!"!!! # P,."!!! S
P'!."!!!+8 S P8."!!! P.!"!!! 5 P8."!!! S P'."!!! ;.
P4."!!!'!.P,,."!!!''.P8F."!!! S P4!!"!!! O P,."!!! ',.P.!"!!!
'8.P,!"!!!Pane
-ills*ash..................................................................................
P4!"!!! P8!"!!!(achiner) and
equipment.................................................
'!!"!!!Building.............................................................................
8.!"!!!
Dubtotal.........................................................................
P'4!"!!! P8!"!!!/ess: /iabilit) assumed b) the
partnership.......................('!!"!!!%*apital balances"
F+'+!$.................................................... P'4!"!!!
P,!"!!!'4.dAdjusted capital of //P '$.";!!*ontributed capital of
((,";.!Total capital P ,4".!'..a00" capital: @nadjusted balance
P.F"!!! Adjustments: Accumulated depreciation ('".!!% Allo:ance for
doubtful account(',"!!!%Adjusted balanceP 48".!! 99" capital:
@nadjusted balance P4;".!! Adjustments: Accumulated depreciation
(4".!!% Allo:ance for doubtful account(4".!!%Adjusted balanceP
4!".!!T(23RI2-Completion statements: '. accounting ,. 9AAP 8. a.
cash $asis instead of accrual $asisb. prior period adjustmentsc.
use of 0air &or current( values instead of historical costd.
recognition of good:ill in situations not involving business
combinations 4. dra:ings .. fair (or current% values $. achieving
equity among the partners F. capital balances . professional
corporationTrue or 4alse; 0alse '4.True ';.0alse ,4.0alse
,;.0alse'!.True '..0alse ,!.True ,..True 8!.True''.0alse '$.0alse
,'.0alse ,$.0alse',.True 'F.0alse ,,.True ,F.True'8.0alse '.True
,8.0alse ,.TrueNote for the following numbers:17.Indiidu!ls"
p!rtnerships" !nd #orpor!tions !re !llowed to be p!rtners in !
p!rtnership.1$.%ll of the gener!l p!rtners !re li!ble for !ll the
p!rtnership&s debts.'1.(ost sm!ll p!rtnerships m!int!in their
)n!n#i!l inform!tion using the t!* b!sis.'+." ,hile the p!rtnership
does not p!- in#ome t!*es" it is responsible for other t!*es su#h
!s p!-roll t!*es !nd fr!n#hise t!*es.'../he propriet!r- theor- is
b!sed on the notion th!t the business entit- is !n !ggreg!tion of
the owners'0./his is !n e*!mple of the propriet!r- theor- of
e1uit-.'2. %n- b!sis (i.e." #!rr-ing !lue" t!* b!sis" or m!rket
!lue) #!n be used to !lue non#!sh !ssets #ontributed to !
p!rtnership%5/TIP/2.C(3IC2 052-TI3*-8'.a 8$.d 4'.c 4$.a .'.d8,.B
8F.b 4,.c 4F.c .,.b88.a 8.c 48.a 4.b .8.b84.e 8;.a 44.d 4;.b8..d
4!.a 4..b .!.c