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Partnership Formation and Capital Balances

FF and GG formed a partnership. FF contributed cash, accounts receivable, machinery and equipment. GG contributed cash, accounts receivable, merchandise inventory, and machinery and equipment. The question asks how much cash FF must invest to bring the partners' capital balances in proportion to their profit and loss ratio of 60% for FF and 40% for GG. Mary and Jane formed a partnership. Mary contributed cash, accounts receivable, and merchandise inventory. Jane will invest cash to obtain a 2/5 interest in the partnership. The question asks how much cash Jane would contribute. Red, White, and Blue formed a partnership where Red contributed office equipment, White contributed delivery equipment, and Blue will contribute cash. Blue wants

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547 views4 pages

Partnership Formation and Capital Balances

FF and GG formed a partnership. FF contributed cash, accounts receivable, machinery and equipment. GG contributed cash, accounts receivable, merchandise inventory, and machinery and equipment. The question asks how much cash FF must invest to bring the partners' capital balances in proportion to their profit and loss ratio of 60% for FF and 40% for GG. Mary and Jane formed a partnership. Mary contributed cash, accounts receivable, and merchandise inventory. Jane will invest cash to obtain a 2/5 interest in the partnership. The question asks how much cash Jane would contribute. Red, White, and Blue formed a partnership where Red contributed office equipment, White contributed delivery equipment, and Blue will contribute cash. Blue wants

Uploaded by

Cris Tine
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

FORMATION

No Bonus, No Revaluation
Cash Contributed by Partner
1. As of July 1, 2020, FF and GG decided to form a partnership. Their balance sheets on this
date are:
FF GG
Cash P 15,000 P 37,500
Accounts receivable 540,000 225,000
Merchandise Inventory - 202,500
Machinery and equipment 150,000 270,000
Total P 705,000 P 735,000

Accounts Payable P 135,000 P 240,000


FF, capital 570,000
GG, capital - 495,000
Total P 705,000 P 735,000
The partners agreed that the machinery and equipment of FF is under depreciated by P15,000
and that of GG by P45.000. Allowance for doubtful accounts is to be set up amounting to
P120,000 for FF and P45,000 for GG. The partnership agreement provides for a profit and loss
ratio and capital interest of 60% to FF and 40% to GG. How much cash must FF invest to bring
the partners' capital balances proportionate to their profit and loss ratio?
a. 142,500 c. 172,500
b. 52,500 d. 102,500

2. Mary admits Jane as a partner in the business. Balance sheet accounts of Mary just before the
admission of Jane show: Cash, P26,000, Accounts receivable, PI20,000, Merchandise
inventory, PI80,000, and Accounts payable, P62,000. It' was agreed that for purposes of
establishing Mary's interest, the following adjustments be made: 1.) an allowance for
doubtful accounts of 3% of accounts receivable is to be established; 2.) merchandise
inventory is to be adjusted upward by P25,000; and 3.) prepaid expenses of P3,600 and
accrued liabilities of P4,000 are to be recognized.

If Jane is to invest sufficient cash to obtain 2/5 interest in the partnership, how much would
Jane contribute to the new partnership?
a. 176,000 c. 95,000
b. 190,000 d. 113,980
 
3. Red, White, and Blue form a partnership on May 1,2020. They agree that Red will contribute
office equipment with a total fair value of P40,000; White will contribute delivery equipment
with a fair value of P80,000; and Blue will contribute cash. If Blue wants a one third interest
in the capital and profits, he should contribute cash of:
a. P 40,000 c. P60,000
b. P120,000 d. P180,000

Noncash Contribution
4. On December 1, 2020, EE and FF formed a partnership, agreeing to share for profits and
losses in the ratio of 2:3, respectively. EE invested a parcel of land that cost him P25,000. FF
invested P30,000 cash. The land was sold for P50,000 on the same date, three hours after
formation of the partnership. How much should be the capital balance of EE right after
formation?
a. 25,000 c. 60,000
b. 30,000 d. 50,000

5. On May 1, 2020, Cobb and Mott formed a partnership and agreed to share profits and losses
in the ratio of 3:7, respectively. Cobb contributed a parcel of land that cost him PI0,000. Mott
contributed P40,000 cash. The land was sold for PI8,000 on May 1, 2020, immediately after
formation of the partnership. What amount should be recorded in Cobb's capital account on
formation of the partnership?
a. 18,000 c. 15,000
b. 17,400 d. 10,000

6. On July 1,2020, 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 1,2020 four hours
after formation of the partnership. How much should be recorded in Monuz capital account
on formation of the partnership?
a. PI0,000 c. P25,000
b. P20,000 d. P50,000

Cash, noncash contribution


7. Jones and Smith formed a partnership with each partner contributing the following items:
Jones Smith
Cash P 80,000 P40,000
Building - cost to Jones 300,000
- fair value 400,000
Inventory - cost to Smith 200,000
- fair value 280,000
Mortgage payable 120,000
Accounts payable 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?
Jones Smith
A. P350,000 P270,000
B. P260,O00 PI 80,000
C. P360,O00 P260,000
D. P500,000 P300,000
a. Option A c. Option C
b. Option B d. Option D
Questions 1 & 2 are based on the following:
8. On March 1, 2020, II and JJ formed a partnership with each contributing the following assets:
II JJ
Cash P300,000 P 700,000
Machinery and equipment 250,000 750,000
Building - 2,250,000
Furniture and fixtures 100,000
The building is subject to mortgage loan of P800,000, which is to be assumed by the
partnership agreement provides that II and JJ share profits and losses 30% and 70%,
respectively. On March 1, 2020 the balance in JJ's capital account should be:
a. 3,700,000 c. 3,050,000
b. 3,140,000 d. 2,900,000

9. The same information in Number 2, except that the mortgage loan is not assumed by the
partnership. On March 1, 2020 the balance in JJ's capital account should be:
a. 3,700,000 c. 3,050,000
b. 3,140,000 d. 2,900,000

10. On January 2, 2020, Abel, Cain, and Josuah formed a partnership. Abel contributed cash
of PI00,000 and a delivery equipment that originally costs him PI20,000, but with a second
hand value of P50,000. Cain contributed PI60,000 in cash. Josuah, whose family sells office
equipment, contributed P50,000 in cash and office equipment that cost his family's dealership
PI00,000 but with a regular selling price of PI20,000. In 2010, the partnership reported net
income of P 120,000. On December 31, 2020, what would be the capital balance of the
partners?
Abel Cain Josuah
a. 257,500 200,000 192,500
b. 190,000 200,000 210,000
c. 260,000 200,000 190,000
d. 187,500 200,000 212,500

11. Roberts and Smith drafted a partnership agreement that lists the following assets
contributed at the partnership's formation:

Contributed by
Roberts Smith
Cash P20,000 P30,000
Inventory 15,000
Building 40,000
Furniture & equipment 15,000

The building is subject to a mortgage of PI0,000, which the partnership has assumed. The
partnership agreement also specifies that profits and losses are to be distributed evenly.
What amounts should be recorded as capital for Roberts and Smith at the formation of the
partnership?
Roberts Smith
a. 35,000 85,000
b. 35,000 75,000
c. 55,000 55,000
d. 60,000 60,000

12. Ben, Joe and Fortune are new CPA's and are to form a partnership. Ben is to contribute
cash of P50,000 and his computer originally costing P60,000 but has a second hand value of
P25,000. Joe is to contribute cash of P80,000. Fortune, whose family is selling computers, is
to contribute cash of P25,000 and a brand new computer plus printer with regular price at
P60,000 but which cost their family's computer dealership, P50,000. Partners agree to share
profits equally.

The capital balances upon formation are:


a. Ben, P 75,000; Joe, P80,000; and Fortune, P85,000.
b. Ben, P110,000; Joe, P80,000; and Fortune, P75,000.
c. Ben, P 80,000; Joe, P80,000; and Fortune, P80,000.
d. Ben, P 88,333; Joe, P88,333; and Fortune, P88,335.

Common questions

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Adjustments in the valuation of contributed assets impact the partners' capital accounts by representing the assets' agreed fair market value rather than their book value. An example from Source 1 involves FF and GG forming a partnership, where adjustments were made for the machinery and equipment's depreciation and allowance for doubtful accounts. The machinery and equipment were under-depreciated by specific amounts (FF by P15,000 and GG by P45,000), hence adjusting these values aligns the partners' contributions with the partnership's fair valuation of the assets .

Changes in asset valuations shortly after partnership formation, such as market-driven reevaluation or early sale, necessitate adjustments in capital accounts to correct initial discrepancies. Such changes can affect profit-sharing, necessitating amendment clauses in partnership agreements to preemptively address valuation discrepancies. EE and FF's partnership saw land value changes immediately post-formation, impacting their capital contributions to align with equitable profit sharing . This underscores the need for flexible agreements accommodating rapid asset value shifts.

Partners' capital accounts reflect the fair market value of the assets contributed minus any liabilities assumed by the partnership. For example, Jones and Smith formed a partnership where both contributed cash and noncash assets. Jones contributed cash and a building with a mortgage, while Smith added cash and inventory. Each partner's capital account reflects the fair market value less the liabilities assumed proportionally . This ensures both partners' equity reflects their true economic contribution and liability share.

Profit and loss sharing ratios determine how partners split the partnership's profits and losses, affecting their initial capital contributions to align with expected future income allocations. For example, in the case of Monuz and Pardo's partnership, the profit and loss ratio was 4:6, impacting the contributions needed to equalize starting capital balances. Monuz's under-valuation of land had to be recalibrated to reflect proportional ownership aligned with income sharing expectations, ensuring fairness .

Partners might adjust the recorded values of contributed assets to reflect their fair market values and provide an equitable basis for initial capital allocations. Common adjustments include revaluation of under-depreciated equipment, allowances for doubtful accounts, and reevaluation of inventory cost . Adjusting these values can prevent future disputes and ensure that capital accounts accurately represent each partner's economic contribution to the partnership.

Setting allowance provisions for doubtful accounts involves evaluating anticipated credit losses to reflect a realistic net receivable value. These provisions impact capital accounts by reducing the net value of accounts receivable, adjusting the economic contribution recorded for partners contributing such assets. For example, FF and GG adjusted for doubtful accounts when forming a partnership, which helped to match contributions more closely with probable realizable values .

Assuming liabilities affects the initial capital accounts by reducing the effective contribution of the partner assuming the liability. For example, in the partnership of Roberts and Smith, Roberts's initial capital account was adjusted to reflect his assumption of a mortgage, reducing the net value attributed to his contribution . The liability assumption distributes financial responsibility and ensures fair allocation of partnership equity.

To determine the cash contribution required for a new partner to achieve a specified ownership interest, the partnership must first establish the total value of the partnership after adjustments and then calculate the new partner's share based on this total value. For instance, Mary and Jane's partnership required Jane to contribute cash for a 2/5 interest after adjusting Mary's account balances for allowances, inventory, prepaid expenses, and liabilities . The cash Jane contributes should equate to 2/5 of the adjusted total value of the partnership.

Partnerships maintain equity by valuating tangible assets at fair market value and ensuring cash contributions complement this value to reflect equal or proportionally fair ownership. For instance, Red contributed office equipment and White delivery equipment with distinct but proportionate fair values, determining Blue's cash contribution needed for equitable one-third ownership . Such adjustments ensure partners' initial equity mirrors their economic influence and risk.

When contributed assets have differing fair market and book values, capital balances must reflect the assets' fair market values. This adjustment ensures that each partner's capital account accurately reflects the real economic value of their contributions, avoiding overstatement or understatement of capital. In Source 1, equipment valuations and account allowances were adjusted, impacting FF and GG's capital accounts to reflect fair valuation adjustments.

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